Exam 12: Systematic Risk and the Equity Risk Premium

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -Which of the following combinations of two stocks would give you the biggest reduction in risk?

Which of the following statements is FALSE?

The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________.

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Lowes in your portfolio is ________.

Your estimate of the market risk premium is 6%. The risk-free rate of return is 4%, and General Motors has a beta of 1.6. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n) 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange-traded fund (ETF) with a 10% expected return and a 20% volatility. Assume that the ETF you invested in returns -10%. Then the realized return on your investment is closest to ________.

Which of the following equations is INCORRECT?

Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds has been ________ and is proxy for the market risk premium.

Stocks tend to move together if they are affected by ________.

Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n) 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange-traded fund (ETF) with a 11% expected return and a 20% volatility. The expected return on your of your investment is closest to ________.

What role does the standard deviations of two assets play in computation of the expected return of the two asset portfolio?

You expect General Motors (GM) to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM) to be 1.9 over the next year. Also, you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year. Which stock has more systematic risk? Which stock has more total risk?

The volatility of an individual stock is more than the volatility of a well-diversified portfolio of stocks.

The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and the time value of money.

Consider the following returns: The volatility on Home Depot's returns is closest to ________.

Which of the following statements is FALSE?

What diversification, if any, is achieved if two stocks in a portfolio are perfectly positively correlated?

A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume the share prices for stocks A and B are $25 and $35, respectively. What is the capitalization of the market portfolio?

If you build a large enough portfolio, you can diversify away all the risks of a portfolio.

A stock market comprises 4600 shares of stock A and 1600 shares of stock B. Assume the share prices for stocks A and B are $15 and $30, respectively. If you have $15,000 to invest and you want to hold the market portfolio, how much of your money will you invest in Stock A?