Problem 1: The stock of Uptown Men's Wear is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?
Probabilities:
Recession:0.2
Normal:0.5
Boom:0.3
Returns:
Recession:-12%
Normal:13%
Boom:25%
Answer
- 12.6 percent
- 10.4 percent
- 7.9 percent
- 11.6 percent
- 9.1 percent
Problem 2: The difference between beta and standard deviation is best described as:
- Beta measures the risk of the market as a whole, while standard deviation measures the risk of individual stocks.
- Beta measures total volatility, while standard deviation measures total risk.
- Beta measures the market risk premium, while standard deviation measures risk.
- Beta measures the risk investors are compensated for, while standard deviation measures both systematic and unsystematic risk.
Problem 3: A company you are researching has common stock with a beta of 1.35. Currently, Treasury bills yield 2.5%, and the market portfolio offers an expected return of 11.5%. What is the required return on this common stock?
Answer
- 10.93%
- 11.86%
- 21.43%
- 14.65%