Question Details

What is the company's new required rate of return



1.	Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

a.	Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.
b.	Adding more such stocks will increase the portfolio's expected rate of return.
c.	Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
d.	Adding more such stocks will have no effect on the portfolio's risk.
e.	Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.


2.	Which of the following statements is CORRECT?  (Assume that the risk-free rate is a constant.)

a.	If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
b.	The effect of a change in the market risk premium depends on the slope of the yield curve.
c.	If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
d.	If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
e.	The effect of a change in the market risk premium depends on the level of the risk-free rate.


3.	During the coming year, the market risk premium (rM − rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same.  Given this forecast, which of the following statements is CORRECT?

a.	The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.
b.	The required return on all stocks will remain unchanged.
c.	The required return will fall for all stocks, but it will fall more for stocks with higher betas.
d.	The required return for all stocks will fall by the same amount.
e.	The required return will fall for all stocks, but it will fall less for stocks with higher betas.


4.	Roenfeld Corp believes the following probability distribution exists for its stock.  What is the coefficient of variation on the company's stock?

		Probability	Stock's
	State of	of State	Expected
	the Economy	Occurring		Return	
	Boom	0.45	25%
	Normal	0.50	15%
	Recession	0.05	5%

a.	0.2839
b.	0.3069
c.	0.3299
d.	0.3547
e.	0.3813
	

5.	Jill Angel holds a $200,000 portfolio consisting of the following stocks.  The portfolio's beta is 0.875.

	Stock	Investment	Beta
	A	$ 50,000	0.50
	B	50,000	0.80
	C	50,000	1.00
	D	  50,000	1.20
	Total	$200,000

If Jill replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?

a.	1.07
b.	1.13
c.	1.18
d.	1.24
e.	1.30
	

6.	Mikkelson Corporation's stock had a required return of 11.75% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%.  Then an increase in investor risk aversion caused the market risk premium to rise by 2%.  The risk-free rate and the firm's beta remain unchanged.  What is the company's new required rate of return?  (Hint: First calculate the beta, then find the required return.)

a.	14.38%
b.	14.74%
c.	15.11%
d.	15.49%
e.	15.87%
	

7.	Data for Dana Industries is shown below.  Now Dana acquires some risky assets that cause its beta to increase by 30%.  In addition, expected inflation increases by 2.00%.  What is the stock's new required rate of return?

	Initial beta	1.00
	Initial required return (rs)	10.20%
	Market risk premium, RPM	6.00%
	Percentage increase in beta	30.00%
	Increase in inflation premium, IP	2.00%

a.	14.00%
b.	14.70%
c.	15.44%
d.	16.21%
e.	17.02%
	

8.	Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%.  What is the required rate of return on the market?  (Hint:  First find the market risk premium.)

a.	10.36%
b.	10.62%
c.	10.88%
d.	11.15%
e.	11.43%




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