Question Details

What is the required rate of return on the new portfolio 



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.	Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3.  Portfolio P has 50% invested in both A and B.  Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

a.	The required return on Portfolio P would increase by 1%.
b.	The required return on both stocks would increase by 1%.
c.	The required return on Portfolio P would remain unchanged.
d.	The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.
e.	The required return for Stock A would fall, but the required return for Stock B would increase.

3.	Assume that you manage a $10 million mutual fund that has a beta of 1.05 and a 9.50% required return.  The risk-free rate is 4.20%.  You now receive another $5 million, which you invest in stocks with an average beta of 0.65.  What is the required rate of return on the new portfolio?  (Hint: You must first find the market risk premium, then find the new portfolio beta.)

a.	8.83%
b.	9.05%
c.	9.27%
d.	9.51%
e.	9.74%
	
4.	If the current one year CD rate is 3% and the best estimate of one year CD which will be available one year from today is 5%, what is the current two year CD rate with 1% liquidity premium?

a.	4.00%
b.	4.50%
c.	5.00%
d.	5.50%
e.	5.75%

5.	How long approximately does it take to triple your investment at 6% per year? 

a.	18.9 years
b.	19.5 years
c.	19.7 years 
d.	20.0 years 
e.	22.7 years




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