Question

 

1-Inflation, slow economic growth, and volatile interest rates are economic outcomes reflected in which of the following components of a security's return?

A)Systematic risk

B)Unsystematic risk

C)Diversifiable risk

D)Company-specific risk

2-What is an asset's expected rate of return if the current risk-free rate is 5%, the stock has a beta of 1.4, and the quoted market rate is 9%?

A)10.6%

B)5.6%

C)0.11%

D)0.05%

3-As investors become more confident about future economic prospects, the SML:

A)Shifts downward but remains parallel to the old SML

B)Shifts upward but remains parallel to the old SML

C)Rotates upward (counterclockwise) on its y intercept and becomes steeper

D)Rotates downward (clockwise) on its y intercept and becomes flatter

11-The T-bill rate is 0.9% and the market rate of return is 7.9%. What is the beta of a stock with a 13.7% rate of return?

Answer 1

 

Q 1)

The correct Option is A Sytematic risk.

Systematic risk is risk associated with macroeconomic factors such as inflation, changes in interest rates, fluctuations in currencies, recessions etc. Macro factors influenceing the direction and volatility of the entire market is systematic risk.

The Options B,C and D are incorrect.

Q 2)

Expected rate of return = risk free rate + Beta x ( Market rate - risk free rate )

Given

risk free rate = 5 %
market rate = 9 %
beta = 1.4

Expected rate of return = 5 % + 1.4 x ( 9 % - 5 %)

Expected rate of return = 5 % + 1.4 x 4 %

Expected rate of return = 5 % + 5.6 %
Expected rate of return = 10.6 %

Therefore the correct option is A.

Q 3)

The correct option is  B Shifts upward but remains parallel to the old SML

As the investors becomong more confident the expected return increases and the inflation premium increases which increases the risk free rate and the SML shifts upwards but remains parallel to the old SML.

The options A,C and D are incorrect.

Q 11)

Given

T bill rate = risk free rate = 0.9 %
market rate = 7.9 %
Expected rate of return = 13.7 %

Beta = ?

Expected rate of return = risk fre rate + Beta x ( market rate - risk free rate )

13.7 % = 0.9 % + Beta x ( 7.9 % - 0.9 %)

13.7 % - 0.9 % = Beta x 7 %
12.8 % = Beta x 7 %

Beta = 12.8 % / 7 %

Beta = 1.828 ~ 1.83

Therefore the Beta of the stock = 1.83