Question

The risk-free rate is expected to remain at current level in the coming years, while the market risk premium is expected to increase. Based on this forecast, which of the following statements is correct?

Group of answer choices

The required return will increase for shares with a beta less than 1.0 and will decrease for shares with a beta greater than 1.0.

The required return will increase for all shares but will increase less for shares with higher betas.

The required return for all shares will increase by the same amount.

The required return will increase for all shares but will increase more for shares with higher betas.

You are holding a share that is expected to earn 35% in a booming economy, 15% in a normal economy, and lose 25 % in a recessionary economy. There is a 10 % probability of a boom and a 65 % chance of a normal economy. What is your expected rate of return on this share?

Group of answer choices

7%

25%

19.5%

8.5%

Your friend complains that she cannot earn profits from trading in the stock markets based on public information, but she continually brags to you about the profits she earns based on confidential information she overhears at her workplace. This information is not available to the general public. Given this, you would tend to argue that the stock markets are at best ________ form efficient.

Group of answer choices

Weak

Strong

Semi strong

Perfect

Answer 1

1. required rate of return=risk free rate+(beta*market risk premium)

Option IV is correct

The required return will increase for all shares but will increase more for shares with higher betas.

If beta is higher than 1, then the required rate will increase higher than other shares. But overall the required rate will increase for all the shares.

2. Expected return on the share=sum of all (weights*expected returns)

=(10%*35%)+(65%*15%)+(25%*-25%)

=3.5%+9.75%-6.25%

=7%

Option I is correct

3. Semi strong efficiency market hypothesis states that a security price movements are reflection of publicly available material information. We can make the profits if we have any non material public information.

Semi-strong is the correct.

Strong market hypothesis consists of both material and non material public information. based on this, we can't make any profits.