Question

1. Consider the following realized annual returns:

Year End	Index Realized Return	Stock A Realized Return
2006	23.6%	46.3%
2007	24.7%	26.7%
2008	30.5%	86.9%
2009	9.0%	23.1%
2010	-2.0%	0.2%
2011	-17.3%	-3.2%
2012	-24.3%	-27.0%
2013	32.2%	27.9%
2014	4.4%	-5.1%
2015	7.4%	-11.3%

The average annual return on Stock A from 2006 to 2015 is closest to:

		18.2%
		16.40%
		18.7%
		29.9%

2. Use the table for the question(s) below.

Consider the following average annual returns:

Investment	Average Return
Small Stocks	23.2%
S&P 500	13.2%
Corporate Bonds	7.5%
Treasury Bonds	6.2%
Treasury Bills	4.8%

What is the excess return for the portfolio of small stocks?

		10.0%
		18.4%
		17.0%
		15.7%

3. Use the following information to answer the question(s) below.

Company	Ticker	Beta
Ford Motor Company	F	2.77
International Business Machines	IBM	0.73
Merck	MRK	0.90

If the expected return on the market is 11% and the risk-free rate is 4%, then the expected return of investing in IBM is closest to:

		11.0%
		10.3%
		9.1%
		12.0%

4.

1. Use the following information to answer the question(s) below.

   Company	Ticker	Beta
   Ford Motor Company	F	2.77
   International Business Machines	IBM	0.73
   Merck	MRK	0.90

   
   If the market risk premium is 6% and the risk-free rate is 4%, then the expected return of investing in Ford Motor Company is closest to:

   		20.6%
   		10.0%
   		17.1%
   		16.2%

5.

1. Use the following information to answer the question(s) below.

   Company	Ticker	Beta
   Ford Motor Company	F	2.77
   International Business Machines	IBM	0.73
   Merck	MRK	0.90

   
   If the market risk premium is 6% and the risk-free rate is 4%, then the expected return of investing in Merck is closest to:

   		10.0%
   		9.4%
   		10.4%
   		5.4%

Answer 1

1]

Average annual return on Stock A = 16.45%

2]

Excess return for small stocks = average annual return of small stocks - average annual return of treasury bonds

Excess return for small stocks = 23.2% - 6.2% = 17.0%

3]

Expected return of IBM = risk free rate + (beta * market risk premium)

Expected return of IBM = 4% + (0.73 * (11% - 4%)) = 9.1%

4]

Expected return of Ford = risk free rate + (beta * market risk premium)

market risk premium = market return - risk free rate

Expected return of Ford = 4% + (2.77 * 6%) = 20.6%

5]

Expected return of Merck = risk free rate + (beta * market risk premium)

market risk premium = market return - risk free rate

Expected return of Merck = 4% + (0.9 * 6%) = 9.4%