accounting-Assume that the risk-free rate of interest is 3% and the expected rate of return

by | Aug 20, 2025 | Business

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1 Assume that the risk-free rate of
interest is 3% and the expected rate of return on the market is 15%. A stock
has an expected rate of return of 8%. What is its beta? (Negative value
should be indicated by a minus sign. Do not round intermediate calculations.
Round your answer to 2 decimal places.)
Beta
2 Suppose the rate of return on
short-term government securities (perceived to be risk-free) is about 6%.
Suppose also that the expected rate of return required by the market for a
portfolio with a beta of 1 is 13%. According to the capital asset pricing model:
a.
What is the expected rate of return
on the market portfolio? (Round your answer to 2 decimal places. Omit the
“%” sign in your response.)
Expected rate of return %
b.
What would be the expected rate of
return on a stock with β = 0? (Round your answer to 2 decimal places. Omit
the “%” sign in your response.)
Expected rate of return %
c.
Suppose you consider buying a share
of stock at $46. The stock is expected to pay $2 dividends next year and you
expect it to sell then for $48. The stock risk has been evaluated at β = –.5.
Is the stock overpriced or underpriced?
3 Here are data on two companies. The
T-bill rate is 4% and the market risk premium is 6%.
Company $1 Discount Store Everything $5
Forecasted return 12% 11%
Standard deviation of returns 8% 10%
Beta 1.5 1
What would be the fair return for
each company, according to the capital asset pricing model (CAPM)? (Do not
round intermediate calculations. Omit the “%” sign in your
response.)
Company Expected Return
$1 Discount Store %
Everything $5 %
4 Kaskin, Inc., stock has a beta of
1.2 and Quinn, Inc., stock has a beta of .6. Which of the following
statements is most accurate?
The expected rate of return will be
higher for the stock of Kaskin, Inc., than that of Quinn, Inc.
The stock of Quinn, Inc., has more
systematic risk than that of Kaskin, Inc.
The stock of Kaskin, Inc., has more
total risk than Quinn, Inc.
5 Assume that the risk-free rate of
interest is 6% and the expected rate of return on the market is 16%. A share
of stock sells for $50 today. It will pay a dividend of $6 per share at the
end of the year. Its beta is 1.2. What do investors expect the stock to sell
for at the end of the year? (Do not round intermediate calculations. Omit the
“$” sign in your response.)
Expected stock price $
6 The market portfolio has a beta of
0
1
-1
0.5.
7 The risk-free rate and the expected
market rate of return are 0.06 and 0.12, respectively. According to the
capital asset pricing model (CAPM), the expected rate of return on security X
with a beta of 1.2 is equal to
0.06.
0.144.
0.12.
0.132.
0.18.
8 Which statement is not true
regarding the market portfolio?
It includes all publicly traded
financial assets.
It lies on the efficient frontier.
All securities in the market
portfolio are held in proportion to their market values.
It is the tangency point between the
capital market line and the indifference curve.
All of the options are true.
9 Which statement is not true
regarding the capital market line (CML)?
The CML is the line from the
risk-free rate through the market portfolio.
The CML is the best attainable
capital allocation line.
The CML is also called the security
market line.
The CML always has a positive slope.
The risk measure for the CML is
standard deviation.
10 According to the Capital Asset
Pricing Model (CAPM), the expected rate of return on any security is equal to
Rf + β [E(RM)].
Rf + β [E(RM) – Rf].
β [E(RM) – Rf].
E(RM) + Rf.
11 The security market line (SML) is:
the line that describes the expected
return-beta relationship for well-diversified portfolios only.
also called the capital allocation
line.
the line that is tangent to the
efficient frontier of all risky assets.
the line that represents the
expected return-beta relationship.
All of the options
12 According to the Capital Asset
Pricing Model (CAPM), fairly priced securities have:
positive betas.
zero alphas.
negative betas.
positive alphas.
13 If the simple CAPM is valid, say
whether the situation is possible or not?
Portfolio Expected Return Beta