Fin300 Unit 5

You invest:

- 50% in Stock A (return = 8%)

- 30% in Stock B (return = 5%)

- 20% in Stock C (return = -3%)

What is the portfolio return?

• 4.2%

• 6.0%

• 4.9%

• 5.8%

Which pair of assets would result in the greatest risk reduction?

• Correlation = +0.9

• Correlation = 0.0

• Correlation = -0.7

• Correlation = +1.0

If the market goes down by 10% and a stock’s beta is 1.3, what is its expected movement?

• -10%

• -11%

• -13%

• -15%

A stock has Beta = 1.1, the risk-free rate is 4%, and market return is 10%. What is the required return according to CAPM?

• 10.0%

• 10.6%

• 11.2%

• 10.4%

An investment has the following possible outcomes:
- 30% chance of a 6% return
- 50% chance of a 10% return
- 20% chance of a -5% return
What is the expected return?

• 7.1%

• 6.0%

• 5.3%

• 5.8%

An investor is analyzing the historical returns of Stock A over the past 4 years:

Year 1 | 12%

Year 2 | 8%

Year 3 | -4%

Year 4 | 14%

What is the standard deviation of Stock A’s returns?

• 6.5%

• 7.0%

• 8.7%

• 9.4%

Which statement about standard deviation is TRUE?

• Lower standard deviation implies higher risk

• It measures average return

• It measures the risk of an investment

• It’s irrelevant to investors

Millstone Corp. has 3 million in equity, 2 million in debt. The cost of equity is 11%, the cost of debt is 5%, and the corporate tax rate is 21%. What is Millstone Corp.’s WACC?

• 8.64%

• 8.18%

• 7.75%

• 9.05%

You invest:
40% in Stock X (return = 9%)
35% in Stock Y (return = 6%)
25% in Stock Z (return = -2%)
What is the portfolio return?

• 5.2%

• 6.0%

• 4.7%

• 5.8%

Which pair of assets would result in the greatest risk reduction?

• Correlation = +0.8

• Correlation = -0.4

• Correlation = -0.9

• Correlation = +1.0