Fin316 Final Exam Practice

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Finance 316 practice problems for final exam 1. True or False: According to the CAPM, a stock's expected return is positively related to its beta. 2. In practice, the market portfolio is often represented by: A. a portfolio of U.S. Treasury securities. B. a diversified stock market index. C. an investor's mutual fund portfolio. D. the historic record of stock market returns. 3. A stock's beta measures the: A. average return on the stock. B. variability in the stock's returns compared to that of the market portfolio. C. difference between the return on the stock and return on the market portfolio. D. market risk premium on the stock. 4. If the slope of the line measuring a stock's historic returns against the market's historic…show more content…
What was your annual rate of return on the investment? 14. ABC’s stock price is currently at $5.00 per share. You believe that there is a 10% chance that the economy will fall back into a recession, a 60% chance that the economy will stay steady and a 30% chance that economic expansion will occur. The following table shows next year’s expected stock prices for ABC under each of these scenarios: Stock ABC Recession $4.00 Steady $5.50 Expansion $8.00 You may assume that ABC does expect to issue dividends in the next year. Additionally, you may assume that the market risk premium is 8% and the Treasury bill yield is 4%. Calculate the expected return and standard deviations for ABC. 4 Finance 316 practice problems for final exam 15. You are trying to decide how to invest your retirement savings. Over the past three years, stock #1 experienced annual returns of -1%, +7%, and +3%, while stock #2 experienced annual returns of +2%, 4%, and +8%. You may assume that the correlation between the returns of stock #1 and stock #2 is 0.25. Use this information in your answers to questions (a) and (b) below. (a) Estimate the expected return and standard deviation for a portfolio that allocates 50% to stock #1 and 50% to stock #2. (b) Using your answer from (a) above, are you able to use the “mean-standard deviation rule” to rank the following three investment options: 1) 100% in stock #1; 2) 100% in stock #2; or 3) 50% in stock

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