16. You bought a stock for $34, and you received dividends of $0.14. The stock i

Question

16. You bought a stock for $34, and you received dividends of $0.14. The stock is now selling for $41. What is your percentage return? a. 7% b. 8% c. 11% d. 15% e. 19% f. 21% g 28% f. 30% g. 31% 17. Consider the following information on returns and probabilities: Invest 1/2 of your money in Asset A and 1/2 in Asset B. State Probability A B Boom.25 Bust 75 What is the expected return for the portfolio? a. 1.7 b. 2.9 c. 3.9 d.4.6 e. 5.5 f.6.9 g.7.5 h.9.0 i.8.2 j.11 12% 6% 4% 18% 18. Following No. 17, what is the standard deviation of the return on the portfolio? a. 1.7 b. 2.9 c. 3.9 d.4.6 e. 5.5 f.6.9 g.7.5 h.9.0 i.8.2 j, 11 19. Consider an asset with a beta of 1.2, a risk-free rate of 5%, and a market return of 13%. What is the reward to risk ratio? a. 5 b.6c. 7 d. 8 e. 9 f. 10 g. 11 h. 12 i. 14 j. 16 % 20. Following No. 19, what is the expected return on the asset? a. 5 b. 6 c. 7 d. 8 e. 9 f. 10.5 g. 11.4 h, 12 i. 14.6 j.16 % 21. Suppose we have a bond issue currently outstanding that has 20 years left to maturity. The coupon rate is 8% , and coupons are paid semiannually. The bond is currently selling for $828 per $%1,000 bond. What is the cost of debt? % d. 8 e. 9 f. 10 g. 11 h. 12 i. 14 j. 16 a, 5 b. 6 c. 7

Explanation / Answer

Answer to Question 16:

Percentage Return = (Selling Price + Dividend - Purchase Price) / Purchase Price
Percentage Return = ($41 + $0.14 - $34) / $34
Percentage Return = 21%

Answer to Question 17:

Boom:

Expected Return = (1/2) * 12% + (1/2) * 4%
Expected Return = 8%

Bust:

Expected Return = (1/2) * 6% + (1/2) * 18%
Expected Return = 12%

Expected Return for Portfolio = 0.25 * 8% + 0.75 * 12%
Expected Return for Portfolio = 11%

Answer to Question 18:

Variance = 0.25 * (8% - 11%)^2 + 0.75 * (12% - 11%)^2
Variance = 0.0003

Standard Deviation = (0.0003)^(1/2)
Standard Deviation = 0.017
Standard Deviation = 1.7%

Answer to Question 19:

Reward to risk ratio = Market return - risk-free rate
Reward to risk ratio = 13% - 5%
Reward to risk ratio = 8%

Answer to Question 20:

Expected Return on assets = risk-free rate + beta * (Market return - risk-free rate)
Expected Return on assets = 5% + 1.2 * (13% - 5%)
Expected Return on assets = 14.6%

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