1. According to the following information, which of the stocks would be consider
ID: 2705888 • Letter: 1
Question
1. According to the following information, which of the stocks would be considered riskiest in a diversified portfolio of investments?
Stock
s
b
ABC
12.5%
1.0
FGH
8.0%
0.5
MNO
20.2%
2.4
TUV
15.3%
3.0
a.
Stock MNO, because it has the highest standard deviation.
b.
Stock TUV, because it has the highest beta.
c.
Stock FGH, because it has the highest s/b ratio
d.
Stock ABC, because its beta is the same as the market beta (1.0) and the market is always very, very risky.
2. If a stock has a beta coefficient, b, equal to 1.50, the risk premium associated with the market is 8 percent, and the risk-free rate is 5 percent, application of the capital asset pricing model indicates the appropriate return should be __________.
a.
9.8%
b.
17%
c.
5%
d.
15.8%
e.
None of the above is correct.
3. Based on the information given below, which of the investments would be considered best based on its risk and return relationship? Assume all investors are risk-averse and the investments will be held in isolation, not in a portfolio.
Investment
D
E
F
Expected return,
10.0%
18.0%
18.0%
Standard deviation, s
7.0%
12.0%
20.0%
a.
D, because its total risk is lowest.
b.
E, because its coefficient of variation is lowest.
c.
F, because its standard deviation, s, is highest.
d.
E and F, because the have the same expected return, .
e.
None of the above.
4. Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics:
Cash Flows
Year
0
$(4,000)
$(4,000)
1
0
3,500
2
5,000
1,100
IRR
11.8%
12.0%
If the firm's required rate of return (k) is 10 percent, which project should be purchased?
a.
Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return.
b.
Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return.
c.
Project Q should be accepted, because its net present value (NPV) is higher than Project R's NPV.
d.
Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV.
e.
None of the above is a correct answer.
5. Why is the ex-dividend date important to someone who is considering purchasing a firm's stock?
a.
If the stock is purchased on this date or later the buyer will not receive the next dividend paid by the firm.
b.
This is the date the firm "opens its books" to determine the names of the persons who will receive the next dividend that will be paid.
c.
This is the date the board of directors announces the value of the next dividend payment, so the market price of the stock will increase at this point.
d.
This is the date the dividend is paid
Stock
s
b
ABC
12.5%
1.0
FGH
8.0%
0.5
MNO
20.2%
2.4
TUV
15.3%
3.0
According to the following information, which of the stocks would be considered riskiest in a diversified portfolio of investments? If a stock has a beta coefficient, b, equal to 1.50, the risk premium associated with the market is 8 percent, and the risk-free rate is 5 percent, application of the capital asset pricing model indicates the appropriate return should be Based on the information given below, which of the investments would be considered best based on its risk and return relationship? Assume all investors are risk-averse and the investments will be held in isolation, not in a portfolio.Explanation / Answer
Stock TUV, because it has the highest beta.
5%
F, because its standard deviation, s, is highest.
Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return.
The ex-dividend date really isn't very important to potential investors; this date is more important to accountants who construct financial statements because it is the date the dividend becomes a legal liability of the firm.
Stock TUV, because it has the highest beta.
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