CH 11 Quiz 1. If the economy booms, RTF, Inc. stock is expected to return 10 per

Question

CH 11 Quiz
1.

If the economy booms, RTF, Inc. stock is expected to return 10 percent. If the economy goes into a recessionary period, then RTF is expected to only return 3 percent. The probability of a boom is 65 percent while the probability of a recession is 35 percent. What is the variance of the returns on RTF, Inc. stock?

Select one below:

.037750

.000725

.001115

.033388

.000334

What is the beta of a portfolio comprised of the following securities?

Select one:

1.530

1.000

1.457

1.850

1.740

Stock Amount Invested Security Beta

Explanation / Answer

1) Probability of Boom = 0.65

Return in case of boom = 10%

Probability of Recession = 0.35

Return in case of Recession = 3%

Expected Return = = xp

     = Probability of Boom * Return in case of boom + Probability of Recession * Return in case of Recession

     = 0.65 * 10% + 0.35 * 3% = 7.55%

Vairance = Var(X) = x2p 2 = 0.65* (0.1 - 0.0755)2 + 0.35* (0.03 - 0.0755)2 = 0.001115

2)

Portfolio Beta is the weighted average of the betas of individual securities.

   = 1.74 * 26.19% + 1.85 * 30.95% + 1 * 42.86% = 1.457

Stock Amount Invested Security Beta Weightage A $5,500 1.74 26.19% B $6,500 1.85 30.95% C $9,000 1 42.86% TOTAL $21,000 100.00%

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