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Exam 11: Systematic Risk and the Equity Risk Premium

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Question 1

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Blackberry stock has a beta of 1.7.If the risk-free rate is 2.1%,and the market risk premium is 7%,what is the expected return of Blackberry stock,according to the CAPM?

A) 9.8%
B) 10.4%
C) 11.9%
D) 14%
E) 10%

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Question 2

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CIBC stock has a beta of 1.2.If the risk-free rate is 1.8%,and the market risk premium is 6.5%,what is the expected return of CIBC stock,according to the CAPM?

A) 7.44%
B) 8.3%
C) 9.6%
D) 7.8%
E) 10%

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Question 3

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For each 1% change in the market portfolio's excess return,the investment's excess return is expected to change by ________ percent due to risks that it has in common with the market.

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What proportion of the market portfolio is comprised of each stock?

If you build a large enough portfolio,you can diversify away all ________ risk,but you will be left with ________ risk.

Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. -The weight of Abbott Labs in your portfolio is:

Your portfolio has 50% of its value invested in Bombardier and the remainder invested in Lululemon.Bombardier stock has a volatility of 25%,while Lululemon stock has a volatility of 10%.If the correlation between Bombardier and Lululemon is -0.1,what is the standard deviation of your portfolio?

Barrick Gold Corp stock has a beta of 2.1.If the risk-free rate is 2.6%,and expected market return is 9%,what is the expected return of Barrick Gold Corp stock,according to the CAPM?

Stocks that have a higher volatility will always have a higher beta.

When the returns of two stocks are negatively correlated,but not perfectly negatively correlated,then

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Suppose you have $10,000 in cash to invest.You decide to sell short $5000 worth of Kinston stock and invest the proceeds from your short sale plus your $10,000 into one-year Treasury bills earning 5%.At the end of the year,you decide to liquidate your portfolio.Kinston Industries has the following realized returns: The return on your portfolio is closest to:

A portfolio has three stocks - 300 shares of Yahoo (YHOO) ,300 Shares of General Motors (GM) ,and 100 shares of Standard and Poor's Index Fund (SPY) .If the price of YHOO is $20,the price of GM is $30,and the price of SPY is $150,calculate the portfolio weight of YHOO and GM.

The Capital Asset Pricing Model asserts that the ________ return is equal to the risk-free rate plus a risk premium for systematic risk.

If you build a large enough portfolio,you can diversify away all the risks of a portfolio.

Your portfolio contains $20,000 of Air Canada stock,which has a beta of 1.4,and $30,000 of WestJet stock,which has a beta of 1.8.What is the beta of your portfolio?

Suppose you buy 50 shares of RBC at $90 per share,and 70 shares of TD at $78 per share.If RBC's stock goes up to $94 per share and TD's stock falls to $72 per share,what is your portfolio return?

Use the information for the question(s) below. Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange-traded fund (ETF) with a 12% expected return and a 20% volatility. -The expected return on your of your investment is closest to:

What role does the correlation of two assets play in computation of the expected return of the two asset portfolio?

RBC stock has a beta of 0.85,while TD stock has a beta of 1.21.The risk-free rate is 1.5%,and the expected return on a portfolio with 50% weight in RBC and the remainder in TD is 9.74%.What is the market risk premium?