Financial Management, 12e (Titman/Keown/Martin)

Financial Management, 12e (Titman/Keown/Martin)

Chapter 8 Risk and Return-Capital Market Theory

8.1 Portfolio Returns and Portfolio Risk

4) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return?

A) 12%

B) 13%

C) 14%

D) 15%

Answer: B

5) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what would be the standard deviation?

A) 2.24

B) 2.56

C) 2.83

D) 2.98

Answer: A

6) You are considering investing in a portfolio consisting of 40% Electric General and 60% Buckstar. If the expected rate of return on Electric General is 16% and the expected return on Buckstar is 9%, what is the expected return on the portfolio?

A) 12.50%

B) 13.20%

C) 11.80%

D) 10.00%

Answer: C

7) The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected return on AAPL next year is 24% with a standard deviation of 30%. If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio.

A) 20%

B) 16%

C) 18%%

D) 25%

Answer: C

8) The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected return on AAPL next year is 24% with a standard deviation of 30%. The correlation between the two stocks is .6. If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio.

A) 21.45%

B) 25.00%

C) 4.60%

D) 15.00%

Answer: A

Use the following information, which describes the possible outcomes from investing in a particular asset, to answer the following question(s).

State of the Economy Probability of the States Percentage Returns

Economic recession 25% 5%

Moderate economic growth 55% 10%

Strong economic growth 20% 13%

9) The expected return from investing in the...