it shows expected return as a function of β. During the same time period, Company V earned -2.50 percent and Company M earned 1.60 percent. Compute the expected return given these three economic states, their likelihoods, and the potential returns: You have a portfolio with a beta of 1.25. Which of these is the term for portfolios with the highest return possible for each risk level? It is calculated by estimating the probability of a full range of returns on an investment, with the probabilities summing to 100%. The security has no special covenants. Answer: You should buy the bond since the actual price of the bond is lower than the price with your required rate. If the risk-free rate is 3 percent and the market risk premium is 8 percent, what is the required return for the market? This dividend will grow at 11 percent indefinitely. CAPM is calculated according to the following formula: Where:Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return of the marketNote: “Risk Premium” = (Rm – Rrf)The CAPM formula is used for calculating the expected returns of an asset. Which of the following is a concern regarding beta? FedEx Corp. stock ended the previous year at $118.30 per share. If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 17 percent, what's the value of the stock? FedEx Corp. ended the previous year at $96.20 per share. Which of the following statements is correct? Stock B has a required return of 26%. It paid a $0.80 per share dividend last year at $105.80. What yield to maturity is the bond offering? At face value, the coupon rate and yield equal each other. A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Discount bond: a bond that sells below its par value Premium bond: a bond that sell above its par value (2) Yield to maturity (YTM): the return from a bond if it is held to maturity Example: a 10-year bond carries a 6% coupon rate and pays interest semiannually. The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 percent. compounded semi-annually. The holding period return yield formula may be used to compare the yields of different bonds in your portfolio over a given time period. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. the expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The y-intercept of the SML is equal to the risk-free interest rate, while the slope is equal to the market risk premium (the market’s rate of return minus the risk-free rate). If you owned 400 shares of FedEx, what was your dollar return? Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. Which of these refer to the ease with which an asset can be converted into cash? this implies that, A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). Calculate the maturity risk premium on the two-year Treasury security. Year-to-Date, Company O had earned a 2.30 percent return. Government Treasury bonds are historically considered the safest bonds. All of these are investor diversification problems. Triple-A (AAA) rated bonds are those deemed least likely to default. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. During the same time period, Company V earned 1.90 percent and Company M earned -3.60 percent. (Assume interest payments are paid semi-annually and a par value of $1,000.) Firms can quite possibly change their stocks' risk level by substantially changing their business. Company X has a beta of 1.45. In return for this safety, the bonds return the lowest interest rate. Which of the following is the correct ranking from least risky to most risky? At … If you owned 500 shares of FedEx, what was your percent return? If you owned 400 shares of FedEx, what was your percent return? Stock A has a required return of 19%. the expected return on default-free bonds. 2. What is the standard deviation of monthly returns? What is the average monthly return? You own $1,000 of City Steel stock that has a beta of 1. What is the value of their stock when the required rate of return is 15.13 percent? His firm has a beta of 1.6, the expected return on the market is 11 percent, and the risk-free rate is 3 percent. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk? Given this information which of the following statements is correct? a) The probability of default is zero b) The bond is callable Answer: The probability of default is zero. Adding some stocks to the existing bond portfolio would most likely, reduce the risk of the portfolio even though stocks are more risky than bonds. Actual Return: An actual return is the actual gain or loss of an investor. CODES (2 months ago) 11 new "zero Coupon Bonds" Quizlet results have been found in the last 90 days, which means that every 8, a new "zero Coupon Bonds" Quizlet result is figured out. calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. Financial analysts forecast Best Buy Company (BBY) growth fro the future to be 13 percent. It is expected to pay its first dividend of $0.10 per share in three years. Which of these is the reward for taking systematic stock market risk? If the market return is expected to be 8 percent and the risk free rate is 3 percent, what is the company's required return? The annual T-bill yield during the same period was 4.3 percent. What was the market risk premium during that year? FedEx Corp. stock ended the previous year at $118.30 per share. The market has an expected rate of return of 12.6 percent. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year … The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. Which of the following statements is correct regarding diversification? Which of the following describes what will occur as you randomly add stocks to your portfolio? The expected return and risk of Portfolio Yellow are 15 percent and 19 percent, and for the Purple Portfolio are 12 percent and 18 percent. A two-year Treasury security currently earns 5.13 percent. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. It paid a $1.30 per share dividend last year. This can be expressed in the following formula: expected return (ex-ante) … The new appropriate discount rate will be 6.00 percent. It ended last year at $131.70. The bond is currently selling at a price below its par value. ... Stock in Ombor Medical Supplies earns a return of 5.3% annually, while bonds issued by Ombor Medical Supplies earns a return of 4.1% annually. Which of the following is a correct statement about the two stocks? Round your answer to the nearest whole percent and assume annual coupon payments. If you owned 500 shares of FedEx, what was your dollar return? Which of the following is the reward investors require for taking risk? In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate. The market has an expected rate of return of 9.8 percent. Expected return The expected return on a risky asset, given a probability distribution for the possible rates of return. What will be the new portfolio beta if you keep 60 percent of your money in the old portfolio and 40 percent in a stock with a beta of 0.8? Assume you borrow 100 apples and in 1 year you return 107 apples. Rank the following three stocks by their level of total risk, highest to lowest. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. If the default risk premium and liquidity risk premium on a 10 year corporate bond is the same as that on the 20 year corporate bond, what is the current rate on a 10 year corporate bond? A particular security's default risk premium is 3 percent, for all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. TC corporate bond with yield of 8.76 percent and B & O corporate bond with a yield of 5.99, under which conditions will an investor demand a smaller return on a bond, if a bonds yield to maturity use above its coupon rate, bond prices must decline at the same time, all of the following items would need to be included in the bond's indenture agreement except, which of these statements answers why bonds are known as fixed income securities, investors know how much they will receive in interest payments, when market interest rates rise we will expect an increase int he yield to maturity on an already outstanding bond, if the coupon rate equals 7% then a corresponding $1,000 face value bond, assume that a bond is quoted to be selling at a price equal to $93, per $100 of face value. what is the default risk premium on the corporation's 10 year bonds? The larger the standard deviation, the higher the total risk. By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios. Stock A has a required return of 15%. FedEx Corp. ended the previous year at $96.20 per share. Easy to use and portable, study sets in Expected Return are great for studying in the way that works for you, at the time that works for you. Most common stocks are positively correlated with each other because they are impacted by the same economic factors. If you have a portfolio made up of 20 percent Company O, 30 percent Company V, and 50 percent Company M, what is your portfolio return? A portfolio manager is managing a $10 million portfolio. Interest rates, inflation and economic growth are economic factors that are examples of __________________. 11) What is the expected rate of return on a bond that matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is currently selling for $911? Assume that you observe the following interest rates on the following 20 year bonds: as a bond approaches its maturity we expect the market price of the bond, under which will an investor demand a larger return on a bond, the bond issue is downgraded from a to BBB, which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate, which of the following bond makes no interest payments, if a bond's yield to maturity rises above its coupon rate, the bond must be selling for a price lower than its par value, when we say that a bondholder faces interest rate risk we mean that the bondholder faces the possibility of a ________ in market interest ratios and a _____ in the value of the bond as a result, which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder, consider the following three bonds A treasury note quoted at 87:25 and a corporate bond quoted at 102.42 and a municipal bond quoted at 101.45. if the treasury and corporate bonds have a par value of 1,000 and the municipal bond has a par value of 5,000 what is the price of these three bonds, which of the following is not a factor that determines the coupon rate of its company's bonds, if a bonds selling at a premium then ____, its yield should be lower than its coupon rate. The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's, Stock valuation model dynamics make clear that higher dividend growth rates lead to, All of the following are stock market indices except, Stock valuation model dynamics make clear that lower discount rates lead to, discounting the future dividends and future stock price appreciation. If the management team of a company decides to increase the dividend payment for the current year. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? Expected Return for Portfolio = 50% * 15% + 50% * 7% 2. The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. 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