BUSIENSS FINANCE - FALL 2011 TOPIC 5 - Investment Risk and Return In Class Problems MULTIPLE CHOI E, Choose the one alternative that best completes the statement or answers the question. 1) Last year Mike bought 100 shates of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share, The stock is currently selling for $60 per share. What actual rate of return did Mike eam over the year? A) 182 percent. 8) 117 percent ©) 14.1 percent. 1D) 15.9 percent. 2) The expected value, standard deviation of retums, and coefficient of variation for asset A are (See below.) Asset A Possible Outcomes Probability Returns (a) Pessimistic 025 3 Most likely 055 10 Optimistic 020 B A) 9.35 percent, 4.68 percent, and 2, respectively, B) 9.33 percent, 8 percent, and 2.15, respectively, ©) 9.35 percent, 2.76 percent, and 0.3, respectively. 1D) 10 percent, 8 percent, and 1.25, respectively. 3) An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be invested in asset J, with an ‘expected annual retum of 18 percent; and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is ‘A) 10.00%, 8B) 12.00%, ©) 12.67%. D) unable to be determined ftom the information provided. 4) An invest ment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is A) 125 By 145 1.33 'D) unable to be determined from the information provided. 5) Asset Y has a beta of 12, The risk-free rate of retumm is 6 percent, while the return on the market portfolio of assets is 12 percent. The asset's risk premium is ‘A) 10 percent B) 600 percent ©) 132 percent. D) 72 percent6) Asset P has a bela of 0.9. The risk-free rate of return is 8 percent, while the return on the market portfolio of assets is Id percent. The asset's required rate of return is, A) Se percent, B) 13.4 percent. C)6.0 percent. 1D) 10 percent. 7) What is the expected market retum if the expected return on asset X is 20 percent, its beta is 1.5, and the risk free rate is 5 percent? A)25% B) 15.0% 75% D)5.0% 8) What is the expected risk-free rate of return if asset X, with a beta of 1.25, hasan expected return of 18 percent, and the market risk premium is 12 percent? A)25% B)3.0% 05.0% D)75% 9) What is the expected return for asset X if t has a beta of 15, the expected market retum is 13 percent, and the expected risk-free rate is 4 percent? A) 21.5% B) 19.0% O155% D) 175% 10) What is the market risk premium ifthe risk free rate is 5 percent and the expected market retum is given as follows? State of Nature Probability Return “Boom —«O% RO Average 70% 15% Recession 10% 5% A) 16.0% B) 16.5% 105% Dy 10% 11) Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002, He received a dividend (of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2008. At the end of 2004, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share, What was Nico’s realized return during the three year holding period? What was Nico's average annual rate of return? A) “125%; -34% B) -167%; -3.4% ©) +16.7%5 44.2% D) +125% 44.2%ESSAY. Write your answer in the space provided or on a separate sheet of paper, 12) Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a Beta of 15 and a rate of return of 14 percent given the facts above? 18) Mr. Thomas is considering investment in a project with beta coefficient of 1.75. Whal would you recommend he do if this investment has an 11.5 percent rate of return, risk-free rate is 55 percent, and the rate of return on the market portfolio of assets is 8.5 percent?