Student name:__________

MULTIPLE CHOICE - Choose the one alternative that

best completes the statement or answers the question.
1) Mary owns a risky stock and anticipates earning 16.5
percent on her investment in that stock. Which one of the
following best describes the 16.5 percent rate?

D) Systematic
A) Expected return return
B) Real return E) Risk premium
C) Market rate

2) A portfolio is:

D) a group of assets
A) a single risky security. held by an investor.
B) any security that is equally as risky as the overall E) an investment in
market. a risk-free security.
C) any new issue of stock.

3) Stock A comprises 28 percent of Susan's portfolio.

Which one of the following terms applies to the 28 percent?

D) Portfolio
A) Portfolio variance expected return
B) Portfolio standard deviation E) Portfolio beta
C) Portfolio weight

4) Systematic risk is defined as:

E) the risk unique

A) any risk that affects a large number of assets. to a firm's management.
B) the total risk of an individual security.
C) diversifiable risk.
D) asset-specific risk.

Version 1 1
5) Unsystematic risk can be defined by all of the following except:

D) unique risk.
A) unrewarded risk. E) asset-specific
B) diversifiable risk. risk.
C) market risk.

6) Which term best refers to the practice of investing in a

variety of diverse assets as a means of reducing risk?

E) Capital asset
A) Systematic pricing model
B) Unsystematic
C) Diversification
D) Security market line

7) The systematic risk principle states that the expected

return on a risky asset depends only on the asset’s
_____________blank risk.

D) market
A) unique E) unsystematic
B) diversifiable
C) asset-specific

8) The amount of systematic risk present in a particular

risky asset relative to that in an average risky asset is
measured by the:

D) mean.
A) squared deviation. E) variance.
B) beta coefficient.
C) standard deviation.

Version 1 2
 E) expected return
A) risk-free rate and beta. and beta.
B) market rate of return and beta.
C) market rate of return and the risk-free rate.
D) risk-free rate and the market rate of return.

10) The slope of the security market line represents the:

E) market rate of
A) risk-free rate. return.
B) market risk premium.
C) beta coefficient.
D) risk premium on an individual asset.

11) The security market line is defined as a positively

sloped straight line that displays the relationship between the:

portfolio.
A) beta and standard deviation of a portfolio. E) risk premium
B) systematic and unsystematic risks of a security. and beta of a portfolio.
C) nominal and real rates of return.
D) expected return and beta of either a security or a

12) Which one of the following is the minimum required

rate of return on a new investment that makes that investment
attractive?

D) Market rate of
A) Risk-free rate return
B) Market risk premium E) Cost of capital
C) Expected return minus the risk-free rate

13) A stock is expected to return 13 percent in an

economic boom, 10 percent in a normal economy, and 3
percent in a recessionary economy. Which one of the
following will lower the overall expected rate of return on this
stock?

Version 1 3
 D) A decrease in
A) An increase in the rate of return in a recessionary the probability of an
economy economic boom
B) An increase in the probability of an economic E) An increase in
boom the rate of return for a
C) A decrease in the probability of a recession normal economy
occurring

14) Which one of the following is the computation of the

risk premium for an individual security? E( R) is the expected
return on the security, Rf is the risk-free rate, β is the
security's beta, and E( RM) is the expected rate of return on
the market.

D) β[E( RM) − Rf]

A) E( RM) − Rf E) β[E( R) − Rf]
B) E( R) − E( RM)
C) E( R) − [E( RM) + Rf]

15) The expected rate of return on Delaware Shores stock concerning the variance of
is based on three possible states of the economy. These states the returns on this stock?
are boom, normal, and recession which have probabilities of
occurrence of 20 percent, 75 percent, and 5 percent,
respectively. Which one of the following statements is correct

state of the economy

A) The variance must decrease if the probability of produces a different
occurrence for a boom increases. expected rate of return.
B) The variance will remain constant as long as the E) The variance is
sum of the economic probabilities is 100 percent. independent of the
C) The variance can be positive, zero, or negative, economic probabilities of
depending on the expected rate of return assigned to each occurrence.
economic state.
D) The variance must be positive provided that each

16) Which one of the

following statements is
correct?

Version 1 4
 risk premium will be
A) The risk premium on a risk-free security is positive.
generally considered to be one percent. E) If a risky
B) The expected rate of return on any security, given security is priced correctly,
multiple states of the economy, must be positive. it will have an expected
C) There is an inverse relationship between the level return equal to the risk-free
of risk and the risk premium given a risky security. rate.
D) If a risky security is correctly priced, its expected

17) Which statement is true?

must equal 1.0.

A) The expected rate of return on any portfolio must E) The standard
be positive. deviation of any portfolio
B) The arithmetic average of the betas for each must equal 1.0.
security held in a portfolio must equal 1.0.
C) The beta of any portfolio must be 1.0.
D) The weights of the securities held in any portfolio

18) Consider a portfolio comprised of four risky securities. guarantee that the portfolio
Assume the economy has three economic states with varying variance will equal zero?
probabilities of occurrence. Which one of the following will

E) There must be
A) The portfolio beta must be 1.0. equal probabilities that the
B) The portfolio expected rate of return must be the state of the economy will
same for each economic state. be a boom or a bust.
C) The portfolio risk premium must equal zero.
D) The portfolio expected rate of return must equal the
expected market rate of return.

19) Which one of the following is the best example of an

announcement that is most apt to result in an unexpected
return?

B) Announcement
A) A news bulletin that the anticipated layoffs by a that the CFO of the firm is
firm will occur as expected on December 1 retiring June 1 as

Version 1 5
previously announced E) The verification
C) Announcement that a firm will continue its practice by senior management that
of paying a $3 a share annual dividend the firm is being acquired
D) Statement by a firm that it has just discovered a as had been rumored
manufacturing defect and is recalling its product

20) Which one of the following is the best example of

unsystematic risk?

E) Increase in
A) Inflation exceeding market expectations consumer spending
B) A warehouse fire
C) Decrease in corporate tax rates
D) Decrease in the value of the dollar

21) Which one of these represents systematic risk?

D) Closure of a
A) Major layoff by a regional manufacturer of power major retail chain of stores
boats E) Product recall
B) Increase in consumption created by a reduction in by one manufacturer
personal tax rates
C) Surprise firing of a firm's chief financial officer

22) Which one of these is the best example of systematic

risk?

E) Decrease in
A) Discovery of a major gas field management bonuses for
B) Decrease in textile imports banking executives
C) Increase in agricultural exports
D) Decrease in gross domestic product

23) Standard deviation measures _____________blank

risk while beta measures _____________blank risk.

A) systematic;

Version 1 6
unsystematic E) asset-specific;
B) unsystematic; systematic market
C) total; unsystematic
D) total; systematic

24) Which one of the following portfolios will have a beta

of zero?

D) A portfolio with
A) A portfolio that is equally as risky as the overall a zero variance of returns
market E) No portfolio can
B) A portfolio that consists of a single stock have a beta of zero.
C) A portfolio comprised solely of U. S. Treasury bills

25) Which one of the following best exemplifies

unsystematic risk?

E) Expected
A) Unexpected economic collapse increase in tax rates
B) Unexpected increase in interest rates
C) Unexpected increase in the variable costs for a firm
D) Sudden decrease in inflation

26) The risk premium for an individual security is based

on which one of the following types of risk?

D) Systematic
A) Total E) Unsystematic
B) Surprise
C) Diversifiable

27) Which one of the following represents the amount of

compensation an investor should expect to receive for
accepting the unsystematic risk associated with an individual
security?

A) Security beta

Version 1 7
multiplied by the market rate of return D) Risk-free rate of
B) Market risk premium return
C) Security beta multiplied by the market risk E) Zero
premium

28) Systematic risk is:

D) measured by
A) totally eliminated when a portfolio is fully beta.
diversified. E) measured by
B) defined as the total risk associated with surprise standard deviation.
events.
C) risk that affects a limited number of securities.

29) Which statement is correct?

market line graph.

A) A portfolio that contains at least 30 diverse E) An underpriced
individual securities will have a beta of 1.0. security will plot above the
B) Any portfolio that is correctly valued will have a security market line.
beta of 1.0.
C) A portfolio that has a beta of 1.12 will lie to the left
of the market portfolio on a security market line graph.
D) A risk-free security plots at the origin on a security

30) Portfolio diversification eliminates:

E) the reward for

A) all investment risk. bearing risk.
B) the portfolio risk premium.
C) market risk.
D) unsystematic risk.

31) Diversifying a portfolio across various sectors and

industries might do more than one of the following. However,
this diversification must do which one of the following?

Version 1 8
 E) Reduce the
A) Increase the expected risk premium portfolio's unique risks
B) Reduce the beta of the portfolio to one
C) Increase the security's risk premium
D) Reduce the portfolio's systematic risk level

32) For a risky security to have a positive expected return

but less risk than the overall market, the security must have a
beta:

D) that is > 1.
A) of zero. E) that is infinite.
B) that is > 0 but < 1.
C) of one.

33) The addition of a risky security to a fully diversified

portfolio:

E) will have no
A) must decrease the portfolio's expected return. effect on the portfolio beta
B) must increase the portfolio beta. or its expected return.
C) may or may not affect the portfolio beta.
D) will increase the unsystematic risk of the portfolio.

34) A portfolio is comprised of 35 securities with varying you know that the portfolio
betas. The lowest beta for an individual security is .74 and the beta:
highest of the security betas of 1.51. Given this information,

D) will be between
A) must be 1.0 because of the large number of 0 and 1.0.
securities in the portfolio. E) will be greater
B) is the geometric average of the individual security than or equal to .74 but
betas. less than or equal to 1.51.
C) must be less than the market beta.

Version 1 9
 E) the lowest
A) 0; 1 individual beta in the
B) 1; the market beta portfolio; the highest
C) the lowest individual beta in the portfolio; market individual beta in the
beta portfolio
D) the market beta; the highest individual beta in the
portfolio

36) If a security plots to the right and below the security

market line, then the security has _____________blank
systematic risk than the market and is _____________blank.

E) less; correctly
A) more; overpriced priced
B) more; underpriced
C) less; overpriced
D) less; underpriced

37) Assume you own a portfolio of diverse securities

which are each correctly priced. Given this, the reward-to-risk
ratio:

E) of each security
A) for the portfolio must equal 1.0. must equal the slope of the
B) for the portfolio must be less than the market risk security market line.
premium.
C) for each security must equal zero.
D) of each security is equal to the risk-free rate.

38) Which statement is correct?

D) A security with
A) An underpriced security will plot below the
security market line.
B) A security with a beta of 1.54 will plot on the
security market line if it is correctly priced.
C) A portfolio with a beta of .93 will plot to the right
of the overall market.

Version 1 10
a beta of .99 will plot above the security market line if it is
correctly priced.
E) A risk-free security will plot at the origin.

Version 1 11
39) Which one of the following is the vertical intercept of
the security market line?

risk premium
A) Market rate of return E) Risk-free rate
B) Individual security rate of return
C) Market risk premium
D) Individual security beta multiplied by the market

40) According to the capital asset pricing model, the

expected return on a security will be affected by all of the
following except the:

D) security’s
A) market risk premium. standard deviation.
B) risk-free rate. E) security’s beta.
C) market rate of return.

41) World United stock currently plots on the security affecting the risk level of
market line and has a beta of 1.04. Which one of the the stock, all else constant?
following will increase that stock's rate of return without

E) Decrease in the
A) An increase in the risk-free rate market rate of return
B) Decrease in the security's beta
C) Overpricing of the stock in the marketplace
D) Increase in the market risk-to-reward ratio

42) The expected return on a security is not affected by

the:

D) security’s beta.
A) security’s unique risks. E) market rate of
B) risk-free rate. return.
C) security’s risk premium.

Version 1 12
43) The capital asset pricing model:

E) assumes the
A) assumes the market has a beta of zero and the risk- market risk premium is
free rate is positive. constant over time.
B) rewards investors based on total risk assumed.
C) considers the relationship between the fluctuations
in a security’s returns versus the market’s returns.
D) applies to portfolios but not to individual securities.

44) Julie wants to create a $5,000 portfolio. She also

wants to invest as much as possible in a high risk stock with
the hope of earning a high rate of return. However, she wants
her portfolio to have no more risk than the overall market.
Which one of the following portfolios is most apt to meet all
of her objectives?

E) Invest $2,000 in
A) Invest the entire $5,000 in a stock with a beta of a stock with a beta of 3,
1.0 $2,000 in a risk-free asset,
B) Invest $2,500 in a stock with a beta of 1.98 and and $1,000 in a stock with
$2,500 in a stock with a beta of 1.0 a beta of 1.0
C) Invest $2,500 in a risk-free asset and $2,500 in a
stock with a beta of 2.0
D) Invest $2,500 in a stock with a beta of 1.0, $1,250
in a risk-free asset, and $1,250 in a stock with a beta of 2.0

45) Based on the capital asset pricing model, which one of individual security, all else
the following must increase the expected return on an held constant?

D) A decrease in
A) An increase in the risk level of that security as the market rate of return
measured by standard deviation given a security beta of .78
B) An increase in the risk-free rate given a security E) A decrease in
beta of 1.42 the risk-free rate given a
C) A decrease in the market rate of return given a security beta of 1.06
security beta of 1.13

Version 1 13
46) Midwest Fastener Supply stock is expected to return 80 percent, and 8 percent,
16 percent in a booming economy, 12 percent in a normal respectively. What is the
economy, and −3 percent in a recession. The probabilities of expected rate of return on
an economic boom, normal state, or recession are 12 percent, this stock?

D) 11.91%
A) 11.28% E) 11.70%
B) 10.67%
C) 10.95%

47) Crabby Shores stock is expected to return 15.7 percent

in a booming economy, 9.8 percent in a normal economy, and
2.3 percent in a recession. The probabilities of an economic
boom, normal state, or recession are 15 percent, 73 percent,
and 12 percent, respectively. What is the expected rate of
return on this stock?

D) 9.79%
A) 10.07% E) 8.68%
B) 10.74%
C) 10.61%

48) Southern Wear stock has an expected return of 15.1 return on this stock if the
percent. The stock is expected to lose 8 percent in a recession economy is normal?
and earn 28 percent in a boom. The probabilities of a
recession, a normal economy, and a boom are 2 percent, 87
percent, and 11 percent, respectively. What is the expected

D) 15.26%
A) 14.00% E) 16.43%
B) 17.04%
C) 14.79%

49) Bernard Companies

stock has an expected
return of 9.5 percent. The
stock is expected to return
11 percent in a normal

Version 1 14
economy and 14.3 percent in a boom. The probabilities of a return if the economy is in
recession, normal economy, and a boom are 10 percent, 84 a recession?
percent, and 6 percent, respectively. What is the expected

D) −10.98%
A) −5.44% E) −6.98%
B) −2.97%
C) −5.98%

50) Bass Clef Music Stores' stock has a risk premium of 7

percent while the inflation rate is 1.9 percent, and the risk-free
rate is 2.2 percent. What is the expected return on this stock?

D) 10.8%
A) 10.9% E) 12.3%
B) 7.3%
C) 9.2%

51) Assume the economy has an 18 percent chance of economy, and −4.5 percent
booming, a 3 percent chance of being recessionary, and being in a recession. What is the
normal the remainder of the time. A stock is expected to expected rate of return on
return 16.8 percent in a boom, 12.9 percent in a normal this stock?

D) 13.08%
A) 7.98% E) 10.68%
B) 8.63%
C) 9.17%

52) Malone Imports stock should return 12 percent in a respectively. What is the
boom, 10 percent in a normal economy, and 2 percent in a variance of the returns on
recession. The probabilities of a boom, normal economy, and this stock?
recession are 5 percent, 85 percent, and 10 percent,

D) .006107
A) .000522 E) .015254
B) .000611
C) .024718

Version 1 15
53) The common stock of The Dominic Companies should and 2 percent, respectively.
return 29 percent in a boom, 12 percent in a normal economy, What is the variance of the
and −15 percent in a recession. The probabilities of a boom, returns on this stock?
normal economy, and recession are 12 percent, 86 percent,

D) .004701
A) .005809 E) .006270
B) .005019
C) .006047

54) North Around, Incorporated, stock is expected to

return 22 percent in a boom, 13 percent in a normal economy,
and −15 percent in a recession. The probabilities of a boom,
normal economy, and a recession are 6 percent, 92 percent,
and 2 percent, respectively. What is the standard deviation of
the returns on this stock?

D) 18.79%
A) 2.15% E) 4.53%
B) 4.6%
C) 20.54%

55) Blue Bell stock is expected to return 8.4 percent in a respectively. What is the
boom, 8.9 percent in a normal economy, and 9.2 percent in a standard deviation of the
recession. The probabilities of a boom, normal economy, and returns on this stock?
a recession are 2 percent, 92 percent, and 6 percent,

D) .42%
A) .38% E) .10%
B) .55%
C) .13%

56) You own a portfolio that is invested as follows:

$22,575 of Stock A, $3,750 of Stock B, $12,500 of Stock C,
and $5,800 of Stock D. What is the portfolio weight of Stock
B?

A) 8.47%

Version 1 16
 B) 8.40% E) 13.08%
C) 10.96%
D) 9.66%

57) You own a $58,600 portfolio comprised of four portfolio weight of Stock
stocks: A, B, C, and D. The values of Stocks A, B, and C are D?
$12,100, $17,400, and $20,400, respectively. What is the

D) 12.10%
A) 16.38% E) 12.58%
B) 14.85%
C) 10.33%

58) You own a portfolio of two stocks, A and B. Stock A is the expected return on
is valued at $84,650 and has an expected return of 10.6 the portfolio if the
percent. Stock B has an expected return of 4.6 percent. What portfolio value is $97,500?

D) 10.09%
A) 9.81% E) 10.05%
B) 9.62%
C) 9.74%

59) You own a portfolio that is invested 32 percent in expected return on the
Stock A, 43 percent in Stock B, and the remainder in Stock C. portfolio?
The expected returns on stocks A, B, and C are 11.5 percent,
15.2 percent, and 8.8 percent, respectively. What is the

D) 12.42%
A) 11.71% E) 12.49%
B) 12.18%
C) 12.83%

60) You own a portfolio consisting of the securities listed What is the expected return
below. The expected return for each security is as shown. on the portfolio?

Stock Number of Price per Expected A 175 $ 1

Shares share Return 9 1

Version 1 17
 .2%
B 250 18 16.4% A) 13.81%
C 400 56 8.7% B) 12.91%
D 225 39 24.5% C) 13.28%
D) 14.14%
E) 13.46%

61) You have compiled the following information on your

investments. What rate of return should you expect to earn on
this portfolio?

Stock Number of Price per Expected

Shares share Return A) 11.57%
A 500 $ 51 13.6% B) 11.13%
B 200 66 14.8% C) 11.87%
C 300 42 7.5% D) 11.30%
D 250 29 2.1% E) 11.61%

62) You want to create a $50,000 portfolio that consists of and for Stock B it is 9.4
three stocks (A, B, and C) and has an expected return of 12.6 percent. What is the
percent. Currently, you own $14,200 of Stock A and $21,700 expected rate of return for
of Stock B. The expected return for Stock A is 16.2 percent, Stock C?

D) 12.36%
A) 13.67% E) 12.11%
B) 14.14%
C) 13.90%

63) You would like to invest $24,000 and have a portfolio Approximately how much
expected return of 11.5 percent. You are considering two should you invest in Stock
securities, A and B. Stock A has an expected return of 18.6 A if you invest the balance
percent and B has an expected return of 7.4 percent. in Stock B?

C) $7,411
A) $7,807
B) $8,786

Version 1 18
 D) $7,137
E) $8,626

Version 1 19
64) Given the following information, what is the expected A and C, and 40 percent in
return on a portfolio that is invested 30 percent in both Stocks Stock B?

Sta Probabi Rate of Return if State Rece .05 2. 1. −

te lity of Occurs: ssio 5 2 .
of State n
Eco Occurri
nom ng A) 9.44%
y Stock A Stock B Stock C B) 11.3%
(%) (%) (%)
C) 10.69%
Boom .08 15 13 12
D) 9.2%
.6 .2 .9
E) 8.78%
Norm .87 11 9. 8
al .2 6

65) Given the following information, what is the expected percent in Stock B, and the
return on a portfolio that is invested 35 percent in Stock A, 45 balance in Stock C?

Sta Probabi Rate of Return if State Rece .03 4. −3 1

te lity of Occurs: ssio 6 .8 .
of State n
Eco Occurri
nom ng A) 12.04%
y Stock A Stock B Stock C B) 12.16%
(%) (%) (%)
C) 12.91%
Boom .12 16 18 4.
D) 13.15%
.7 .9 6
E) 11.87%
Norm .85 14 14 9.
al .2 .1 5

66) Given the following information, what is the variance Stocks A and B, and 20
of the returns on a portfolio that is invested 40 percent in both percent in Stock C?

Sta Probabil Rate of Return if State y (%) (%)

te ity of Occurs: Boom .08 15.8 9.
of State Norma .92 10.6 8.
Eco Occurrin l
nom g
Stock A Stock B Stock C

Version 1 20
 D) .000205
A) .000602 E) .001143
B) .001490
C) .000153

67) Given the following information, what is the standard

deviation of the returns on a portfolio that is invested 35
percent in both Stocks A and C, and 30 percent in Stock B?

Sta Probabil Rate of Return if State Stag .92 7.4 7.2

te ity of Occurs: nant
of State
Eco Occurrin A) 1.95%
nom g
B) 1.13%
y Stock A Stock B Stock C
C) 3.67%
(%) (%) (%)
D) 2.91%
Grow .08 21. 12. 16.1
E) 2.37%
th 6 8

68) Given the following information, what is the standard

deviation of the returns on a portfolio that is invested 40
percent in Stock A, 35 percent in Stock B, and the remainder
in Stock C?

Sta Probabi Rate of Return if State gna

te lity of Occurs: nt
of State
Eco Occurri A) 1.68%
nom ng
B) 6.72%
y Stock A Stock B Stock C
C) 3.16%
(%) (%) (%)
D) 2.43%
Gro .07 18. 10. 12.
E) 1.49%
wth 9 2 1
Sta .93 7.5 8.5 9.3

69) You want to create

a $72,000 portfolio
comprised of two stocks

Version 1 21
plus a risk-free security. Stock A has an expected return of return equal to that of the
13.6 percent and Stock B has an expected return of 14.7 market, how much should
percent. You want to own $25,000 of Stock B. The risk-free you invest in the risk-free
rate is 3.6 percent and the expected return on the market is security?
12.1 percent. If you want the portfolio to have an expected

D) $13,315
A) $12,921 E) $12,775
B) $12,987
C) $13,550

70) A portfolio has an expected return of 13.4 percent. security. How much is
This portfolio contains two stocks and one risk-free security. invested in Stock X?
The expected return on Stock X is 12.2 percent and on Stock
Y it is 19.3 percent. The risk-free rate is 4.1 percent. The
portfolio value is $48,000 of which $10,000 is the risk-free

D) $22,200.14
A) $21,548.19 E) $16,904.72
B) $19,514.14
C) $18,478.87

71) You own a $36,800 portfolio that is invested in Stocks

A and B. The portfolio beta is equal to the market beta. Stock
A has an expected return of 22.6 percent and has a beta of
1.48. Stock B has a beta of .72. What is the value of your
investment in Stock A?

D) $13,558
A) $8,619 E) $17,204
B) $12,333
C) $14,500

72) A $36,000 portfolio is invested in a risk-free security

and two stocks. The beta of Stock A is 1.29 while the beta of
Stock B is .90. One-half of the portfolio is invested in the
risk-free security. How much is invested in Stock A if the beta
of the portfolio is .58?

Version 1 22
 D) $15,000
A) $6,000 E) $18,000
B) $9,000
C) $12,000

73) What is the beta of the following portfolio?

Stock Value Beta

M $ 18,400 .97 A) 1.08
N 6,320 1.04 B) 1.15
O 32,900 1.23 C) 1.04
P 11,850 .88 D) 1.11
E) .99

74) What is the beta of the following portfolio?

Stock Value Beta

W $ 32,960 .76 A) .98
X 15,780 1.31 B) .76
Y 8,645 1.49 C) 1.18
Z 19,920 .00 D) 1.21
E) 1.13

75) You would like to create a portfolio that is equally be if you want the portfolio
invested in a risk-free asset and two stocks. One stock has a to be equally as risky as
beta of 1.39. What does the beta of the second stock have to the overall market?

D) 1.55
A) .72 E) 1.61
B) .97
C) 1.23

76) You currently own

a portfolio valued at
$52,000 that has a beta of

Version 1 23
1.16. You have another $10,000 to invest and would like to
invest it in a manner such that the portfolio beta decreases to
1.15. What does the beta of the new investment have to be?

D) .924
A) 1.098 E) 1.125
B) .889
C) .869

77) Currently, you own a portfolio comprised of the

following three securities. How much of the riskiest security
should you sell and replace with risk-free securities if you
want your portfolio beta to equal 90 percent of the market
beta?

Stock Value Beta

D $ 13,640 1.13 A) $7,023.15
E 15,980 1.48 B) $7,811.29
F 23,260 .86 C) $8,666.67
D) $7,753.51
E) $8,318.50

78) You currently own a portfolio valued at $76,000 that below, what is the beta of
is equally as risky as the market. Given the information Stock C?

Stock Value Beta

A $ 13,800 1.21 A) .91
B 48,600 1.08 B) .95
C 8,400 ? C) .81
Risk-free ? ? D) 1.03
E) 1.06

79) Stock A has an expected return of 14.4 percent and a

beta of 1.21. Stock B has an expected return of 12.87 percent
and a beta of 1.06. Both stocks have the same reward-to-risk
ratio. What is the risk-free rate?

Version 1 24
 D) 3.35%
A) 2.06% E) 1.92%
B) 2.28%
C) 1.79%

80) Currently, the risk-free rate is 3.2 percent. Stock A has reward-to-risk ratios. What
an expected return of 11.4 percent and a beta of 1.11. Stock B is the beta of Stock B?
has an expected return of 13.7 percent. The stocks have equal

D) 1.08
A) 1.27 E) 1.42
B) 1.33
C) 1.36

81) Stock A has a beta of 1.09 while Stock B has a beta and both stocks have equal
of .76 and an expected return of 8.2 percent. What is the reward-to-risk premiums?
expected return on Stock A if the risk-free rate is 4.6 percent

D) 10.89%
A) 11.12% E) 11.73%
B) 8.07%
C) 9.76%

82) A stock has a beta of 1.32 and an expected return of slope of the security
12.8 percent. The risk-free rate is 3.6 percent. What is the market line?

D) 9.03%
A) 6.49% E) 7.99%
B) 7.28%
C) 6.97%

83) A stock has an expected return of 11.3 percent and a slope of the security
beta of 1.08. The risk-free rate is 4.7 percent. What is the market line?

C) 6.78%
A) 7.25% D) 5.92%
B) 6.11%

Version 1 25
 E) 7.03%

Version 1 26
84) Stock J has a beta of 1.52 and an expected return of securities both plot on the
15.76 percent. Stock K has a beta of .98 and an expected security market line?
return of 11.44 percent. What is the risk-free rate if these

D) 3.52%
A) 3.60% E) 3.64%
B) 3.34%
C) 3.57%

85) The risk-free rate is 3.7 percent and the expected correctly priced? Why or
return on the market is 12.3 percent. Stock A has a beta of 1.1 why not?
and an expected return of 13.1 percent. Stock B has a beta
of .86 and an expected return of 11.4 percent. Are these stocks

D) No, Stock A is
A) No, Stock A is underpriced, and Stock B is underpriced but Stock B is
overpriced. correctly priced.
B) No, Stock A is overpriced, and Stock B is E) No, both stocks
underpriced. are overpriced.
C) No, Stock A is overpriced but Stock B is correctly
priced.

86) Bama Entertainment has common stock with a beta of

1.22. The market risk premium is 8.1 percent, and the risk-
free rate is 3.9 percent. What is the expected return on this
stock?

D) 13.78%
A) 13.31% E) 14.13%
B) 12.67%
C) 12.40%

87) The stock of Wiley United has a beta of .98. The

market risk premium is 7.6 percent, and the risk-free rate is
3.9 percent. What is the expected return on this stock?

Version 1 27
 D) 11.52%
A) 7.53% E) 12.01%
B) 7.69%
C) 11.35%

88) BJB stock has an expected return of 17.82 percent. is 8.2 percent. What is the
The risk-free rate is 4.6 percent, and the market risk premium stock's beta?

D) 1.48
A) 1.47 E) 1.68
B) 1.51
C) 1.61

89) Ben & Terry's has an expected return of 13.2 percent percent. What is the risk-
and a beta of 1.08. The expected return on the market is 12.4 free rate?

D) 3.29%
A) 3.87% E) 2.40%
B) 4.24%
C) 2.61%

90) You own a stock that has an expected return of 15.72 expected rate of return on
percent and a beta of 1.33. The U.S. Treasury bill is yielding the market?
3.82 percent and the inflation rate is 2.95 percent. What is the

D) 14.09%
A) 12.07% E) 13.42%
B) 12.77%
C) 13.64%

91) A stock has a beta of 1.10, an expected return of 12.11

percent, and lies on the security market line. A risk-free asset
is yielding 3.2 percent. You want to create a portfolio valued
at $12,000 consisting of Stock A and the risk-free security
such that the portfolio beta is .80. What rate of return should
you expect to earn on your portfolio?

Version 1 28
 D) 9.41%
A) 9.68% E) 9.56%
B) 9.16%
C) 9.33%

92) You own a portfolio that has $2,200 invested in Stock is the expected return on
A and $1,300 invested in Stock B. If the expected returns on the portfolio?
these stocks are 11 percent and 17 percent, respectively, what

D) 13.23%
A) 12.57% E) 13.07%
B) 11.14%
C) 14.96%

93) Consider the following information:

Sta Probabili Rate of Return if State Stag .75 10.4 12.

te ty of Occurs: nant
of State What is the variance of a
Eco Occurring portfolio invested 25
nom Stock A Stock B Stock C percent each in Stocks A
y (%) (%) (%)
and B and 50 percent in
Grow .25 11.8 19.6 23.7
Stock C?
th

D) .001128
A) .001427 E) .000740
B) .000863
C) .001289

94) You own a portfolio equally invested in a risk-free must the beta be for the
asset and two stocks. If one of the stocks has a beta of 1.86 other stock in your
and the total portfolio is equally as risky as the market, what portfolio?

D) .14
A) 1.07 E) .97
B) .54
C) 1.14

Version 1 29
95) A stock has a beta of 1.04, the expected return on the What must the expected
market is 11.75 percent, and the risk-free rate is 3.75 percent. return on this stock be?

D) 19.16%
A) 9.89% E) 12.07%
B) 38.32%
C) 13.56%

96) A stock has an expected return of 13.4 percent, the 7.8 percent. What must the
risk-free rate is 3.9 percent, and the market risk premium is beta of this stock be?

D) 1.22
A) 1.67 E) 1.33
B) .94
C) 1.08

97) A stock has a beta of 1.48 and an expected return of weight must
17.3 percent. A risk-free asset currently earns 4.6 percent. If a be_____________blank.
portfolio of the two assets has a beta of .98, then the weight of
the stock must be _____________blank and the risk-free

D) .66; .34
A) .56; .44 E) .72; .28
B) .34; .66
C) .44; .56

98) Stock Y has a beta of 1.28 and an expected return of

13.7 percent. Stock Z has a beta of 1.02 and an expected
return of 11.4 percent. What would the risk-free rate have to
be for the two stocks to be correctly priced relative to each
other?

D) 3.69%
A) 2.38% E) 4.08%
B) 2.76%
C) 3.23%

Version 1 30
99) Stock J has a beta of 1.06 and an expected return of risk as the market, what
12.3 percent, while Stock K has a beta of .74 and an expected rate of return should you
return of 6.7 percent. If you create portfolio with the same expect to earn?

D) 11.25%
A) 10.67% E) 11.13%
B) 11.18%
C) 11.62%

100) Consider the following information on a portfolio of

three stocks:

St Probabi Rate of Return Bus .15 1 2 −

at lity of t 0 3
e State 5
of Occurri The portfolio is invested
Ec ng 40 percent in each Stock A
on Stock Stock Stock and Stock C and 20
om A (%) B (%) C (%)
percent in Stock B. If the
y
Boo .05 7 1 2
expected T-bill rate is 4.03
m 5 8
percent, what is the
Nor .80 9 1 1
expected risk premium on
mal 2 7
the portfolio?

D) 5.38%
A) 6.72% E) 7.68%
B) 5.62%
C) 6.90%

101) Popular Finger Foods stock is expected to return 20 87 percent, and 5 percent,
percent in a booming economy, 14 percent in a normal respectively. What is the
economy, and −5 percent in a recession. The probabilities of expected rate of return on
an economic boom, normal state, or recession are 8 percent, this stock?

D) 14.16%
A) 13.53% E) 13.95%
B) 12.92%
C) 13.20%

Version 1 31
102) Crabby Shores stock is expected to return 16 percent
in a booming economy, 11.5 percent in a normal economy,
and 1.8 percent in a recession. The probabilities of an
economic boom, normal state, or recession are 6 percent, 85
percent, and 9 percent, respectively. What is the expected rate
of return on this stock?

D) 10.90%
A) 8.96% E) 7.57%
B) 9.63%
C) 9.50%

103) Bernard Companies stock has an expected return of the expected return if the
10.75 percent. The stock is expected to return 13.5 percent in economy is in a recession?
a normal economy and 19.6 percent in a boom. The
probabilities of a recession, normal economy, and a boom are
5 percent, 80 percent, and 15 percent, respectively. What is

D) −36.72%
A) −59.80% E) −63.76%
B) −42.77%
C) −68.20%

104) Sarina Stable Supply stock has a risk premium of 6.2

percent while the inflation rate is 1.7 percent, and the risk-free
rate is 3.1 percent. What is the expected return on this stock?

D) 10.9%
A) 10.2% E) 12.4%
B) 7.63%
C) 9.3%

105) Assume the

economy has a 6 percent
chance of booming, am 8
percent chance of being
recessionary, and being

Version 1 32
normal the remainder of the time. A stock is expected to
return 22.5 percent in a boom, 11.5 percent in a normal
economy, and −8 percent in a recession. What is the expected
rate of return on this stock?

D) 10.60%
A) 5.5% E) 10.38%
B) 9.15%
C) 6.69%

106) A stock has a beta of .95, the expected return on the What must the expected
market is 13.25 percent, and the risk-free rate is 3.66 percent. return on this stock be?

D) 19.86%
A) 10.59% E) 12.77%
B) 39.02%
C) 14.26%

Version 1 33
Answer Key

Test name: Chapter 11 Test bank - Static

1) A
2) D
3) C
4) A
5) C
6) C
7) D
8) B
9) E
10) B
11) D
12) E
13) D
14) D
15) D
16) D
17) D
18) B
19) D

Version 1 34
20) B
21) B
22) D
23) D
24) C
25) C
26) D
27) E
28) D
29) E
30) D
31) E
32) B
33) C
34) E
35) E
36) A
37) E
38) B
39) E
40) D

Version 1 35
41) D
42) A
43) C
44) C
45) E
46) A
State of Probabili Stock return p × or 11
Economy ty of in given Return .2
State state 8%
Boom .12 .16 .0192 47) D
Normal .80 .12 .0960
Recession .08 −.03 −.0024
Sum .1128

State of Probabil Stock p × Return or 9

Economy ity of return in .
State given state 7
Boom .15 .157 .0236 9
Normal .73 .098 .0715 %
Recession .12 .023 .0028 48) A
.0979

E(R) = .151 = (.02 × −.08) + (.87 × x) + (.11 × .1218 = .87x

.28) x = .1400, or
E(R) = .151 = −.0016 + .87x + .0308 14.00%
49) C
E(R) = .095 = (.10 × x) + (.84 ×.11) + (.06 −.00598 = .10x
× .143) x = −.0598, or
E(R) = .095 = .10x + .09240 + .00858 −5.98%
50) C

Version 1 36
Expected return = .022 + .07 = .092, or 9.2%
51) D
State of Probabili Stock return p × o 13
Economy ty of in given Return r .0
State state 8%
Boom .18 .168 .03024 52) B
Normal .79 .129 .10191
Recession .03 −.045 −.0013
5
.1308

State Probab Stock p × E( R − [R − p × [R R .1 .0 . . − .0 .0

of ilit retur Retur R) E(R) E(R) − e 0 20 0 05 00
2
Economy of n in n ] E(R)]2 c 9 32 53
State given e 3 9 3
state s 0
Boom .05 .120 . .0 .0 .000 .00003 s
0 93 27 729 6 i
0 0 00 o
6 0 n
0 E( . Va .0
Norma .85 .100 . .0 .0 .000 .00004 R) ri 00
l 0 93 07 049 2 an 61
8 0 00 ce 1
5 0 53) D
0

State Probab Stock p × E( R − [R − p × [R 2

of ility return Retur R) E(R E(R)] − R .0 − − . − .0 .0
Econom of in n ) 2
E(R)]2 e 2 . 1 . 81 01
y State given c 1 4 2 2 62
state e 5 8 5
Boom .12 .290 . .1 .15 .0240 .00288 s 0 5
0 4 5 3 s
3 i
4 o
8 n
Normal .86 .120 . .1 −. .0002 .00019 E( . Va .0
1 4 01 4 R) ri 04
0 5 an 70
3 ce 1

Version 1 37
54) E
State Proba Stock p × E(R R − [R − p × s 1 . 97 %
of bilit return Retu ) E(R) E(R)]2 [R − s 8
Econom y of in rn E(R)]2 i 0
y State given o 0
state n %
Boom 6 2 1 12. 9. .8136% .0488 E( . Va .2
2 . 980 02 % R) ri 05
. 3 0% 00 an 4%
0 2 % ce
% 0 or 1 St 4.
0 an 53
% da 21
Norm 9 1 1 12. .0 .0000% .0000 rd %
al 3 1 980 20 % De
. . 0% 0% vi
0 9 at
% 6 io
0 n
0
%
55) E
Rece 2 − − 12. −2 7.8288% .1566

State Proba Stock p × E(R R − [R − p × [R n 5 % 0

of bilit retur Retu ) E(R) E(R)]2 − E( . Va .
Econom y of n in rn E(R)]2 R) ri
y State given an
state ce
Boom 2 8.4% . 8.9 − .0026% . or 8 St .
1 08% . 0 an
6 5 0 da
8 % 0 rd
0 1 De
% % vi
Norm 9 8.9% 8 8.9 . .0000% . at
al . 08% 0 0 io
1 % 0 n
8 0 St .
8 0 an
0 % da
% rd
Rece 6 9.2% . 8.9 . .0009% . De
ssio 5 08% 3 0 vi

Version 1 38
 ation 56) B
WeightC = $3,750/($22,575 + 3,750 + 12,500
+ 5,800) = .084, or 8.40%
57) B
WeightD = ($58,600 − 12,100 − 17,400 −
20,400)/$58,600 = .1485 or 14.85%
58) A
Stock V Value P E(R) P × E(R) Tot $ 1.00 .09
portfolio al 97,5 00 81
% 00.0
A $ 84,650.00 .8682 .1060 .0920 0
B $ 12,850.00 .1318 .0460 .0061 59) D
Security Portfolio % Return % × Return or 12.
Stock A .32 .115 .0368 42%
Stock B .43 .152 .06536 60) E
Stock C .25 .088 .022
E(R) .12416

Sto Numbe Price Stock Portfol Expecte p × 1 4 . . 1

ck r of per $ io d Retur C 40 $ $ 6 8 .
Share share Invest Weight Return n 0
s ed D 22 $ $ 2 2 .
A 175 $ $ 4. 11 .0 5 3 8 . . 5
9 1,5 2% .2 04 $ E .
75 % 73
6 E 1
B 250 $ $ 12 16 .0
61) B
Sto Numbe Price Stock Portfol Expecte p × 1
ck r of per $ io d Retur B 20 $ $ 2 1 .
Share share Invest Weight Return n 0
s ed C 30 $ $ 2 7 .
A 500 $ $ 43 13 .0 0
5 25, .6 .6 59 D 25 $ $ 1 2 .
1 500 % % 23

Version 1 39
 0 5 3
$ E( .1 E 1
58, R) 11
62) C
Value Stock C = $50,000 − 14,200 − 21,700 = [($14,100/$50,000)
$14,100 × E( RC)]
E( RP) = .126 = [($14,200/$50,000) × .162] + E( RC) = .1390, or
[($21,700/$50,000) × .094] + 13.90%
63) B
E( RP) = .115 = .186 x + .074(1 − x)
x = .3661
InvestmentA = .3661 × $24,000 = $8,786
64) A
S Pr Ra St Su Probability × o
t ob te oc m Sum m
a ab of k A, N .87 . . . . . . . .
t il Re We B, o
e it tu ig C r
o y rn ht m
f of if × a
E St St Re l
c at at tu R .05 . . − . . − − −
o e e rn e
n Oc Oc c
o cu cu e
m rr rs s
y in s
g i
St St St St St St o
oc oc oc oc oc oc n
k k k k k k Po 0.0944
A B C A B C rt
30 40 30 E(
% % % R)
B .08 . . . . . . .
o
65) D

Version 1 40
 S ProRat Sto Sum Probability × Sum N .85 .14 . .09 .0 .0 . .
t bab e ck A,B o 2 5 49 63 1
a ili of Wei ,C r 7 45 3
t tyRet ght m 2
e ofurn × a 1
o Sta if Ret l 5
f teSta urn R .03 .06 − .11 .0 −. . .
E Occ te e 4 2 22 01 0
c urrOcc c 4 71 2
o ingurs e 7
n Sto Sto Sto Sto Sto Sto s 7
o ck ck ck ck ck ck s
m A B C A B C i
y 35% 45% 20% o
B .12 .16 . .04 .0 .0 . . n
o 7 6 58 85 1 . Por .13
o 45 05 5 0 t
m 2 1 E(R
7 8 )
3
66) C
Sta Proba Rate Stock Sum Proba E(R) R − [R Boo .08 .158 .094 .212 .0
te bilit of Weigh A,B,C bilit E(R) E(R m 2
of y of Retur t × y ×
Eco State n if Retur Sum Nor .92 .106 .086 .104 .0
nom Occur State n mal 4
y ring Occur
s Port .1012 Varia
Stock Stock Stock Stock Stock Stock E(R) 48 nce
A 40% B 40% C 20% A B C
67) E
Sta Proba Rate Stock Sum Proba E(R) R − [R Boo .08 .216 .128 .161 .0
te bilit of Weigh A,B,C bilit E(R) E(R m 6
of y of Retur t × y ×
Eco State n if Retur Sum Nor .92 .074 .072 .101 .0
nom Occur State n mal 9
y ring Occur
s Port .0898 Varia
Stock Stock Stock Stock Stock Stock E(R) 50 nce
A 35% B 30% C 35% A B C
68) E
S Pr Ra St Su Pr E( R [R P × [R − a ab of k A, ab E( E(
t ob te oc m ob R) − − E(R)]2 t il Re We B, il R) R)

Version 1 41
 e it tu ig C it ]2
o y rn ht y N .93 .0 .0 .0 .0 .0 .0 .0 .07 .0
f of if × × o 75 85 93 30 29 23 83 719 87
E St St Re Su r 00 57 25 00 0 09
c at at tu m m 0 0 0 0 9
o e e rn a
n Oc Oc l
o cu cu
m rr rs
y in Po .0 Va .000223
g rt 87 ri
St St St St St St E( 09 an
oc oc oc oc oc oc R) 9 ce
k k k k k k St .014939
A B C A B C an
40 35 25 da
% % % rd
B .07 .1 .1 .1 .0 .0 .0 .1 .00 .0 . .00 .00 De
o 89 02 21 75 35 30 41 990 87 0 296 020 vi
o 60 70 25 55 9 09 5 5 8 at
m 0 0 0 0 9 4 io
4 n
5
69) C
E(RP) = .121 = [(x/$72,000) × .036] + [($25,000/$72,000)
{[($72,000 − x − 25,000)/$72,000 ] × .136} + × .147]
x = $13,550
70) C
E(RP) = .134 = [($10,000/$48,000) × .041] + x)/$48,000] × .193}
[(x/$48,000) × .122]+ {[($48,000 − 10,000 − x = $18,478.87
71) D
β P = 1.0 = 1.48A + [.72 × (1 − A)]
A = .368421
Investment in Stock A = $36,800 × .368421 =
$13,558

Version 1 42
72) C
β P = .58 = [(A/$36,000) × 1.29] + [($36,000
− A − 18,000)/$36,000) × .90] + [.50 × 0]
A = $12,000
73) A
Portfolio value = $18,400 + 6,320 + 32,900 + 11,850 = ($32,900/$69,470)(1.23) +
$69,470 ($11,850/$69,470)(.88) =
β P = ($18,400/$69,470)(.97) + ($6,320/$69,470)(1.04) + 1.08

74) B
Portfolio value = $32,960 + 15,780 + 8,645 + 19,920 = ($8,645/$77,305)(1.49) +
$77,305 ($19,920/$77,305)(0) = .76
β P = ($32,960/$77,305)(.76) + ($15,780/$77,305)(1.31) +

75) E
1/3(0) + 1/3(1.39) + 1/3(x) = 1.0
x = 1.61
76) A
β P = 1.15 = ($52,000/$62,000)(1.16) + ($10,000/$62,000)x
x = 1.098
77) D
Portfolio value = $13,640 + 15,980 + 23,260 = $52,880
β P = (.90)(1.00) = [$13,640/$52,880][1.13] + [($15,980 −
x)/$52,880)(1.48) + [$23,260/$52,880)(.86) + (x/$52,880)(0)
x = $7,753.51

78) C
Value of risk-free asset = $76,000 − 13,800 − 48,600 − 8,400 + ($8,400/$76,000)(βC) +
= $5,200 ($5,200/$76,000)(0)
βP = 1 = ($13,800/$76,000)(1.21) + ($48,600/$76,000)(1.08) βC = .81

Version 1 43
79) A
(.144- Rf)/1.21 = (.1287 − Rf)/1.06
Rf = .0206, or 2.06%
80) E
(.114 − .032)/1.11 = (.137 − .032)/βB
βB = 1.42
81) C
(RA − .046)/1.09 = (.082 − .046)/.76
RA = .0976, or 9.76%
82) C
Slope = (.128 − .036)/1.32 = .0697, or 6.97%
83) B
Slope = (.113 − .047) /1.08 = .0611, or 6.11%
84) A
(.1576 − Rf)/1.52 = (.1144 − Rf)/.98
Rf = .0360, or 3.60%
85) B
E(RA) = .037 + 1.1(.123 − .037) = .1316, or Stock B is
13.16% underpriced because
E(RB) = .037 + .86(.123 − .037) = .1110, or its expected return
11.10% lies above the
Stock A is overpriced because its expected security market line.
return lies below the security market line.
86) D

Version 1 44
E(R) = .039 + 1.22(.081) = .1378, or 13.78%
87) C
E(R) = .039 + .98(.076) = .1135, or 11.35%
88) C
E(R) = .1782 = .046 + β(.082)
β = 1.61
89) E
E(R) = .132 = Rf + 1.08(.124 − Rf)
Rf = .0240, or 2.40%
90) B
E( R) = .1572 = .0382 + 1.33(RM − .0382)
RM = .1277, or 12.77%
91) A
E(R) = .1211 = .032 + 1.10(MRP)
MRP = .0810
E(RP) = .032 + .80(.0810) = .0968, or 9.68%
92) D
E(R) = [$2,200/($2,200 + 1,300)] × .11 +
[$1,300/($2,200 + 1,300)] × .17 = .1323, or
13.23%
93) A
E(RBoom) = (.25 × .118) + (.25 × .196) + (.50 × .237) = .19700 Variance = .25(.19700
E(RBust) = (.25 × .104) + (.25 × .129) + (.50 × .103) = .10975 − .1315625)2 + .75(.10975
E(RPortfolio) = (.25 × .19700) + (.75 × .10975) = .1315625 − .1315625)2 = .001427

Version 1 45
94) C
βP = 1 = (1/3)(0) + (1/3)(1.86) + (1/3)(x)
x = 1.14
95) E
E(Ri) = Rf + βi(E(RM) − Rf) E(Ri) = .1207, or
E(Ri) = .0375 + 1.04(.1175 − .0375) 12.07%
96) D
E(R) = .143 = .039 + β(.078)
β = 1.22
97) D
βP = .98 = x(1.48) + (1 –x)(0) Stock weight is .66
x = .66 and the risk-free
weight is .34
98) A
(.137 − Rf)/1.28 = (.114 − Rf)/1.02
Rf = .0238, or 2.38%
99) D
βP = 1.0 = 1.06x + .74(1 − x)
x = .8125
E( RP) = .8125(.123) + (1 − .8125)(.067)
= .1125, or 11.25%
100) B
P R S S Prob × becA
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101) A
State of Probabili Stock return p × or 13
Economy ty in given Return .5
of State state 3%
Boom .08 .20 .0160 102) D
Normal .87 .14 .1218
Recession .05 −.53 −.0025
Sum .1353

State of Probabili Stock return p × or 10

Economy ty in given Return .9
of State state 0%
Boom .06 .160 .0096 103) A
Normal .85 .115 .0978
Recession .09 .018 .0016
.1090

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E(R) = .1075 = (.05 × x) + (.80 × 135) + (.15 × x = −.5980, or
196) −59.80%
104) C
Expected return = .031 + .062 = .093, or 9.3%
105) D
State of Probabili Stock return p × or 10
Economy ty in given Return .6
of State state 0%
Boom .06 .225 .0135 106) E
Normal .86 .115 .0989
Recession .08 −.008 −.0064
.106

E(Ri) = Rf + βi(E(RM) − Rf) E(Ri) = .1277, or

E(Ri) = .0366 + .95(.1325 − .0366) 12.77%

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