| | | Statements a, b, and c are correct. 2. The risk-free rate, KRF, is 6 percent and the market risk premium, (KM KRF), is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is most correct? | | | The portfolios required return is less than 11 percent. | | | | If the risk-free rate remains unchanged but the market risk premium increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points. | | | | If the market risk premium remains unchanged but expected inflation increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points. | | | | If the stock market is efficient, your portfolios expected return should equal the expected return on the market, which is 11 percent. | | | | None of the above answers is correct. 3. Inflation, recession, and high interest rates are economic events, which are characterized as | | | Company-specific risk that can be diversified away. | | | | Market risk. | | | | Systematic risk that can be diversified away. | | | | Diversifiable risk. | | | | Unsystematic risk that can be diversified away. 4. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose b is equal to 1.0, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose b is equal to 2.0. What will be the new beta of the portfolio? | | | 1.10 | | | | 1.15 | | | | 1.12 | | | | 1.20 | | | | 1.22 5. Lowell Inc. faces the following probability distribution: State of Probability of Stocks Expected Return the Economy State Occurring if this State Occurs Boom 0.25 25% Normal 0.50 15 Recession 0.25 5 What is the coefficient of variation on the company's stock? (Assume that the standard deviation is calculated using the probability statistic.) | | | 0.71 | | | | 0.67 | | | | 0.06 | | | | 0.54 | | | | 0.47 6. Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be _________________ the YTM with it. | | | the same as | | | | unrelated to | | | | higher than | | | | either higher or lower, depending on the level of call premium, than | | | | lower than 7. If the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value? | | | A 10-year bond with a 12 percent coupon. | | | | A 10-year bond with an 8 percent coupon. | | | | A 10-year zero-coupon bond. | | | | A 1-year bond with an 8 percent coupon. | | | | A 1-year zero-coupon bond. 8. Lowell Corporation recently issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each six months. Their price has remained stable since they were issued, i.e., they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months. If both bonds have the same yield, how many new bonds must Lowell issue to raise $2,000,000 cash? | | | 2,596 | | | | 2,400 | | | | 4,275 | | | | 5,000 | | | | 3,000 9. Lowell Inc. has bonds which mature in 10 years, and have a face value of $1,000. The bonds have a 10 percent quarterly coupon (i.e., the nominal coupon rate is 10 percent). The bonds may be called in five years. The bonds have a nominal yield to maturity of 8 percent and a yield to call of 7.5 percent. What is the call price on the bonds? | | | $1,036.77 | | | | $1,136.78 | | | | $1,048.34 | | | | $1,025.00 | | | | $ 379.27 10. Lowell Motors has bonds outstanding which will mature in 12 years. The bonds pay a 12 percent semiannual coupon and have a face value of $1,000 (i.e., the bonds pay a $60 coupon every six months). The bonds currently have a yield to maturity of 10 percent. The bonds are callable in 8 years and have a call price of $1,050. What are the bonds' yield to call? | | | 9.89% | | | | 12.00% | | | | 10.00% | | | | 8.89% | | | | 9.94% | | | | | | | | | |
