I cannot get the answers to #1, 3, 19, or 27. Can you find the answers to any of them?

Quiz #6: Stock Risk and Return Closes: Tuesday Nov 1st at 11:55pm 30 questions ...60 points Numerical Problems 1. Consider the following pool of securities (where you can only place all of your investment wealth into one of these securities), Which of the following securities are NOT dominated by any other assets in the pool? a. B b. H c. E d. C e. More than one of the above four choices are NOT dominated by any other assets in the pool. Asset r A 0.12 0.25 B 0.20 0.30 C 0.16 0.25 D 0.12 0.30 E 0.16 0.20 F 0.08 0.18 G 0.10 0.16 H 0.10 0.13 r 1 2. You are an investor who believes that their full wealth (of $300,000) is invested in a manner that leaves you with the following statistics: r = .14 and r = 0.27. What do you believe is the upper boundary of the 95% confidence interval that would apply to your wealth level in one year? a. $504,000 b. $462,000 c. $423,000 d. $396,000 For Questions 3-7, assume that you estimate that the current risk-free rate is 2.2% and the Equity Premium is 6.5%. These numbers allow you to build an SML graph which depicts your personal equilibrium model of the market. 3. You are considering a stock that, when compared to the Market Portfolio, has twice as much sensitive to market-wide news. What risk premium should you require to invest in this stock? a. 15.2% b. 17.4% c. 13.0% d. 8.7% e. None of the above 4. What equilibrium beta would you assign to a Treasury Bond for which you calculated a yield-to-maturity of 3.7%? a. 0.57 b. 0.35 c. 0.23 d. 0.18 2 5. You analyze a stock and believe that it has a of 1.20 and an implied return of 10.3%. Which of the following statements would accurately depict your beliefs about this stock? a. You believe that this stock is accurately priced given your model of the market. b. You believe that this stock is underpriced given your model of the market. c. You believe that this stock is overpriced given your model of the market. 6. You are considering purchasing a stock that has a beta of 0.80 and your analysis indicates that the company should pay a dividend in one year of $0.50 per share and that the dividends should grow at 2.4% per year indefinitely. According to your research and the CAPM, what is your estimate of the stock's intrinsic value - the value that brings it into equilibrium with your model of the market? a. $10.00 b. $18.52 c. $7.94 d. $14.11 7. Suppose that a news event happens for this same stock discussed in the previous question. The market reacts to this news event by adjusting the stock's g to 3.0% and its to 0.90. What new intrinsic value would you expect to see after the news event hits the market for this stock? a. $6.76 b. $9.90 c. $11.36 d. $13.71 ***************************** end of question set 3-7 ************************************************ 3 Information for questions 8 and 9 (Difficult) You have modeled a market equilibrium for stocks and you believe that the following two stocks are correctly priced by your model: Stock A: r = 12.1% and Stock B: r = 8.1% and 8. =1.2 = 0.7 What is the Equity Premium EP that you must have chosen for your modeled market? (Hint: think back to your linear algebra work in your prereq classes). a. 7.0% b. 7.6% c. 8.0% d. 8.4% 9. What is the risk free rate that you must have chosen for your modeled market? (Hint: think back to your linear algebra work in your prereq class). a. 3.2% b. 3.0% c. 2.9% d. 2.5% ************************************************************************************************************************ 10. You run a regression and estimate that the of Cintap, Inc. to be 0.87. Cintap has a debt to equity ratio of 0.32 and a corporate income tax rate of 0.35. What must be the unlevered beta U of Cintap stock shares? a. 0.72 b. 1.05 c. 0.78 d. 0.97 4 11. Difficult. Jasphone Inc. currently has an income tax rate of 40% (t=0.40) and a d/e ratio of 0.20. You have measured a levered beta of 1.30 for Jasphone stock. Now, if the firm wishes to increase its debt to equity ratio to 0.40. If the firm makes this move (issues more debt), then what would you expect would be the new of Jasphone stock? a. 1.61 b. 1.42 c. 1.44 d. 1.51 12. The p of a stock portfolio is simply the weighted average of all the betas of the various stocks i held in that portfolio. The weights xi represent the proportion of the the stock's value / the portfolio's overall value. Catherine is currently holding a portfolio with the following parameters: Stock Weight xi i A 0.35 1.15 B 0.20 0.74 C 0.10 0.53 D 0.35 0.92 What is the p of Catherine's portfolio? The formula for the beta of a portfolio is: (xi)( i) p= a. 0.82 b. 0.87 c. 0.93 d. 0.98 5 13. Difficult: The market's collective opinion on a stock is that: D1 = $1.00, r = 11% and P1 = $21.20. It is January 7, 2016 and this stock currently sells for $20.00. You buy shares of this stock today and then, tomorrow afternoon, some unexpected and significant news causes the market to reassess the growth rate g for this stock. You lose money as the stock's price drops to $16.67. According to the growing perpetuity model of stock prices, what would you now expect the price of this stock to be on January 8, 2017? a. $18.50 b. $18.20 c. $17.10 d. $17.50 Conceptual Questions Easier: Vocabulary and Basic Facts 14. Theoretically, for this type of news event, the returns of various individual stocks will show a strong positive correlation with each other in how they reacted to each of these particular news events. a. Only for Firm-Focused News Events b. Only for Market-Wide News Events c. For both types of News Events d. For Neither type of News Events 15. Suppose that an investor observes the price of a stock in the actual markets and then makes her own personal estimate of the next dividend and the long term dividend growth rate for that stock. If this investor then uses these three variables to estimate a return for this stock, what type of return is she calculating? A timeline would be a big help with this question. a. An Implied Return b. A Required Return c. An Intrinsic Value Return d. A Realized Return 6 16. Three scatter plots (Security Characteristic Lines) are given below for Firms A, B and C. Each shows how that firm's stock returns have been linked to the returns on the S&P 500 Index portfolio. Which of the following statements is true for this set of regression results? A B C a. Stock A has the highest beta and also shows the highest R2 in the set. b. Stock B has the highest beta and also shows the highest R2 in the set. c. Stock C has the highest beta and also shows the highest R2 in the set. d. None of the above statements are true. 17. A firm made an announcement today about their quarterly earnings. Interestingly, these earnings were down 18% from the previous quarter, but strangely there was no change in the price of the firm's stock shares when this announcement was made. Which of the following is True regarding this situation? a. The market was not surprised by the firm's announcement. b. The firm's announcement does not qualify as a \"news event\" as is defined in this course. c. The firm's stock price likely already declined at one or more points prior to today's announcement by the firm. d. All of the above choices are True with respect to the information given above. 7 Moderate: Deeper Understanding of Variables and Facts, Relations Between Variables 18. When applying the CAPM to estimate a required return and value a stock, an analyst desires to have \"forward-looking\" estimates of the input variables. As covered in the lecture notes and in class, for which of the following variables are forward-looking estimates readily available at a low cost? a. rf b. EP c. d. Forward-looking estimates are available for more than one of the variables listed above. and r can be used as measures of risk. Which of the statements below is True regarding what types of risk these two variables measure? 19. Based on the findings of the CAPM theory, a. is an appropriate measure of just a stock's market risk while appropriate measure of just a stock's firm-focused risk. b. is an appropriate measure of just a stock's market risk while r is an appropriate measure of a security's market risk and firm-focused risk combined. c. is an appropriate measure of just a stock's market risk while appropriate measure of just a stock's firm-focused risk. r d. For the market portfolio, both portfolio's market risk. m and m r is an is an are appropriate measures of just the e. Two of the above statements are actually true. 8 20. Which of these three statements about the concept of Firm-Focused Risk is False? a. On average, Firm-Focused Risk provides no long-run return to investors who bear it. b. According to CAPM theory, investors who invest all their money in the Market Portfolio will not experience any Firm-Focused Risk. c. Since Firm-Focused News Events can be diversified away, these events cannot cause a stock's price to change when they occur. d. More than one of the above statements is False. 21. The Capital Asset Pricing Model would hold that over any 20-year period, the rise or fall of the S&P Index would have been caused by: a. Market-Wide News Events b. Firm-Focused News Events c. both Market-Wide and Firm-Focused News Events in roughly equal share. d. Each 20-year period is different, and so any of the choices above could hold for some particular 20-year period. 22. A firm makes and sells products that are in the category of luxury goods. Which of the following statements are False with respect to this firm? a. The beta of the firm's stock will most likely be greater than 1.0. b. When you run a regression of the firm's stock returns against the S&P 500 returns, you will likely find that the slope of the stock's SCL will likely be less than 0.80 and the R2 for the regression will be above 0.90. c. As the economy expands and contracts, the unit sales and/or margin levels for this firm's products will likely fluctuate more dramatically than would be found for the average product in the marketplace. d. The risk premium for the firm's stock will most likely be greater than the equity premium. 9 Information for Questions 23-26 Consider the following three stock portfolios where two different measures of risk have been provided for each portfolio. You will all of your personal funds ($500,000) into just one of these portfolios. Portfolio A: =1.3 r = 0.20 Portfolio B: =1.1 r = 0.32 Portfolio C =0.8 r = 0.24 23. Which portfolio would, on average, grow your wealth to the highest level by the end of the year? a. Portfolio A b. Portfolio B c. Portfolio C d. You can't be sure given the information that is available. 24. As you project your possible wealth ahead from today, which portfolio will give you the widest 95% confidence interval for your end-of-year wealth? a. Portfolio A b. Portfolio B c. Portfolio C d. You can't be sure given the information that is available. 10 Hardest: Connecting Deeper Understanding Across Different Concepts 25. Continuing from the previous page, if you can only invest your $500,000 into only one of these portfolios, which one would be the best investment choice? a. Portfolio A b. Portfolio B c. Portfolio C d. You can't be sure given the information that is available. 26. Very Difficult. Which of these portfolios most likely has the least amount of firm-focused risk and thus likely the highest R2 for its SCL regression? It may help to draw some SCL graphs with an SCL line and scatter points. a. Portfolio A b. Portfolio B c. Portfolio C ***************************** end of question set 10-13 ************************************************ 27. Which of the choices below is a reasonable ending to the starting phrase given just below? According to the CAPM theory, the forward-looking risk premium expected on average by investors when they invest in the Market Portfolio... a. must, because the Market Portfolio has 100% market risk, be larger than the risk premium of any individual stock. b. is constant over time c. is represented by the symbol EP d. can be estimated to a high degree of precision by averaging past returns of T-Bills and T-Bonds e. Two of the above choices actually provide correct reasonable endings to the starting phrase. 11 28. In the CAPM model, the concept of the \"sensitivity\" of stock returns is best connected to which of the following choices? a. how dramatically the overall Market Portfolio moves on any given day b. how quickly a stock's r changes over time c. how a given stock's returns compare to the Market's Portfolio returns across time d. how a firm's stock's returns compare over time with that same company's earnings per share 29. Consider the following statement about the slopes of some key graph-lines covered in the B2 unit. I. The slope of an estimated Security Market Line (SML) equals the Equity Premium estimated by the person building the SML graph. II. The slope of the Security Characteristic Line provides the sensitivity of a stock's price to market-wide news events, relative to, how the Market Portfolio responds to those same events. Which of the following choices is True regarding the two statements above? a. Both Statements are true. b. Only Statement I is true. c. Only Statement II is true. d. Neither Statement is true. 12 30. Prenev starts with $10,000 worth of one stock and then (during the same day) keeps adding $10,000 worth of other stocks to his portfolio until he has a portfolio worth $200,000. Interestingly, he has chosen his stocks so that they all of them have a of 0.92 and a r of 0.36. Given this situation, which of the following statements is TRUE with respect to the beta p and sigma p of Prenev's portfolio as more and more stocks are added to it? a. p will remain at 0.36, p will remain at 0.92 b. p will remain at 0.36, p will drop further and further below 0.92 c. p will remain at 0.92, p will drop further and further below 0.36 d. p and p will both drop further and further below 0.36 and 0.92, respectively 13