The returns of StarCups are 25% in economic boom, 10% in normal economics, and -5% in economic recessions.

The returns of StarCups are 25% in economic boom, 10% in normal economics, and -5% in economic recessions.

Subject: Business    / Finance   
Question
1.    The returns of StarCups are 25% in economic boom, 10% in normal economics, and -5% in economic recessions. If the probabilities of economic boom, normal economics and economic recession are 40%, 35%, and 25% respectively. What is the expected return of StarCups?
a.    8.75%
b.    9.88%
c.    11.06%
d.    12.25%
e.    15.67%

 

2.    The covariance between H and C is 0.004. What is the correlation coefficient between H and C if H’s standard deviation is 0.1 and if C’s standard deviation is 0.1?
a.    – 0.2
b.    – 0.1
c.    0.1
d.    0.2
e.    0.4

 

3.    Returns on shares of Lattice are predicted as follows: Lattice earns 0.10 return in recession and 0.20 return in a boom. An economist attributes a 0.40 chance of a recession and a 0.60 chance of a boom. Which of the following is closest to lattice’s variance?
a.    0.0024
b.    0.0056
c.    0.0034
d.    0.0083
e.    0.0093

 

4.    What is the beta of a $1 million portfolio with $350,000 investment in Treasury bills and having the remainder invested in the market portfolio?
a.    0.35
b.    0.65
c.    0.00
d.    1.00
e.    2.00

5.    The covariance between Van Gough’s common stock returns and the return on the market portfolio is 0.008. The variance of the market 0.02. Which of the following comes closest to the beta of Van Gough’s common stock?
a.    0.1
b.    0.2
c.    0.4
d.    0.6
e.    0.8

 

6.    The beta of stock Golden is 1.25. The risk free rate of interest is 2.5% and the expected return on the market is 10%. According to the capital asset pricing model, which of the following comes closest to the expected return of Golden?
a.    11.88%
b.    12.37%
c.    13.12%
d.    14.25%
e.    15.00%

 

7.    If the expected return on State Farm from the Capital Asset Pricing Model (the CAPM) is 0.20, and if the risk free rate of interest is 0.05, and if the expected return on the market portfolio is 0.20, then which of the following comes closest to State Farm’s beta?
a.    0.00
b.    0.50
c.    1.00
d.    1.50
e.    2.00

 

8.    What does a negative covariance between two assets imply?
a.    That most of the risk of the two assets will cancel out due to diversification.
b.    That the two assets tend to be in different industries.
c.    That the two assets are mirror images of each other.
d.    That the probabilities of different economic scenarios tend to be equal to each other.
e.    That the returns of the two different assets tend to move in different directions.

 

9.    Which of the following best describes the risk measure known as beta?
a.    A measure of the expected return of the market.
b.    A measure of risk that cannot be diversified away by conforming portfolios.
c.    A measure of efficient frontier.
d.    A measure of state dependent returns.
e.    A measure of firm specific risk.

10.    From CAPM, a stock with a beta equal to zero has an expected return equal to what?
a.    The risk-free rate of return.
b.    One-half the expected return on the market portfolio.
c.    The expected return on the market.
d.    The difference between the risk free rate of return and the market portfolio.
e.    The risk free rate plus one-half of the difference between the risk free rate of return and the market portfolio.