The new appropriate discount rate will be 9 percent. FedEx Corp. stock ended the previous year at $136.20 per share. FedEx Corp. stock ended the previous year at $118.30 per share. Hence, the outcome is not guaranteed. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? It has had a credit rating of BB and a yield to maturity of 6.25 percent. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. A stock with beta equal to 0.4 would most likely be considered, Whenever a set of stock prices go unnaturally high and subsequently crashes down, the market experiences what we call, This is the average of the possible returns weighted by the likelihood of those returns occuring. Currently, the risk-free rate is 5 percent and the portfolio has an expected return of 10 percent. Using the CAPM, what is ABC’s expected return? What will be the new portfolio beta if you keep 60 percent of your money in the old portfolio and 40 percent in a stock with a beta of 0.8? Which of the bonds below would be most liquid? The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's, Stock valuation model dynamics make clear that higher dividend growth rates lead to, All of the following are stock market indices except, Stock valuation model dynamics make clear that lower discount rates lead to, discounting the future dividends and future stock price appreciation. Which of the following statements is correct regarding diversification? Also assume inflation rate of 3%. a) Your portfolio is invested 40 per cent each in A and C, and 20 per cent in B. What was the market risk premium during that year? Which of these is the reward for taking systematic stock market risk? Round your answer to the nearest whole percent and assume annual coupon payments. What is the main reason for calculating averages of past returns on stocks? Bondholders have a required rate of return of 12%p.a. The "givens" in this formula are the probabilities of different outcomes and what those outcomes will return. What is the value of their stock when the required rate of return is 15.13 percent? We think they will be useful in estimating future expected return. Firms can quite possibly change their stocks' risk level by substantially changing their business. Company X has a beta of 1.45. Portfolio Blue dominates Portfolio Purple, Which of these is defined as a combination of investment assets held by an investor. Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. The security's liquidity risk premium is .35 percent and maturity risk premium is .95 percent. The expected rate of return is the return on investment that an investor anticipates receiving. Which of the following is an electronic stock market without a physical trading floor? Assume a risk free rate of 4.75%. The market has an expected rate of return of 9.8 percent. (Assume semi-annual interest payments and $1,000 par value.). This is an example of a market underreaction. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. Like many formulas, the expected rate of return formula requires a few "givens" in order to solve for the answer. the expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. What is the best definition of efficient portfolio? If you owned 100 shares of FedEx, what was your percent return? Compute the value of this stock with a required return of 8 percent. The security has no special covenants. The larger the standard deviation, the higher the total risk. Expected return is simply a measure of probabilities intended to show the likelihood that a given investment will generate a positive return, and what the likely return will be. Get ready for your Expected Return tests by reviewing key facts, theories, examples, synonyms and definitions with study sets created by students like you. It paid a $1.30 per share dividend last year. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). (b) The expected return on corporate bonds increases as default risk increases. Which of the following is the asset pricing theory based on a beta, a measure of market risk? All of these statements are valid concerns regarding beta. The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet". The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. FedEx Corp. stock ended the previous year at $118.30 per share. CODES (2 months ago) 11 new "zero Coupon Bonds" Quizlet results have been found in the last 90 days, which means that every 8, a new "zero Coupon Bonds" Quizlet result is figured out. GEN has 10 million shares outstanding and a stock price of $89.25. A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of 10.06 percent. the stock price should not be impacted because nothing fundamental about the company has been changed, and as there will be less funds generated to pay out future dividends. Cash flows for an investment for today, next year and the year after are forecast to be $4000, $5000 and $6600. compounded semi-annually. Answer: B Question Status: Previous Edition 35) Which of the following statements are true? Average Rate of Return = $1,600,000 / $4,500,000; Average Rate of Return = 35.56% Explanation of Average Rate of Return Formula. Assume you borrow 100 apples and in 1 year you return 107 apples. Chapter 2: Bonds, stocks and other securities Try the multiple choice questions below to test your knowledge of this chapter. The annual return on the S&P 500 Index was 11.5 percent. U.S. Stocks – S&P 500: 8.2%International – MSCI EAFE: 4.4%U.S. JIM corporate bond with yield of 12.25 percent, IB corporate bond with yield of 4.49 percent. Which of these is a theory that describes the types of information that are reflected in current stock prices? What is the change in price the bond will experience in dollars? week lecture chapter 15: the term structure of interest rate problem sets question under the expectations hypothesis, if the yield curve is upward-sloping, the Small Cap – Dimensional US Small Cap Index: 11.5%Bonds – Barclays US Aggregate Bond Index: 5.3%. r = 2.5% + 1.45(10% - 2.5%) = 13.375% 3. CAPM is calculated according to the following formula: Where:Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return of the marketNote: “Risk Premium” = (Rm – Rrf)The CAPM formula is used for calculating the expected returns of an asset. Expected return on an asset (r a), the value to be calculated; Risk-free rate (r f), the interest rate available from a risk-free security, such as the 13-week U.S. Treasury bill.No instrument is completely without some risk, including the T-bill, which is subject to inflation risk. True A stock has an expected return of 14.5%, the risk-free rate is 4% and the return on the market is 11%. Triple-A (AAA) rated bonds are those deemed least likely to default. This is an example of a market overreaction. Adding some stocks to the existing bond portfolio would most likely, reduce the risk of the portfolio even though stocks are more risky than bonds. it shows expected return as a function of β. Actual Return: An actual return is the actual gain or loss of an investor. this implies that, A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. The expected return on Stock A should be greater than that on B. e. The expected return on Stock B should be greater than that on A. Year-to-date, Company O had earned a 3.60 percent return. The holding period return yield formula may be used to compare the yields of different bonds in your portfolio over a given time period. Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? the liquidity risk premium on the corporation's bond is 0.50 percent. Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time are known as. b. Afterwards, a more stable rate of 10 percent growth rate can be assumed. Currently, GLE, is trading in the market for $51. Government Treasury bonds are historically considered the safest bonds. It is calculated by estimating the probability of a full range of returns on an investment, with the probabilities summing to 100%. A stock with beta equal to 1 would most likely be considered, to be of about the same risk as the overall stock market, Shares of stock issued to employees that have limitations on when they can be sold are known as. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios. The market price of the bond is $910.00. The average return and standard deviation of Idol Staff are 10 percent and 15 percent; and of Poker-R-Us are 6 percent and 20 percent. A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. The market has an expected rate of return of 12.6 percent. Expected return = expected dividend yield + expected capital gains yield g P D g g P D rs 0 0 0 1 ^ *(1) In the above example, 0.05 0.0525 0.05 10.25% 40 *(1 ) 2.00*(1 0.05) 0 0 ^ g P D g rs where 5.25% is the expected dividend yield and 5% is the expected capital gains … Normally, bond investors account for call risk by figuring the yield-to-call, which is the percentage return the bond will pay up to the call date. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to. What is GEN's market capitalization? Assume a risk-averse investor holds a portfolio of bonds, because bonds are known to be less risky than stocks. Which of the following is one of those assumptions? The y-intercept of the SML is equal to the risk-free interest rate, while the slope is equal to the market risk premium (the market’s rate of return minus the risk-free rate). In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate. Financial analysts believe the stock will be at their target price of $65.00 in two years. Which of the following is a concern regarding beta? Treasury bills, long-term Treasury bonds, stocks. Assume interest payments are paid semi-annually and par value is $1,000. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. Our most popular study sets are an effective way to learn the things you need to know to ace your exams. Which of the following statements is correct? a) The probability of default is zero b) The bond is callable Answer: The probability of default is zero. What yield to maturity is the bond offering? This is a measure of the co-movement between two variables that ranges between -1 and +1, Company A = 71 shares, Company B = 117 shares, Company F = 615 shares. Ex… All of these are investor diversification problems. This implies that. Which of these is the portion of total risk that is attributable to overall economic factors? A bond issued by the United States government, common stock issued by a small but financially strong firm. A bond's yield is more accurately thought of as the effective rate of return based on the actual market value of the bond. During the same time period, Company V earned 1.90 percent and Company M earned -3.60 percent. Which of the below would be correct? The expected return and risk of Portfolio Yellow are 15 percent and 19 percent, and for the Purple Portfolio are 12 percent and 18 percent. Price of the bond with the required rate of return: PV ($1,152.12) FV $1,000.00 PMT 120 N 15 I 10% Given your required rate of return, you would value the bond to be worth $1,152.12 today. A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. At … U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. Given this information which of the following statements is correct? At face value, the coupon rate and yield equal each other. The dividend is expected to grow at a 14.5 percent rate. Calculate the bond's default risk premium. The new appropriate discount rate will be 6.00 percent. Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. (Assume interest payments are paid semi-annually and a par value of $1,000.) What will be the change in the bond's price in percentage terms? The risk premium on an average stock in the market, A stock with beta equal to 2.4 would most likely be considered. Financial analysts forecast Best Buy Company (BBY) growth fro the future to be 13 percent. If you owned 400 shares of FedEx, what was your dollar return? 23. Which of these is similar to the capital market line, except that risk is characterized by beta instead of standard deviation? FedEx Corp. ended the previous year at $96.20 per share. The wall street journal reports that the current rate of 10 year Treasury bonds is 6.75 percent on 20 year treasury bonds is 7.25 percent and on a 20 year bond is 8.50 percent. if a bonds yield to maturity falls below its coupon rate, the bond must be selling for a price higher than its par value, bond prices are quoted in terms of which of the following, rank the following bonds in order from lowest credit his to highest risk all with the same time to maturity. The expected risk-free rate of interest is 2.5% and the expected return on the market as a whole is 10%. What would this position on the diagram imply about stock Z? The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. a corporations 10 years bond are currently yielding a return of 7.75 percent. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year … Which of the below is the best description of the effect of portfolio diversification? It ended last year at $145.50. This dividend will grow at 11 percent indefinitely. If you owned 500 shares of FedEx, what was your dollar return? Which of the following is the model that includes an equation that relates a stock's required return to an appropriate risk premium? Calculate the maturity risk premium on the two-year Treasury security. Which of the following is a correct statement about the two stocks? It paid a $0.60 per share dividend last year. Which of the following is the reward investors require for taking risk? It ended last year at $173.90. Name the dominated portfolio and the portfolio that dominates it. It paid a $1.20 per share dividend last year. Master key terms, facts, and definitions before your next test with the latest study sets in the Expected Return category. If you owned 600 shares of FedEx, what was your percent return? Risk is reduced without necessarily reducing the expected return. The formula is the following. Yield to maturity is the expected rate of return from a bond until its maturity date. All of the following are necessary conditions for an efficient market EXCEPT: If Zeus Energy Bonds are upgraded from BBB- to BBB+, which of the following statements is true? Efficient portfolio is a portfolio that is not dominated by any other portfolio. Stock A has a required return of 19%. Which of these investors earn returns from receiving dividends and from stock price appreciation? What is the standard deviation of monthly returns? Which of the following statements is correct regarding this information? The security has no special covenants. 2. Interest rates, inflation and economic growth are economic factors that are examples of __________________. Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. Assume a risk free rate of 4.75%. As mentioned in the section above, a Sharpe ratio of … They're customizable and designed to help you study and learn more effectively. It paid a $0.80 per share dividend last year at $105.80. Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? You have a portfolio with a beta of 1.25. (a) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. What is the beta of your portfolio? An efficient portfolio, also known as an ‘optimal portfolio’, is one that provides that best expected return on a given level of risk, or alternatively, the minimum risk for a given expected return.A portfolio is a spread of investment products.. Which of the following are investor diversification problems? It is expected to pay its first dividend of $0.10 per share in three years. Assume that the market is in equilibrium so that expected returns equal required returns. If you have a portfolio made up of 50 percent Company O, 30 percent Company V, and 20 percent Company M, what is your portfolio return? For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. What would this position on the diagram imply about stock Z? Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued. what is the default risk premium on the corporation's 10 year bonds? As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk? The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. If the management team of a company decides to increase the dividend payment for the current year. The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. Let’s take an example of a portfolio of stocks and bonds where stocks have a 50% weight and bonds have a weight of 50%. Answer: You should buy the bond since the actual price of the bond is lower than the price with your required rate. Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? The real rate of interest on the loan is equal to 4%. Which of the following is a true statement? What is the average monthly return? A corporate bond with a 5.75 percent coupon has 15 years left to maturity. If a 13 percent discount rate is appropriate for this stock, what is its value? Stock B has a required return of 26%. Please show all work and formulas. If the default risk premium and liquidity risk premium on a 10 year corporate bond is the same as that on the 20 year corporate bond, what is the current rate on a 10 year corporate bond? It paid a $1.30 per share dividend last year. You own $1,000 of City Steel stock that has a beta of 1. Compute the expected return given these three economic states, their likelihoods, and the potential returns: You have a portfolio with a beta of 1.25. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. Expected Return. What is the average monthly return? Expected Return for Portfolio = 50% * 15% + 50% * 7% 2. This can be expressed in the following formula: expected return (ex-ante) … The annual T-bill yield during the same period was 4.3 percent. Once you have completed the test, … Assume that the maturity risk premium is zero. It also claims that this stock is a "safe bet" for the future. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a total increase of $11. If you have a portfolio made up of 20 percent Company O, 30 percent Company V, and 50 percent Company M, what is your portfolio return? If you owned 400 shares of FedEx, what was your percent return? Given this information which of the following statements is correct? the liquidity risk premium on the corporation's bond is 0.50 percent. At the current stock price of $26.07, what is the return shareholders are expecting? The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 percent. Their recent dividend was $.69. Assume when plotting stock Z on a security market line diagram the stock would be found below the security market line. Currently the portfolio is invested in the following manner. Which of these are valued as a special zero-growth case of the constant growth rate model? If this bond pays its coupon payments semi annually and par value is $1,000 what is the bonds annual coupon rate? a corporations 10 years bond are currently yielding a return of 7.75 percent. Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. The Vanguard fund had both a higher average annual return for the period and a lower standard deviation. It paid a $0.60 per share dividend last year. It is based on the idea of systematic risk (otherwise known as or non-diversifiable risk) and that investors need to be compensated for it in the for… What is the expected return of the portfolio? Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, -0.60 percent, and 1.20 percent. You believe that in one year, the yield to maturity will be 6.25 percent. Which of these is the term for portfolios with the highest return possible for each risk level? According to the Fisher Effect equation, the nominal rate of interest is equal to, the real rate of interest plus the inflation rate, the higher the liquidity risk, the higher the interest rate that security buyers will demand, If you want to get a 2% real raise at work so that you can buy 2% more of the things you like, and you expect the inflation rate to be around 3% in the future, you will have to ask for a, This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments. Probability distribution for the next 3 years rating of BBB and a lower standard deviation of 10 percent these to! Stock issued by the United States government, common stock issued by the same time period, Company had! That year 15 years left to maturity is selling for $ 51 maturity premium... 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