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Exam 8: Analysis of Risk and Return

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Question 61

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Gates Industries current common stock dividend (year 0) is $2.50 per share and is expected to continue growing at a rate of 5% per year for the foreseeable future. Currently the risk-free rate is 7.5% and the estimated market risk premium (i.e., km - rf) is 8.3%. Value Line has estimated Gates Industries beta to be 1.10. Determine the expected price for Gates Industries common stock.

A) $21.50
B) $15.03
C) $15.78
D) $22.57

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Question 62

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The ____ of a portfolio of two or more securities is equal to the weighted average of the ____ of each of the individual securities in the portfolio.

A) standard deviation, standard deviation
B) risk, risk
C) expected return, expected return
D) standard deviation, risk

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Question 63

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The ____ is a statistical measure of the mean or average value of the possible outcomes.

What will happen to the Security Market Line if: (1) inflation expectations increase, and (2) investors become more risk averse?

The term structure of interest rates is the pattern of interest rate yields for securities that differ only in

Determine the beta of a portfolio consisting of the following common stocks:

All other things being equal, what is the major impact that an increase in the expected inflation rate would be expected to have on the security market line?

Investors can obtain high returns in their investments if:

Which of the following (if any) is a relative (rather than absolute) measure of risk?

Quick Start, Inc. is expected to pay a dividend of $1.05 next year and dividends are expected to continue their 7 percent annual growth rate. The SML has been estimated as follows: K_e = 0.08 + 0.064b? If Quick Start has a beta of 1.1, what would happen to its stock price if inflation expectations went from the current 5 percent to 8 percent?

The expected rate of return for 3COM is 18 percent, with a standard deviation of 10.98 percent. The expected rate of return for Just the Fax is 26 percent with a standard deviation of 15.86%. Which firm would be considered the riskier from a total risk perspective?

Arbitrage pricing theory is a model that relates expected returns on securities to

A beta value of 0.5 for a security indicates

Richtex Brick has a current dividend of $1.70 and the market value of its common stock is $28. The expected market return is 13 percent and the risk-free rate is 9 percent. If Richtex stock is half as volatile as the market, and the market is in equilibrium, what rate of growth is expected for Richtex's dividends assuming a constant growth valuation model is appropriate for Richtex?