As a result of your research, your expected rate of return on BDK stock is 20% T

Question

As a result of your research, your expected rate of return on BDK stock is 20% The risk-free interest rate is 2% and the required return on the market index is i 2%. BDK's beta is 1.5. According to the Capital asset pricing Model A. you should purchase this stock B. the market is not in equilibrium C. BDK's historical rate of return is 50% more volatile than average D. all of the above 6. 7. The DJIA is a measure of A. The market index of 30 large blue chip stocks B. The market index of 500 stocks included in Standard&Poor; C The market index of NYSE traded stocks D. The market index of NASDAQ traded stocks 8. A diversified portfolio of U.S. stocks should have A. market risk only B. unique risk only C. both market and unique risk D. no risk 9. A security market line has an intercept and slope of.01 and.09. This implies that A. A. B C. the risk-free interest rate is.01 the market risk premium is equal to .09 the market required return is .10 all of the above The current price of Pfizer stock is $35.00 per share. Earning next year is expected to be $2.00 per share and it should pay a $1.00 dividend each share. The industry P/E multiple is 25 times on average. What price would you expect for B&D; stock next year? A. $25.00 B. $35.00 C. $50.00 D. none of the above; the correct answer is 10- 11. If you expect the market to decrease which of the following portfolios should you purchase? A. a portfolio with a beta of 2.0 B. a portfolio with a beta of 1.0 C. a portfolio with a beta of 0 D. a portfolio with a beta of -0.5 12. is a statistical measure of the relationship between any two series numbers. A. Coefficient of variation B. Standard deviation C. Correlation coefficient D. Probability

Explanation / Answer

7) The Dow Jones Industrial Average (DJIA) is a measure of the market index of 30 large blue chip stocks. (option a)

8) A well diversified portfolio eliminates the unsystematic / unique risk of individual stocks. Therefore, it should have market risk only. (option a)

9) The market risk premium is equal to the slope of a security market line. Therefore, option b (second a?) is correct.

10) Market price of share = Earning per share x P/E Ratio

Or, Market price of share = $2 x 25 = $50 (Option c)

11) Beta is a measure of movement of a stock in relation to the market. If we expect the market to go down, we would the portfolio with the negative beta (option d) as it indicates an opposite movement in relation to the market. So, if market decreases, the portfolio would increase.

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