5. Stock A has a beta of 1.9 and market expected return of 12 percent. What is t

Question

5. Stock A has a beta of 1.9 and market expected return of 12 percent. What is the the risk-free rate is 4 percent? A. 15.00 percent B. 15.33 percent C. 16.50 percent D. 17.67 percent E. 19.20 percent 6. When a financial market reflects all the available information in the prices of the securities the market is referred to as a(n): A. normal distribution. B. primary market. C. efficient capital market. D. delayed reaction market. E. current yield market. 7. The mean plus or minus one standard deviation for a normal distribution provides a probability range of A. 66 B. 68 C. 95 D. 97 percent. E. 99 8. A bond has an average return of 6.8 percent and a standard deviation of 4.6 percent. What range of returns would you expect to see 95 percent of the time? A. 2.2 percent to 11.4 percent B. 4.6 percent to 11.4 percent C. 4.6 percent to 22.8 percent D. 11.4 percent to 22.8 percent E. -2.4 percent to 16.0 percent 9. Risk premium is defined as the: A. rate of return on a U.S. Treasury bill. B. required return on a security less the inflation rate. C. excess return required on a risky investment over that of a risk-free investment D. average actual return on a security minus the inflation rate. E. the nominal rate of return less the real rate of return.

Explanation / Answer

(5) Using CAPM:
Return = Rf+Beta(Market risk premium)
4+1.9(12-4)=19.2
Hence option E is correct

6) When a market reflects all information it is an efficient market hence option C is correct

7) Mean plus 1 standard deviation comes from 68-95-99.7 rule
Hence 1 standard deviation = 68%
Hence option B is most correct

8)At 95% we have 2 standard deviations from mean on either side.
Hence range = 6.8+-(2*4.6)=16 to -2.4
Hence option E is correct

9)Risk premium is excess return over a return to compensate for bearing the risk

Hence option C is most correct

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