1) The table below shows expected rates of return for three stocks and their weight in a portfolio: Stock AStock BStock C Portfolio weights 0.3 0.2 0.5 State Probability Expected returns...

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Answered Same DayApr 06, 2021

Answer To: 1) The table below shows expected rates of return for three stocks and their weight in a portfolio:...

Neenisha answered on Apr 06 2021
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1) The table below shows expected rates of return for three stocks and their weight in a portfolio:
                Stock A    Stock B    Stock C
Portfolio weights        0.3        0.2        0.5
State        Probability        Expected
returns    
Recession    0.3        0.05        0.03        0.12
Boom        0.7        0.1        0.05        0.13
What is the approximate expected portfolio return?
a) 8%        b) 9%        c) 10%    d) 11%    e) 12%    f) Other, specify
Ans.
Expected Portfolio Return = [0.3*(0.3*0.05 + 0.2*0.03 + 0.5*0.12) + 0.7*(0.3*0.1 + 0.2*0.05 +0.5*0.13)] = 9.8% ~ 10%
Correct Answer = 10%
2) The fact that less than half of all equity fund managers beat the market in most years indicates that the stock market is _____Largely Efficient (b)
a) profitable for more competent managers    b) largely efficient    c) largely inefficient
d) ripe for disruption        e) rife with insider trading        f) Other, specify.
                
3) When WACC is used to evaluate new project ideas, the capital structure weights to be used in the WACC calculation should ideally reflect _____Observed market values (d)
a) observed book values        b) target market values    c) target book values
d) observed market values        e) historical values        f) Other, specify.
4) Suppose that an investor holds a stock which has a rate of return based on a single-factor model. The model equation can be presented as: r = E(r) + βF + e, where F is the unanticipated growth in GDP. The market consensus about the GDP growth rate is 4%. The investor currently expects to earn a 9.4% return. The stock's β value is 1.2.
The next day you learn that new macroeconomic information suggests that GDP growth will be 5%, which is higher than the market consensus. What will be the revised approximate estimate of the stock's expected rate of return?
a) 9%        b) 10%    c) 11%    d) 12%    e) 13%    f) Other, specify.
Ans. Option (c) 11%
5) Combination Algebraic/Short Essay
a) (2 points)
Assume CAPM is correct (the market is the tangency portfolio), and all...
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