clearlycanadian

A model that estimates expected excess return on a security based on the ratio of the firm’s book value to its market value is best described as a:

A) market model.

B) single-factor model.

C) multifactor model.

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A model that estimates a stock’s expected excess return based only on the book-to-market ratio is a single-factor model. The market model is a single-factor model that estimates expected excess return based on a security’s sensitivity to the expected excess return of the market portfolio. A multifactor model would estimate expected excess return based on more than one factor.

clearlycanadian

Beta is a measure of:

A) total risk.

B) systematic risk.

C) company-specific risk.

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Beta is a measure of systematic risk.

clearlycanadian

Beta is least accurately described as:

A) a standardized measure of the total risk of a security.

B) a measure of the sensitivity of a security’s return to the market return.

C) the covariance of a security’s returns with the market return, divided by the variance of market returns.

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Beta is a standardized measure of the systematic risk of a security. β = Covr,mkt / σ2mkt. Beta is multiplied by the market risk premium in the CAPM: E(Ri) = RFR + β[E(Rmkt) – RFR].

clearlycanadian

An analyst has developed the following data for two companies, PNS Manufacturing (PNS) and InCharge Travel (InCharge). PNS has an expected return of 15% and a standard deviation of 18%. InCharge has an expected return of 11% and a standard deviation of 17%. PNS’s correlation with the market is 75%, while InCharge’s correlation with the market is 85%. If the market standard deviation is 22%, which of the following are the betas for PNS and InCharge?

Beta of PNS

Beta of InCharge

A) 0.66 0.61

B) 0.61 0.66

C) 0.92 1.10

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Betai = (si/sM) × rI, M
BetaPNS = (0.18/0.22) × 0.75 = 0.6136
BetaInCharge = (0.17/0.22) × 0.85 = 0.6568

clearlycanadian

If the standard deviation of the market’s returns is 5.8%, the standard deviation of a stock’s returns is 8.2%, and the covariance of the market’s returns with the stock’s returns is 0.003, what is the beta of the stock?

A) 0.05.

B) 0.89.

C) 1.07.

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The formula for beta is: (Covstock,market)/(Varmarket), or (0.003)/(0.058)2 = 0.89.

clearlycanadian

Which of the following statements about a stock's beta is CORRECT? A beta greater than one is:

A) riskier than the market, while a beta less than one is less risky than the market.

B) risky, while a beta less than one is risk-free.

C) undervalued, while a beta less than one is overvalued.

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Beta is a measure of the volatility of a stock.  The overall market's beta is one. A stock with higher systematic risk than the market will have a beta greater than one, while a stock that has a lower systematic risk will have a beta less than one.

clearlycanadian

The expected rate of return is twice the 12% expected rate of return from the market. What is the beta if the risk-free rate is 6%?

A) 2.

B) 3.

C) 4.

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24 = 6 + β (12 − 6)
18 = 6β
β = 3

clearlycanadian

Given the following data, what is the correlation coefficient between the two stocks and the Beta of stock A?

• standard deviation of returns of Stock A is 10.04%
• standard deviation of returns of Stock B is 2.05%
• standard deviation of the market is 3.01%
• covariance between the two stocks is 0.00109
• covariance between the market and stock A is 0.002

Correlation Coefficient

Beta (stock A)

A) 0.5296 2.20

B) 0.6556 2.20

C) 0.5296 0.06

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correlation coefficient = 0.00109 / (0.0205)(0.1004) = 0.5296.
beta of stock A = covariance between stock and the market / variance of the market
Beta = 0.002 / 0.03012 = 2.2

clearlycanadian

The expected rate of return is 2.5 times the 12% expected rate of return from the market. What is the beta if the risk-free rate is 6%?

A) 5.

B) 4.

C) 3.

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30 = 6 + β (12 - 6)
24 = 6β
β = 4

clearlycanadian

The expected rate of return is 1.5 times the 16% expected rate of return from the market. What is the beta if the risk free rate is 8%?

A) 3.

B) 2.

C) 4.

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24 = 8 + β (16 − 8)
24 = 8 + 8β
16 = 8β
16 / 8 = β
β = 2