Question

QUESTION 13

1. Assume that the risk-free rate is 6% and the market risk premium (r_m - r_f) is 5%. Given this information, which of the following statements is CORRECT?

   		A stock fund with beta = 1.5 should have a required return of 14.5%.
   		If a stock has a negative beta, its required return must also be negative.
   		A stock with beta = 2.0 should have a required return equal to 16%.
   		If a stock's beta doubles, its required return must also double.
   		An index fund with beta = 1.0 should have a required return greater than 11%.

4 points   

QUESTION 14

1. Assume that you hold a well-diversified portfolio that has an expected return of 12.0% and a beta of 1.20. You are in the process of buying 100 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock?
   
               r_p             b_p

   		11.69%;     1.22
   		12.30%;     1.28
   		12.92%;     1.34
   		13.56%;     1.41
   		14.24%;     1.48

4.5 points   

QUESTION 15

1. Molen Inc. has an outstanding issue of common stock with an annual dividend of $8.50 per share. The stock's annual dividend is expected to remain $8.50 in the future (i.e., g=0). If the required return on this stock is 6.0%, at what price should the stock sell today?

   		$104.27
   		$146.95
   		$141.66
   		$112.50
   		$115.38

Answer 1

If beta is 2.0 compute the required return using the equation as shown below:

Required return = Risk-free rate + (Beta * Market risk premium)

                         = 6% + ( 2.0 * 5%)

                         = 16%

So, required return is 16% if beta is 2.0.

Thus, third option is correct option.