in an efficient market, investors will sell overvalued stock which will drive its price down, This is typically considered the return on U.S. government bonds and bills and equals the real interest and the expected inflation premium. Which of the below is the best description of the effect of portfolio diversification? Triple-A (AAA) rated bonds are those deemed least likely to default. What is the expected return of the portfolio? What yield to maturity is the bond offering? Stock B has a required return of 26%. Given this information which of the following statements is correct? You believe that in one year, the yield to maturity will be 6.25 percent. You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). Which of the following is a correct statement about the two stocks? It paid a $0.60 per share dividend last year. The dividend is expected to increase at a 20 percent rate for the next 3 years. there is typically not much trading activity related to the security, the rate that a security would pay if no inflation were expected over its holding period, Assume the interest rate demanded on a bond issued by Ford is 7%. Our most popular study sets are an effective way to learn the things you need to know to ace your exams. If you owned 500 shares of FedEx, what was your dollar return? a) The probability of default is zero b) The bond is callable Answer: The probability of default is zero. An efficient portfolio, also known as an ‘optimal portfolio’, is one that provides that best expected return on a given level of risk, or alternatively, the minimum risk for a given expected return.A portfolio is a spread of investment products.. FedEx Corp. stock ended the previous year at $118.30 per share. Sally has researched GLE and wants to pay no more than $50 for the stock. A fast growing firm recently paid a dividend of $0.50 per share. What will be the new portfolio beta if you keep 60 percent of your money in the old portfolio and 40 percent in a stock with a beta of 0.8? Expected return The expected return on a risky asset, given a probability distribution for the possible rates of return. ... Stock in Ombor Medical Supplies earns a return of 5.3% annually, while bonds issued by Ombor Medical Supplies earns a return of 4.1% annually. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The market has an expected rate of return of 12.6 percent. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. Interest rates, inflation and economic growth are economic factors that are examples of __________________. Chapter 2: Bonds, stocks and other securities Try the multiple choice questions below to test your knowledge of this chapter. It paid a $1.20 per share dividend last year. Assume a risk free rate of 4.75%. Which of these is a measure summarizing the overall past performance of an investment? Assume that the maturity risk premium is zero. If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 17 percent, what's the value of the stock? Which of the following is a concern regarding beta? All of these are investor diversification problems. During the same time period, Company V earned -2.50 percent and Company M earned 1.60 percent. Their recent dividend was $.69. It is based on the idea of systematic risk (otherwise known as or non-diversifiable risk) and that investors need to be compensated for it in the for… Treasury bills, long-term Treasury bonds, stocks. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? What is the main reason for calculating averages of past returns on stocks? Currently the portfolio is invested in the following manner. Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios. Round your answer to the nearest whole percent and assume annual coupon payments. Understand the expected rate of return formula. They're customizable and designed to help you study and learn more effectively. What will be the change in the bond's price in percentage terms? a) Your portfolio is invested 40 per cent each in A and C, and 20 per cent in B. Compute the expected return given these three economic states, their likelihoods, and the potential returns: You have a portfolio with a beta of 1.25. Which of these is the reward for taking systematic stock market risk? (a) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. this implies that, A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. It is expected to pay its first dividend of $0.10 per share in three years. Which of these are valued as a special zero-growth case of the constant growth rate model? The Vanguard fund had both a higher average annual return for the period and a lower standard deviation. Rank the following three stocks by their level of total risk, highest to lowest. Consider a portfolio comprised of four securities in the following proportions and with the indicated security beta. Risk is reduced without necessarily reducing the expected return. Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims. The expected return of stocks is 15% and the expected return for bonds is 7%.Expected Return is calculated using formula given belowExpected Return for Portfolio = Weight of Stock * Expected Return for Stock + Weight of Bond * Expected Return for Bond 1. This is a measure of the co-movement between two variables that ranges between -1 and +1, Company A = 71 shares, Company B = 117 shares, Company F = 615 shares. This is an example of a market overreaction. The security has no special covenants. Assume when plotting stock Z on a security market line diagram the stock would be found below the security market line. Which of the debt contracts below would be associated with the biggest interest rate risk? Which of the following is the correct ranking from least risky to most risky? The annual T-bill yield during the same period was 4.3 percent. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's, Stock valuation model dynamics make clear that higher dividend growth rates lead to, All of the following are stock market indices except, Stock valuation model dynamics make clear that lower discount rates lead to, discounting the future dividends and future stock price appreciation. It ended last year at $131.70. In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate. At the current stock price of $26.07, what is the return shareholders are expecting? CODES (2 months ago) 11 new "zero Coupon Bonds" Quizlet results have been found in the last 90 days, which means that every 8, a new "zero Coupon Bonds" Quizlet result is figured out. the liquidity risk premium on the corporation's bond is 0.50 percent. taught by Chao Jiang at the University of Kansas. As mentioned in the section above, a Sharpe ratio of … The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The security has no special covenants. What is GEN's market capitalization? This dividend will grow at 11 percent indefinitely. The real rate of interest on the loan is equal to 4%. If you owned 400 shares of FedEx, what was your percent return? Which of the following will only be executed if the order's price conditions are met? Which of these is the portion of total risk that is attributable to overall economic factors? The higher the probability that the return on an investment will not pay off its average promised value, the higher the expected return must be to induce an investor to invest in it. compounded semi-annually. What is the best definition of efficient portfolio? Name the dominated portfolio and the portfolio that dominates it. The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, -0.60 percent, and 1.20 percent. Assume a risk-averse investor holds a portfolio of bonds, because bonds are known to be less risky than stocks. The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. The long-term government bond is expected to yield 4.5 percent and the U.S. Treasury bill is expected to yield 3.4 percent. It ended last year at $173.90. Expected Return. If a 13 percent discount rate is appropriate for this stock, what is its value? Calculate the security's equilibrium rate of return. Which of the following is the asset pricing theory based on a beta, a measure of market risk? If you owned 600 shares of FedEx, what was your percent return? What would this position on the diagram imply about stock Z? The dividend is expected to grow at a 14.5 percent rate. Bondholders have a required rate of return of 12%p.a. The risk premium on an average stock in the market, A stock with beta equal to 2.4 would most likely be considered. Which of these is similar to the capital market line, except that risk is characterized by beta instead of standard deviation? A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of 10.06 percent. What is the value of their stock when the required rate of return is 15.13 percent? week lecture chapter 15: the term structure of interest rate problem sets question under the expectations hypothesis, if the yield curve is upward-sloping, the It has had a credit rating of BBB and a yield to maturity of 8.0 percent. Average Rate of Return = $1,600,000 / $4,500,000; Average Rate of Return = 35.56% Explanation of Average Rate of Return Formula. It paid a $1.30 per share dividend last year. The expected return and risk of Portfolio Yellow are 15 percent and 19 percent, and for the Purple Portfolio are 12 percent and 18 percent. If you owned 100 shares of FedEx, what was your dollar return? FedEx Corp. ended the previous year at $96.20 per share. Assume interest payments are paid semi-annually and par value is $1,000. The past four monthly returns for K and Company are 0.60 percent, -0.80 percent, 1.80 percent, and 2.70 percent. Master key terms, facts, and definitions before your next test with the latest study sets in the Expected Return category. What will be the change in the bond's price in dollars? Expected return is simply a measure of probabilities intended to show the likelihood that a given investment will generate a positive return, and what the likely return will be. The expected rate of return is the return on investment that an investor anticipates receiving. A portfolio manager is managing a $10 million portfolio. A bond issued by the United States government, common stock issued by a small but financially strong firm. The inflation rate is … All of the following are necessary conditions for an efficient market EXCEPT: If Zeus Energy Bonds are upgraded from BBB- to BBB+, which of the following statements is true? The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 percent. Which of the following statements is correct? If the market return is expected to be 8 percent and the risk free rate is 3 percent, what is the company's required return? The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. "zero Coupon Bonds" Quizlet - 06/2020. If you owned 400 shares of FedEx, what was your dollar return? If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to. During the same period, Company V earned 1.70 percent and Company M earned -1.20 percent. His firm has a beta of 1.6, the expected return on the market is 11 percent, and the risk-free rate is 3 percent. A) 13% the liquidity risk premium on the corporation's bond is 0.50 percent. Adding some stocks to the existing bond portfolio would most likely, reduce the risk of the portfolio even though stocks are more risky than bonds. The "givens" in this formula are the probabilities of different outcomes and what those outcomes will return. It ended last year at $145.50. Calculate the maturity risk premium on the two-year Treasury security. Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. The y-intercept of the SML is equal to the risk-free interest rate, while the slope is equal to the market risk premium (the market’s rate of return minus the risk-free rate). Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time are known as. Calculate the bond's default risk premium. In return for this safety, the bonds return the lowest interest rate. Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? FedEx Corp. ended the previous year at $96.20 per share. The expected return on Stock A should be greater than that on B. e. The expected return on Stock B should be greater than that on A. The average return and standard deviation of Idol Staff are 10 percent and 15 percent; and of Poker-R-Us are 6 percent and 20 percent. Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. What was the market risk premium during that year? Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued. True A stock has an expected return of 14.5%, the risk-free rate is 4% and the return on the market is 11%. Assume that you observe the following interest rates on the following 20 year bonds: as a bond approaches its maturity we expect the market price of the bond, under which will an investor demand a larger return on a bond, the bond issue is downgraded from a to BBB, which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate, which of the following bond makes no interest payments, if a bond's yield to maturity rises above its coupon rate, the bond must be selling for a price lower than its par value, when we say that a bondholder faces interest rate risk we mean that the bondholder faces the possibility of a ________ in market interest ratios and a _____ in the value of the bond as a result, which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder, consider the following three bonds A treasury note quoted at 87:25 and a corporate bond quoted at 102.42 and a municipal bond quoted at 101.45. if the treasury and corporate bonds have a par value of 1,000 and the municipal bond has a par value of 5,000 what is the price of these three bonds, which of the following is not a factor that determines the coupon rate of its company's bonds, if a bonds selling at a premium then ____, its yield should be lower than its coupon rate. Which of the following is one of those assumptions? A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. Like many formulas, the expected rate of return formula requires a few "givens" in order to solve for the answer. Year-to-Date, Company O had earned a 2.30 percent return. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. A company has a beta of 0.75. what is the default risk premium on the corporation's 10 year bonds? Stock A has a required return of 15%. Company X has a beta of 1.45. What is the change in price the bond will experience in dollars? Stock B has a required return of 8%. Which of the following statements is correct regarding diversification? If you have a portfolio made up of 20 percent Company O, 30 percent Company V, and 50 percent Company M, what is your portfolio return? Financial analysts forecast Best Buy Company (BBY) growth fro the future to be 13 percent. A bond's yield is more accurately thought of as the effective rate of return based on the actual market value of the bond. r = 2.5% + 1.45(10% - 2.5%) = 13.375% 3. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. At … As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a total increase of $11. Determine which one of these three portfolios dominates another. A stock with beta equal to 0.4 would most likely be considered, Whenever a set of stock prices go unnaturally high and subsequently crashes down, the market experiences what we call, This is the average of the possible returns weighted by the likelihood of those returns occuring. Which of the following is a correct statement about the two stocks? (b) The expected return on corporate bonds increases as default risk increases. This implies that. Ex… Discount bond: a bond that sells below its par value Premium bond: a bond that sell above its par value (2) Yield to maturity (YTM): the return from a bond if it is held to maturity Example: a 10-year bond carries a 6% coupon rate and pays interest semiannually. The average rate of return will give us a high-level view of the profitability of the project and can help us access if it is worth investing in the project or not. Portfolio Blue dominates Portfolio Purple, Which of these is defined as a combination of investment assets held by an investor. JIM corporate bond with yield of 12.25 percent, IB corporate bond with yield of 4.49 percent. the expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. 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