Which of the following are investor diversification problems? A manager believes his firm will earn a 12 percent return next year. What is the average monthly return? 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. Which of the bonds below would be most liquid? It ended last year at $131.70. Which of the following is a concern regarding beta? the expected return on default-free bonds. It is calculated by estimating the probability of a full range of returns on an investment, with the probabilities summing to 100%. Which of the following statements is correct regarding diversification? Normally, bond investors account for call risk by figuring the yield-to-call, which is the percentage return the bond will pay up to the call date. This can be expressed in the following formula: expected return (ex-ante) … 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. It paid a $0.80 per share dividend last year at $105.80. The current bond price will increase and interest rates on new bonds will decrease. Round your answer to the nearest whole percent and assume annual coupon payments. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. 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. It ended last year at $173.90. 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. a corporations 10 years bond are currently yielding a return of 7.75 percent. This dividend will grow at 11 percent indefinitely. They're customizable and designed to help you study and learn more effectively. If a 13 percent discount rate is appropriate for this stock, what is its value? 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. It paid a $0.60 per share dividend last year. Name the dominated portfolio and the portfolio that dominates it. Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. 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. FedEx Corp. stock ended the previous year at $118.30 per share. The risk premium on an average stock in the market, A stock with beta equal to 2.4 would most likely be considered. Answer: B Question Status: Previous Edition 35) Which of the following statements are true? Small Cap – Dimensional US Small Cap Index: 11.5%Bonds – Barclays US Aggregate Bond Index: 5.3%. Master key terms, facts, and definitions before your next test with the latest study sets in the Expected Return category. A stock with beta equal to 1 would most likely be considered, to be of about the same risk as the overall stock market, Shares of stock issued to employees that have limitations on when they can be sold are known as. If you owned 100 shares of FedEx, what was your dollar return? According to the Fisher Effect equation, the nominal rate of interest is equal to, the real rate of interest plus the inflation rate, the higher the liquidity risk, the higher the interest rate that security buyers will demand, If you want to get a 2% real raise at work so that you can buy 2% more of the things you like, and you expect the inflation rate to be around 3% in the future, you will have to ask for a, This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments. GEN has 10 million shares outstanding and a stock price of $89.25. Assume when plotting stock Z on a security market line diagram the stock would be found below the security market line. What yield to maturity is the bond offering? 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. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. Portfolio Blue dominates Portfolio Purple, Which of these is defined as a combination of investment assets held by an investor. Assume that the market is in equilibrium so that expected returns equal required returns. What is the main reason for calculating averages of past returns on stocks? r = 2.5% + 1.45(10% - 2.5%) = 13.375% 3. 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 The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. If you owned 400 shares of FedEx, what was your percent return? Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). Their recent dividend was $.69. Understand the expected rate of return formula. Which of the following are the stock of small companies that are priced below $1 per share? It is expected to pay its first dividend of $0.10 per share in three years. 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). The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. It has had a credit rating of BB and a yield to maturity of 6.25 percent. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to. Currently the portfolio is invested in the following manner. What would this position on the diagram imply about stock Z? We think they will be useful in estimating future expected return. 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. Also assume inflation rate of 3%. 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. determine the interest payment for the following bonds: 5.5 percent coupon corporate bond 6.45 percent coupon treasury note and a corporate zero coupon bond maturing in 10 years. 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. the stock price should not be impacted because nothing fundamental about the company has been changed, and as there will be less funds generated to pay out future dividends. By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios. Calculate the security's equilibrium rate of return. Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? 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. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year … During the same time period, Company V earned 1.90 percent and Company M earned -3.60 percent. Which of the following is one of those assumptions? a corporations 10 years bond are currently yielding a return of 7.75 percent. Which of the following describes what will occur as you randomly add stocks to your portfolio? 2. 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. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. The market price of the bond is $910.00. TC corporate bond with yield of 8.76 percent and B & O corporate bond with a yield of 5.99, under which conditions will an investor demand a smaller return on a bond, if a bonds yield to maturity use above its coupon rate, bond prices must decline at the same time, all of the following items would need to be included in the bond's indenture agreement except, which of these statements answers why bonds are known as fixed income securities, investors know how much they will receive in interest payments, when market interest rates rise we will expect an increase int he yield to maturity on an already outstanding bond, if the coupon rate equals 7% then a corresponding $1,000 face value bond, assume that a bond is quoted to be selling at a price equal to $93, per $100 of face value. calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. 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