Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. The security's liquidity risk premium is .35 percent and maturity risk premium is .95 percent. The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. The expected risk-free rate of interest is 2.5% and the expected return on the market as a whole is 10%. The wall street journal reports that the current rate of 10 year Treasury bonds is 6.75 percent on 20 year treasury bonds is 7.25 percent and on a 20 year bond is 8.50 percent. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? During the same period, Company V earned 1.70 percent and Company M earned -1.20 percent. 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. (Assume semi-annual interest payments and $1,000 par value.). 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. What will be the change in the bond's price in percentage terms? a corporations 10 years bond are currently yielding a return of 7.75 percent. Expected return The expected return on a risky asset, given a probability distribution for the possible rates of return. a corporations 10 years bond are currently yielding a return of 7.75 percent. It ended last year at $131.70. 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. Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. 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. What is the expected return of the portfolio? 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 annual return on the S&P 500 Index was 11.5 percent. They're customizable and designed to help you study and learn more effectively. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. Chapter 2: Bonds, stocks and other securities Try the multiple choice questions below to test your knowledge of this chapter. The market price of the bond is $910.00. You have a portfolio with a beta of 1.25. Sally has researched GLE and wants to pay no more than $50 for the stock. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. Like many formulas, the expected rate of return formula requires a few "givens" in order to solve for the answer. it shows expected return as a function of β. 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 bond is currently selling at a price below its par value. Afterwards, a more stable rate of 10 percent growth rate can be assumed. At the current stock price of $26.07, what is the return shareholders are expecting? 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. Stock B has a required return of 8%. 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 expected return on default-free bonds. Firms can quite possibly change their stocks' risk level by substantially changing their business. Stock B has a required return of 26%. Assume a risk-averse investor holds a portfolio of bonds, because bonds are known to be less risky than stocks. The new appropriate discount rate will be 9 percent. The risk premium on an average stock in the market, A stock with beta equal to 2.4 would most likely be considered. During the same time period, Company V earned -2.50 percent and Company M earned 1.60 percent. It paid a $0.80 per share dividend last year at $105.80. Which of the following will only be executed if the order's price conditions are met? Which of the following is the continual increase in the price level of a basket of goods or services? This is an example of a market overreaction. A two-year Treasury security currently earns 5.13 percent. 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. If you owned 100 shares of FedEx, what was your dollar return? Which of the below is the best description of the effect of portfolio diversification? 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? A portfolio manager is managing a $10 million portfolio. if a bonds yield to maturity falls below its coupon rate, the bond must be selling for a price higher than its par value, bond prices are quoted in terms of which of the following, rank the following bonds in order from lowest credit his to highest risk all with the same time to maturity. Assume a risk free rate of 4.75%. Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? 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. The "givens" in this formula are the probabilities of different outcomes and what those outcomes will return. It paid a $0.60 per share dividend last year. What was the market risk premium during that year? It is expected to pay its first dividend of $0.10 per share in three years. What is the main reason for calculating averages of past returns on stocks? The real rate of interest on the loan is equal to 4%. 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. A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. compounded semi-annually. What is the average monthly return? calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. Expected Return. A company has a beta of 0.75. A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of 10.06 percent. Easy to use and portable, study sets in Expected Return are great for studying in the way that works for you, at the time that works for you. 2. It graphs the relationship between beta (β) and expected return, i.e. This can be expressed in the following formula: expected return (ex-ante) … Given this information which of the following statements is correct? We think they will be useful in estimating future expected return. Most common stocks are positively correlated with each other because they are impacted by the same economic factors. Which of the following statements is correct regarding diversification? The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. Compute the value of this stock with a required return of 8 percent. Which of these refer to the ease with which an asset can be converted into cash? The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, -0.60 percent, and 1.20 percent. Which of the debt contracts below would be associated with the biggest interest rate risk? taught by Chao Jiang at the University of Kansas. Expected return on an asset (r a), the value to be calculated; Risk-free rate (r f), the interest rate available from a risk-free security, such as the 13-week U.S. Treasury bill.No instrument is completely without some risk, including the T-bill, which is subject to inflation risk. Understand the expected rate of return formula. It ended last year at $173.90. A fast growing firm recently paid a dividend of $0.50 per share. Expected return = expected dividend yield + expected capital gains yield g P D g g P D rs 0 0 0 1 ^ *(1) In the above example, 0.05 0.0525 0.05 10.25% 40 *(1 ) 2.00*(1 0.05) 0 0 ^ g P D g rs where 5.25% is the expected dividend yield and 5% is the expected capital gains … 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. The past four monthly returns for K and Company are 0.60 percent, -0.80 percent, 1.80 percent, and 2.70 percent. Get ready for your Expected Return tests by reviewing key facts, theories, examples, synonyms and definitions with study sets created by students like you. Rank the following three stocks by their level of total risk, highest to lowest. 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. 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. The formula is the following. Assume that the maturity risk premium is zero. GEN has 10 million shares outstanding and a stock price of $89.25. If the default risk premium and liquidity risk premium on a 10 year corporate bond is the same as that on the 20 year corporate bond, what is the current rate on a 10 year corporate bond? Which of the following statements is correct regarding this information? Calculate the bond's default risk premium. What is the average monthly return? Which of the following are the stock of small companies that are priced below $1 per share? Assume a risk free rate of 4.75%. It paid a $1.20 per share dividend last year. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. It paid a $0.60 per share dividend last year. Which of the following is an electronic stock market without a physical trading floor? What is the change in price the bond will experience in dollars? Company X has a beta of 1.45. This implies that. FedEx Corp. stock ended the previous year at $118.30 per share. What is GEN's market capitalization? Determine which one of these three portfolios dominates another. Which of the following is a correct statement about the two stocks? Stock A has a required return of 19%. 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. Efficient portfolio is a portfolio that is not dominated by any other portfolio. Name the dominated portfolio and the portfolio that dominates it. FedEx Corp. stock ended the previous year at $136.20 per share. A bond's yield is more accurately thought of as the effective rate of return based on the actual market value of the bond. 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. Consider a portfolio comprised of four securities in the following proportions and with the indicated security beta. If a 13 percent discount rate is appropriate for this stock, what is its value? It also claims that this stock is a "safe bet" for the future. r = 2.5% + 1.45(10% - 2.5%) = 13.375% 3. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. What will be the change in the bond's price in dollars? Calculate the maturity risk premium on the two-year Treasury security. Interest rates, inflation and economic growth are economic factors that are examples of __________________. What should be YTM for the bond? FedEx Corp. stock ended the previous year with $165.30 per share. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. ... 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. 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? Risk is reduced without necessarily reducing the expected return. 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. Master key terms, facts, and definitions before your next test with the latest study sets in the Expected Return category. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. What is the average monthly return? Our most popular study sets are an effective way to learn the things you need to know to ace your exams. CAPM is calculated according to the following formula: Where:Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return of the marketNote: “Risk Premium” = (Rm – Rrf)The CAPM formula is used for calculating the expected returns of an asset. Bondholders have a required rate of return of 12%p.a. Which of these is the interest rate that is actually observed in financial markets? b-1) What is the variance of this portfolio? In return for this safety, the bonds return the lowest interest rate. Their recent dividend was $.69. A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. Year-to-Date, Company O had earned a 2.30 percent return. Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. If you owned 400 shares of FedEx, what was your dollar 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. 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. If this bond pays its coupon payments semi annually and par value is $1,000 what is the bonds annual coupon rate? 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. By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios. Which of the following is a correct statement about the two stocks? Assume when plotting stock Z on a security market line diagram the stock would be found below the security market line. A corporate bond with a 5 percent coupon has 10 years left to maturity. Which of the following is the asset pricing theory based on a beta, a measure of market risk? 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). If the management team of a company decides to increase the dividend payment for the current year. Year-to-date, Company O had earned a 3.50 percent return. 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 dividend will grow at 11 percent indefinitely. It ended last year at $145.50. If you owned 100 shares of FedEx, what was your percent return? Which of the following describes what will occur as you randomly add stocks to your portfolio? The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet". 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.. 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%. 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. Sally would be best served to: Stock valuation model dynamics make clear that higher discount rates lead to, Stock valuation model dynamics make clear that lower dividend growth rates lead to, When residual cash flows are high, stock values will be, Why is it expected to be using higher discount rates to discount stock dividend payments compared to the discount rates used to discount bond coupon payments, because the cash flows resulting from owning a stock are typically more risky than the cash flows resulting from owning a bond. Once you have completed the test, … Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. Which of the following is a concern regarding beta? Which of the below would be correct? 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. If you owned 600 shares of FedEx, what was your percent return? Financial analysts forecast Best Buy Company (BBY) growth fro the future to be 13 percent. A particular security's default risk premium is 3 percent, for all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. What yield to maturity is the bond offering? Assume you borrow 100 apples and in 1 year you return 107 apples. (a) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 23. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? (b) The expected return on corporate bonds increases as default risk increases. U.S. Stocks – S&P 500: 8.2%International – MSCI EAFE: 4.4%U.S. If you owned 500 shares of FedEx, what was your dollar return? Which of these is the term for portfolios with the highest return possible for each risk level? Round your answer to the nearest whole percent and assume annual coupon payments. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk? If you owned 500 shares of FedEx, what was your percent return? (Assume interest payments are paid semi-annually and a par value of $1,000.) Answer: You should buy the bond since the actual price of the bond is lower than the price with your required rate. If you have a portfolio made up of 50 percent Company O, 30 percent Company V, and 20 percent Company M, what is your portfolio return? a) The probability of default is zero b) The bond is callable Answer: The probability of default is zero. Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. Which of these is similar to the capital market line, except that risk is characterized by beta instead of standard deviation? Which of the following are investor diversification problems? A bond issued by the United States government, common stock issued by a small but financially strong firm. b. a) Your portfolio is invested 40 per cent each in A and C, and 20 per cent in B. You own $1,000 of City Steel stock that has a beta of 1. What would this position on the diagram imply about stock Z? Which of these is a theory that describes the types of information that are reflected in current stock prices? What is the standard deviation of monthly returns? 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. Expected return is based on historical data, so investors should take into consideration the likelihood that each security will achieve its historical return given the current investing environment. It ended last year at $131.70. A) 13% A corporate bond with a 5.75 percent coupon has 15 years left to maturity. 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 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. A manager believes his firm will earn a 12 percent return next year. What is the value of their stock when the required rate of return is 15.13 percent? 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%. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year … 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? Calculate the security's equilibrium rate of return. The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 percent. 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. Which of the following is a true statement? It paid a $1.30 per share dividend last year. Currently the portfolio is invested in the following manner. FedEx Corp. ended the previous year at $96.20 per share. The security has no special covenants. Which of the following is the correct ranking from least risky to most risky? This is an example of a market underreaction. It ended last year at $145.50. Actual Return: An actual return is the actual gain or loss of an investor. What is the beta of your portfolio? Bond-rating agencies take into account a company's balance sheet and many other factors. What is the standard deviation of monthly returns? However, the YTM equals the expected rate of return under certain assumptions. Currently, the risk-free rate is 5 percent and the portfolio has an expected return of 10 percent. FedEx Corp. ended the previous year at $96.20 per share. 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. Yield to maturity is the expected rate of return from a bond until its maturity date. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. FedEx Corp. stock ended the previous year at $118.30 per share. Financial analysts believe the stock will be at their target price of $65.00 in two years. "zero Coupon Bonds" Quizlet - 06/2020. Assume that the market is in equilibrium so that expected returns equal required returns. Year-to-date, Company O had earned a 3.60 percent return. 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. A firm does not pay a dividend. 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… Given a required return of 7%, the intrinsic value of this investment is: The correct answer is: $14437 A zero coupon bond has a face value of $2000 and a current price of $624. Which of the bonds below would be most liquid? As mentioned in the section above, a Sharpe ratio of … Expected Return for Portfolio = 50% * 15% + 50% * 7% 2. The market has an expected rate of return of 9.8 percent. What would this position on the diagram imply about stock Z? The larger the standard deviation, the higher the total risk. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. Stock A has a required return of 15%. Which of these are valued as a special zero-growth case of the constant growth rate model? It has had a credit rating of BB and a yield to maturity of 6.25 percent. JIM corporate bond with yield of 12.25 percent, IB corporate bond with yield of 4.49 percent. What is the best definition of efficient portfolio? Using a 13 percent discount rate, compute the value of this stock. the liquidity risk premium on the corporation's bond is 0.50 percent. 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