Which of these is the term for portfolios with the highest return possible for each risk level? A two-year Treasury security currently earns 5.13 percent. It also claims that this stock is a "safe bet" for the future. If you owned 600 shares of FedEx, what was your percent return? 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. Actual Return: An actual return is the actual gain or loss of an investor. Efficient portfolio is a portfolio that is not dominated by any other portfolio. 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. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. FedEx Corp. stock ended the previous year at $118.30 per share. Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. The market has an expected rate of return of 9.8 percent. The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, -0.60 percent, and 1.20 percent. The dividend is expected to grow at a 14.5 percent rate. Portfolio Blue dominates Portfolio Purple, Which of these is defined as a combination of investment assets held by an investor. 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. Which of these is the portion of total risk that is attributable to overall economic factors? What should be YTM for the bond? U.S. Stocks – S&P 500: 8.2%International – MSCI EAFE: 4.4%U.S. The past four monthly returns for K and Company are 0.60 percent, -0.80 percent, 1.80 percent, and 2.70 percent. Which of the bonds below would be most liquid? Which of these are valued as a special zero-growth case of the constant growth rate model? Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. Sally has researched GLE and wants to pay no more than $50 for the stock. Which of these is a measure summarizing the overall past performance of an investment? What is the main reason for calculating averages of past returns on stocks? This dividend will grow at 11 percent indefinitely. The market has an expected rate of return of 12.6 percent. Firms can quite possibly change their stocks' risk level by substantially changing their business. Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? JIM corporate bond with yield of 12.25 percent, IB corporate bond with yield of 4.49 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. A) 13% FedEx Corp. ended the previous year at $96.20 per share. Calculate the maturity risk premium on the two-year Treasury security. Which of the following describes what will occur as you randomly add stocks to your portfolio? The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. 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? If you owned 400 shares of FedEx, what was your percent return? What is the expected return of the portfolio? FedEx Corp. stock ended the previous year at $136.20 per share. Interest rates, inflation and economic growth are economic factors that are examples of __________________. The larger the standard deviation, the higher the total risk. Chapter 2: Bonds, stocks and other securities Try the multiple choice questions below to test your knowledge of this chapter. The security has no special covenants. Which of the following are investor diversification problems? a) The probability of default is zero b) The bond is callable Answer: The probability of default is zero. What is the beta of your portfolio? It graphs the relationship between beta (β) and expected return, i.e. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 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. Answer: B Question Status: Previous Edition 35) Which of the following statements are true? 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. Which of the following is a correct statement about the two stocks? Portfolio Blue has an expected return of 13 percent and risk of 17 percent. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk? The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. Which of the following is the asset pricing theory based on a beta, a measure of market risk? what is the default risk premium on the corporation's 10 year bonds? The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. 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. b-1) What is the variance of this portfolio? The new appropriate discount rate will be 9 percent. If this bond pays its coupon payments semi annually and par value is $1,000 what is the bonds annual coupon rate? 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? Which of these is a theory that describes the types of information that are reflected in current stock prices? Most common stocks are positively correlated with each other because they are impacted by the same economic factors. It paid a $1.30 per share dividend last year. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. What is the average monthly return? During the same time period, Company V earned 1.90 percent and Company M earned -3.60 percent. 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. 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. It paid a $1.30 per share dividend last year. Risk is reduced without necessarily reducing the expected return. At face value, the coupon rate and yield equal each other. 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. Which of these is the reward for taking systematic stock market risk? Compute the value of this stock with a required return of 8 percent. We think they will be useful in estimating future expected return. If you owned 100 shares of FedEx, what was your dollar return? 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. Currently, GLE, is trading in the market for $51. Consider a portfolio comprised of four securities in the following proportions and with the indicated security beta. (a) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 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. Hence, the outcome is not guaranteed. Expected Return for Portfolio = 50% * 15% + 50% * 7% 2. Which of the below would be correct? Which of the following is a concern regarding beta? Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. 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? As mentioned in the section above, a Sharpe ratio of … This is an example of a market underreaction. 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. What is the best definition of efficient portfolio? It is expected to pay its first dividend of $0.10 per share in three years. Our most popular study sets are an effective way to learn the things you need to know to ace your exams. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. Which of the following will only be executed if the order's price conditions are met? Which of the below is the best description of the effect of portfolio diversification? This can be expressed in the following formula: expected return (ex-ante) … 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. Assume that the market is in equilibrium so that expected returns equal required returns. 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 Vanguard fund had both a higher average annual return for the period and a lower standard deviation. Stock B has a required return of 26%. a corporations 10 years bond are currently yielding a return of 7.75 percent. It ended last year at $131.70. 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. Understand the expected rate of return formula. As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims. calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. Given this information which of the following statements is correct? If you have a portfolio made up of 40 percent Company O, 40 percent Company V, and 20 percent Company M, what is your portfolio return? 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. 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. Currently the portfolio is invested in the following manner. Let’s take an example of a portfolio of stocks and bonds where stocks have a 50% weight and bonds have a weight of 50%. Triple-A (AAA) rated bonds are those deemed least likely to default. Financial analysts believe the stock will be at their target price of $65.00 in two years. A company has a beta of 0.75. 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. It has had a credit rating of BB and a yield to maturity of 6.25 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. Government Treasury bonds are historically considered the safest bonds. 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 maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. All of these statements are valid concerns regarding beta. (Assume semi-annual interest payments and $1,000 par value.). 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. Determine which one of these three portfolios dominates another. Assume interest payments are paid semi-annually and par value is $1,000. 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. The dividend is expected to increase at a 20 percent rate for the next 3 years. Using the CAPM, what is ABC’s expected return? b. Which of these is the interest rate that is actually observed in financial markets? Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. It ended last year at $145.50. 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 expected risk-free rate of interest is 2.5% and the expected return on the market as a whole is 10%. It paid a $0.80 per share dividend last year at $105.80. 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. stock ended the previous year at $118.30 per share. It ended last year at $145.50. What is the average monthly return? The security's liquidity risk premium is .35 percent and maturity risk premium is .95 percent. Rank the following three stocks by their level of total risk, highest to lowest. By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios. The annual return on the S&P 500 Index was 11.5 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%. What will be the change in the bond's price in dollars? If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to. it shows expected return as a function of β. the expected return on default-free bonds. Bond-rating agencies take into account a company's balance sheet and many other factors. This implies that. 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.. Which of the following is a correct statement about the two stocks? Cash flows for an investment for today, next year and the year after are forecast to be $4000, $5000 and $6600. Like many formulas, the expected rate of return formula requires a few "givens" in order to solve for the answer. Which of the debt contracts below would be associated with the biggest interest rate risk? Which of the following is the reward investors require for taking risk? Assume when plotting stock Z on a security market line diagram the stock would be found below the security market line. Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. Assume a risk free rate of 4.75%. Which of the following is the model that includes an equation that relates a stock's required return to an appropriate risk premium? 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. The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet". Which of these refer to the ease with which an asset can be converted into cash? What was the market risk premium during that year? A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. You believe that in one year, the yield to maturity will be 6.25 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. The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 percent. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? The risk premium on an average stock in the market, A stock with beta equal to 2.4 would most likely be considered. 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. Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 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. What is the standard deviation of monthly returns? Year-to-Date, Company O had earned a 2.30 percent return. If a 13 percent discount rate is appropriate for this stock, what is its value? It paid a $0.60 per share dividend last year. The market price of the bond is $910.00. Ex… Name the dominated portfolio and the portfolio that dominates it. 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. 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 these investors earn returns from receiving dividends and from stock price appreciation? 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. 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. 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. compounded semi-annually. 23. The bond is currently selling at a price below its par value. It paid a $0.60 per share dividend last year. Stock A has a required return of 15%. A manager believes his firm will earn a 12 percent return next year. Please show all work and formulas. 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. Is ABC ’ S expected return on corporate bonds increases as default risk increases term for portfolios with the interest... 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