71. The systematic risk of the market is measured by:
a beta of 1.0.
72. A security that is fairly priced will have a return that lies _____ the Security Market
Line.
on
73. Which of the following will increase the expected rate of return on an individual
security as computed by the Capital Asset Pricing Model (CAPM)? Assume that the
security’s beta, the risk-free rate of return, and the market rate of return are all positive.
I.
a decrease in the security’s beta
II. an increase in the security’s beta
III. a decrease in the risk premium
IV. an increase in the market rate of return
b.
II and IV only
74. What is the expected return on a portfolio which is invested 20 percent in stock A, 50
percent in stock B, and 30 percent in stock C?
State of
Economy
Boom
Normal
Recession
Probability of
Returns if State Occurs
State of Economy Stock A
Stock B
Stock C
20%
18%
9%
6%
70%
11%
7%
9%
10%
-10%
4%
13%
8.25 percent
E(r)Boom = (.20  .18) + (.50  .09) + (.30  .06) = .036 + .045 + .018 = .099
E(r)Normal = (.20  .11) + (.50  .07) + (.30  .09) = .022 + .035 + .027 = .084
E(r)Bust = (.20  -.10) + (.50  .04) + (.30  .13) = -.020 + .020 + .039 = .039
E(r)Portfolio = (.20  .099) + (.70  .084) + (.10  .039) = .02376 + .0588 + .0039 =
.0825 = 8.25 percent
75. The risk-free rate of return is 4 percent and the market risk premium is 8 percent. What
is the expected rate of return on a stock with a beta of 1.28?
14.24 percent
E(r) = .04 + (1.28  .08) = .1424 = 14.24 percent
76. A financial contract that gives its owner the right, but not the obligation, to buy or sell
a specified asset at an agreed-upon price on or before a given future date is called
a(n) _____ contract.
option
77. The number of shares of stock received for each convertible bond converted into stock
is called the:
conversion ratio.
78. The intrinsic value of a call is:
I.
the value of the call if it were about to expire.
II. equal to the lower bound of a call’s value.
III. another name for the market price of a call.
IV. always equal to zero if the call is currently out of the money.
I, II, and IV only
79. Employee stock options:
are frequently granted on a regular basis such as quarterly or annually.
80. You own two call option contracts on ABC stock with a strike price of $15. When you
purchased the shares the option price was $1.20 and the stock price was $15.90. What is the
total intrinsic value of these options if ABC stock is currently selling for $14.50 a share?
$0