Chapter 17: Q8. (page 369)
The interest rate on short-term U.S. government bonds is 4 percent. The risk premium for any asset with a beta = 1.0 is 6 percent. What is the average expected rate of return on the market portfolio?
0 percent
4 percent
6 percent
10 percent
The correct option is (d): 10 percent
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If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?
Suppose initially that two assets, A and B, will each make a single guaranteed payment of \(100 in 1 year. But asset A has a current price of \)80 while asset B has a current price of $90.
What are the rates of return of assets A and B at their current prices? Given these rates of return, which asset should investors buy and which asset should they sell?
Assume that arbitrage continues until A and B have the same expected rate of return. When arbitrage ends, will A and B have the same price?
If an investment has 35 percent more non-diversifiable risk than the market portfolio, its beta will be:
35
1.35
0.35
Corporations often distribute profits to their shareholders in the form of dividends, which are quarterly payments sent to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for \(35 and that the company will pay dividends of \)2 per year on that share. What is the annual percentage rate of return? Next, suppose that you and other investors could get a 12 percent per year rate of return on the stocks of other very similar fashion companies. If investors care only about rates of return, what should happen to the share price of Rogue Designs? (Hint: This is an arbitrage situation.)
Tammy can buy an asset this year for \(1,000. She is expecting to sell it next year for \)1,050. What is the asset’s anticipated percentage rate of return?
0 percent
5 percent
10 percent
15 percent
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