Name: ____________________________ Nickname for website grades: _______________________
Financial Management I
Spring 2008
Quiz 5 – Risk and Return – April 8, 2008
Dr. Stanley D. Longhofer
11:00-12:15
You have 10 minutes to complete this quiz. It is worth 10 points (5 total questions).
______ 1. Assume that the risk-free rate is 6 percent and the expected return on the market is
13 percent. What is the required return on a stock with a beta of 0.7?
A. 6.0%
B. 13.0%
C. 15.1%
D. 10.9%
E. None of the above; the correct answer is __________.
______ 2. The required return for a stock with a beta of 1.2 is 14.6 percent. If risk free rate is 5
percent, what is the market risk premium?
A. 8.0%
B. 3.0%
C. 9.6%
D. 16.5%
E. None of the above; the correct answer is __________.
______ 3. ABC Enterprises has a beta of 1.4 while XYZ, Inc. has a beta of 0.5. What is the
beta of a portfolio comprised of $500,000 worth of ABC stock and $1.5 million of
XYZ stock?
A. $1,450,000
B. 0.725
C. 0.950
D. 0.800
E. None of the above; the correct answer is __________.
______ 4. The expected return on Stock A has a standard deviation of 14 percent, while the
expected return on Stock B has a standard deviation of 8 percent. Stock A’s beta is
0.9 while stock B’s beta is 1.2. Based on this information, which stock will have a
higher required rate of return?
A. Stock A
B. Stock B
C. They will both have the same required rate of return.
D. There is not enough information to answer this question.
______ 5. True or False: An increase in expected inflation raises the required return of high-
beta stocks more than it does low-beta stocks.
