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. Understand the expected rate of return formula. What is the average monthly return? Which of these investors earn returns from receiving dividends and from stock price appreciation? The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. The expected rate of return is the return on investment that an investor anticipates receiving. Which of the following is an electronic stock market without a physical trading floor? According to the Fisher Effect equation, the nominal rate of interest is equal to, the real rate of interest plus the inflation rate, the higher the liquidity risk, the higher the interest rate that security buyers will demand, If you want to get a 2% real raise at work so that you can buy 2% more of the things you like, and you expect the inflation rate to be around 3% in the future, you will have to ask for a, This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments. What is the average monthly return? What will be the change in the bond's price in dollars? Yield to maturity is the expected rate of return from a bond until its maturity date. It paid a $1.30 per share dividend last year. Calculate the bond's default risk premium. What is the standard deviation of monthly returns? Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. 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. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. All of these statements are valid concerns regarding beta. (Assume semi-annual interest payments and $1,000 par value.). 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. A corporate bond with a 5.75 percent coupon has 15 years left to maturity. Assume that the market is in equilibrium so that expected returns equal required returns. It ended last year at $131.70. Which of these are valued as a special zero-growth case of the constant growth rate model? 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". 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. Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. 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. If you owned 100 shares of FedEx, what was your percent return? The expected risk-free rate of interest is 2.5% and the expected return on the market as a whole is 10%. If the management team of a company decides to increase the dividend payment for the current year. Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. Which of the below is the best description of the effect of portfolio diversification? 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. a corporations 10 years bond are currently yielding a return of 7.75 percent. The larger the standard deviation, the higher the total risk. However, the YTM equals the expected rate of return under certain assumptions. Which of the following are the stock of small companies that are priced below $1 per share? Which of the following is a correct statement about the two stocks? 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. Government Treasury bonds are historically considered the safest bonds. Assume when plotting stock Z on a security market line diagram the stock would be found below the security market line. At face value, the coupon rate and yield equal each other. If you owned 400 shares of FedEx, what was your percent return? The formula is the following. taught by Chao Jiang at the University of Kansas. A bond issued by the United States government, common stock issued by a small but financially strong firm. Which of these is the reward for taking systematic stock market risk? Bond-rating agencies take into account a company's balance sheet and many other factors. 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. 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? 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. (Assume interest payments are paid semi-annually and a par value of $1,000.) Which of these is a theory that describes the types of information that are reflected in current stock prices? What is the beta of your portfolio? Risk is reduced without necessarily reducing the expected return. Stock B has a required return of 8%. At … 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. 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. FedEx Corp. stock ended the previous year with $165.30 per share. Which of the following is a true statement? You own $1,000 of City Steel stock that has a beta of 1. During the same period, Company V earned 1.70 percent and Company M earned -1.20 percent. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. Which of the following is a concern regarding beta? FedEx Corp. ended the previous year at $96.20 per share. Compute the value of this stock with a required return of 8 percent. It ended last year at $145.50. Using the CAPM, what is ABC’s expected return? Expected return The expected return on a risky asset, given a probability distribution for the possible rates of 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. A two-year Treasury security currently earns 5.13 percent. Which of the following is the correct ranking from least risky to most risky? 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 bonds below would be most liquid? 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. The market price of the bond is $910.00. Currently, the risk-free rate is 5 percent and the portfolio has an expected return of 10 percent. it shows expected return as a function of β. 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. The new appropriate discount rate will be 6.00 percent. What would this position on the diagram imply about stock Z? During the same time period, Company V earned -2.50 percent and Company M earned 1.60 percent. The dividend is expected to increase at a 20 percent rate for the next 3 years. the expected return on default-free bonds. What is the average monthly return? It graphs the relationship between beta (β) and expected return, i.e. It is calculated by estimating the probability of a full range of returns on an investment, with the probabilities summing to 100%. 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). You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). At the current stock price of $26.07, what is the return shareholders are expecting? 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. If you owned 500 shares of FedEx, what was your dollar return? Actual Return: An actual return is the actual gain or loss of an investor. This is an example of a market underreaction. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. It ended last year at $173.90. Rank the following three stocks by their level of total risk, highest to lowest. 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? The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 percent. compounded semi-annually. If this bond pays its coupon payments semi annually and par value is $1,000 what is the bonds annual coupon rate? (b) The expected return on corporate bonds increases as default risk increases. It is expected to pay its first dividend of $0.10 per share in three years. Which of these is a measure summarizing the overall past performance of an investment? Once you have completed the test, … 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? Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? As mentioned in the section above, a Sharpe ratio of … What should be YTM for the bond? What is the expected return of the portfolio? Which of the following statements is correct? 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 best definition of efficient portfolio? 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? the liquidity risk premium on the corporation's bond is 0.50 percent. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to. Which of the following is the continual increase in the price level of a basket of goods or services? 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. 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? Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 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. If you owned 400 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? 11) What is the expected rate of return on a bond that matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is currently selling for $911? A company has a beta of 0.75. The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. (a) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. What would this position on the diagram imply about stock Z? Assume you borrow 100 apples and in 1 year you return 107 apples. Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. If you owned 100 shares of FedEx, what was your dollar return? Treasury bills, long-term Treasury bonds, stocks. Round your answer to the nearest whole percent and assume annual coupon payments. "zero Coupon Bonds" Quizlet - 06/2020. Sally has researched GLE and wants to pay no more than $50 for the stock. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. It paid a $1.20 per share dividend last year. Assume that the maturity risk premium is zero. If a 13 percent discount rate is appropriate for this stock, what is its value? 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. Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? 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. what is the default risk premium on the corporation's 10 year bonds? the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year … The Vanguard fund had both a higher average annual return for the period and a lower standard deviation. 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. r = 2.5% + 1.45(10% - 2.5%) = 13.375% 3. Stock A has a required return of 15%. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk? A) 13% Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. 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