Suppose the interest rate on a 1-year T-bond is 3% and that on a 3-year  T-bill is 3.4%.  Assuming the pure expectations theory is correct, what is the  market’s forecast for 2-year rates 1 year from now?

You have been scouring The Wall Street Journal looking for stocks that are “good values”  and have calculated expected returns for five stocks. Assume the risk-free rate (rRF) is 5  percent and the market risk premium (rM – rRF) is 2.3 percent.  Which security would be the best a. Expected Return = 9.01%, Beta = 2 b. Expected Return = 7.06%, Beta = 0.5 c. Expected Return = 5.04%, Beta = -0.3 d. Expected Return = 8.74%, Beta = 0.3 e. Expected Return = 11.50%, Beta = 1.8

T. Martell Inc.’s stock has a 37% chance of producing a 11% return, a  17% chance of producing a 14% return, and a 46% chance of producing a  -4% return. What is Martell’s expected return? 

T. Martell Inc.’s stock has a 24% chance of producing a 12% return, a  24% chance of producing a 8% return, and a 52% chance of producing a  -6% return. What is Martell’s expected return? 

Keys Corporation’s 5-year bonds yield 5.1%, and 5-year T-bonds yield 3.9%. The real risk-free rate is r* =  2.1%, the inflation premium  for 5 years bonds is  IP = 1.4%, the default risk premium for Keys’ bonds is DRP = 0.55% versus  zero for T-bonds, and the maturity risk premium for all bonds is found with  the formula  MRP =  (t – 1)*0.1%, where t = number of years to maturity.  What  is the liquidity premium (LP) on Keys’ bonds?

You have been scouring The Wall Street Journal looking for stocks that are “good values”  and have calculated expected returns for five stocks. Assume the risk-free rate (rRF) is 4  percent and the market risk premium (rM – rRF) is 3.2 percent.  Which security would be the best a. Expected Return = 9.01%, Beta = 0.8  b. Expected Return = 7.06%, Beta = -0.2 c. Expected Return = 5.04%, Beta = -0.2 d. Expected Return = 8.74%, Beta = 0.3 e. Expected Return = 11.50%, Beta = 0.5

Given the following data, find the expected rate of inflation during the next year. ·         r* = real risk-free rate = 2.80%. ·         Maturity risk premium on 10-year T-bonds = 2%.  It is zero on 1-year bonds, and a linear relationship exists. ·         Default risk premium on 10-year, A-rated bonds = 1.5%. ·         Liquidity premium = 0%. ·         Going interest rate on 1-year T-bonds = 5.80%.

The real risk-free rate of interest is 1 percent.  Inflation is expected to be 5 percent this  coming year, jump to 7 percent next year, and increase to 8 percent the year after (Year 3).   According to the expectations theory, what should be the interest rate on 2-year, risk-free  securities today?

Given the following probability distribution, what are the expected return and the standard  deviation of returns for Security J? State                      Pi                              rj     1                          0.4                           6%     2                          0.2                           6%     3                          0.4                           16%

One-year Treasury securities yield 7.6%, 2-year Treasury securities yield 7%,  and 3-year Treasury securities yield 7.5%. Assume that the expectations theory  holds. What does the market expect will be the yield on 1-year Treasury  securities two years from now?