Suppose you hold a diversified portfolio consisting of a $12,999 invested equally  in each of 5 different common stocks.  The portfolio’s beta is 0.88.  Now  suppose you decided to sell one of your stocks that has a beta of 1.4 and to  use the proceeds to buy a replacement stock with a beta of 0.7.  What would  the portfolio’s new beta be?

The real risk-free rate of interest is 2 percent.  Inflation is expected to be 3 percent this  coming year, jump to 5 percent next year, and increase to 6 percent the year after (Year 3).   According to the expectations theory, what should be the interest rate on 2-year, risk-free  securities today?

Suppose the real risk-free rate is 3.8%, the average future inflation rate is  2.3%, a maturity premium of 0.05% per year to maturity applies, i.e., MRP =  0.05%(t), where t is the years to maturity.  Suppose also that a liquidity premium  of 1% and a default risk premium of 0.5% applies to A-rated corporate bonds.   How much higher would the rate of return be on a 7-year A-rated corporate  bond than on a 5-year Treasury bond.  Here we assume that the pure  expectations theory is NOT valid.   

Suppose the real risk-free rate is 2.3%,  the average future inflation rate is  2%, and a maturity premium of 0.1% per year to maturity applies, i.e., MRP =  0.1%(t), where t is the years to maturity.  What rate of return would you  expect on a 4-year Treasury security, assuming the pure expectations theory is NOT valid?

According to the Capital Asset Pricing Model (CAPM), beta is a measure of __________.

Suppose the real risk-free rate is 4.8%,  the average future inflation rate is  2.4%, and a maturity premium of 0.1% per year to maturity applies, i.e., MRP =  0.1%(t), where t is the years to maturity.  What rate of return would you  expect on a 4-year Treasury security, assuming the pure expectations theory is NOT valid?

XYZ Corp.’s union is striking. In addition XYZ Corp. is currently being sued for product infringement by several other companies. This is an example of ______________.

Keys Corporation’s 5-year bonds yield 8.1%, and 5-year T-bonds yield 6.8%. The real risk-free rate is r* =  1.5%, the inflation premium  for 5 years bonds is  IP = 4.9%, the default risk premium for Keys’ bonds is DRP = 0.54% 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?

The risk-free rate is 3.4 percent.  Stock A has a beta = 1.8 and Stock B has a beta = 1.1. Stock A has a required return of 7 percent.  What is Stock B’s required return?

Given the following data, find the expected rate of inflation during the next year. ·         r* = real risk-free rate = 4.60%. ·         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 = 6.70%.