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    Mishal Khalid
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    This document contains a quiz with 7 multiple choice questions on capital markets concepts. Question 1 has 3 parts asking about calculating a holding company's beta and required rate of return given information on its subsidiaries. Question 2 asks about calculating an investor's expected risk premium and a portfolio's expected return. Question 3 asks about calculating how much an investor needs to borrow to achieve a target return. Question 4 asks about calculating a stock's expected return using CAPM. Questions 5-6 ask about calculating required rates of return for companies and stocks. Question 7 asks about choosing between investment portfolios.

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    This document contains a quiz with 7 multiple choice questions on capital markets concepts. Question 1 has 3 parts asking about calculating a holding company's beta and required rate of return given information on its subsidiaries. Question 2 asks about calculating an investor's expected risk premium and a portfolio's expected return. Question 3 asks about calculating how much an investor needs to borrow to achieve a target return. Question 4 asks about calculating a stock's expected return using CAPM. Questions 5-6 ask about calculating required rates of return for companies and stocks. Question 7 asks about choosing between investment portfolios.

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    273 views2 pages

    Quiz 3 Version A

    Uploaded by

    Mishal Khalid
    This document contains a quiz with 7 multiple choice questions on capital markets concepts. Question 1 has 3 parts asking about calculating a holding company's beta and required rate of return given information on its subsidiaries. Question 2 asks about calculating an investor's expected risk premium and a portfolio's expected return. Question 3 asks about calculating how much an investor needs to borrow to achieve a target return. Question 4 asks about calculating a stock's expected return using CAPM. Questions 5-6 ask about calculating required rates of return for companies and stocks. Question 7 asks about choosing between investment portfolios.

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    Lahore School of Economics

    Intro to Capital Markets


    Quiz 3
    Version A

    Q1) ECRI Corporation is a holding company with four main subsidiaries. The percentage of
    its business coming from each of the subsidiaries, and their respective betas, are as follows:

    Subsidiary Percentage of Business Beta


    Electric utility 70% 0.80
    Cable company 25 0.90
    Real estate 10 1.30
    International/special projects 5 1.50

    a. What is the holding company’s beta?


    b. Assume that the risk-free rate is 6 percent and the market risk premium is 4 percent. What
    is the holding company’s required rate of return?
    c. ECRI is considering a change in its strategic focus; it will reduce its reliance on the electric
    utility subsidiary, so the percentage of its business from this subsidiary will be 50 percent. At
    the same time, ECRI will increase its reliance on the international/special projects division,
    so the percentage of its business from that subsidiary will rise to 15 percent. What will be the
    shareholders’ required rate of return if they adopt these changes?

    Q2) Suppose that the risk-free rate of 7 percent and the expected return on the investor’s
    tangency portfolio is 15 percent, with a standard deviation of 24 percent.
    a. Calculate the investor’s expected risk premium per unit of risk.
    b. Calculate the portfolio’s expected return if the portfolio’s standard deviation of return is
    20 percent.

    Q3) Suppose that the risk-free rate is 6 percent and the expected return on the market
    portfolio of risky assets is 14 percent. An investor with $1 million to invest wants to achieve
    a 17 percent rate of return on a portfolio combining a risk-free asset and the market portfolio
    of risky assets. Calculate how much this investor would need to borrow at the risk-free rate in
    order to establish this target expected return

    Q4) Suppose that the best predictor for a stock’s future beta is determined to be Expected
    beta=0.33+0.67(historical beta). The historical beta is calculated as 1.2. The risk-free rate is 5
    percent, and the market risk premium is 8.5 percent. Calculate the expected return on the
    stock using expected (adjusted) beta in the CAPM.

    Q5) The market has an expected return of 13 percent, and the risk-free rate is 5 percent.
    Activalue Corp. is 80 percent as risky as the market as a whole. What is the required rate of
    return for this company?
    Q6) The expected return for the market is 12 percent, and the risk-free rate is 8 percent. The
    following information is available for each of five stocks.

    Stock Beta E(Ri)


    1 0.9 13
    2 1.3 12
    3 0.5 11
    4 1.3 14

    a. Calculate the required return for each stock.


    b. Assume that an investor, using fundamental analysis, develops the estimates of expected
    return labeled E (Ri) for these stocks. Determine which stocks are undervalued and which are
    overvalued.
    c. What is the market’s risk premium?

    Q7) Eduardo Martinez is evaluating the following investments:


    Portfolio A: E(RA) =12 percent, σ (RA) =16
    Portfolio B: E RB) =10 percent, σ (RB) =7
    Portfolio C: E (RC) =10 percent, σ (RC) =8
    Explain the choice among Portfolios A, B, and C, assuming that borrowing and lending at a
    risk-free rate of RF=2 percent is possible.

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