Question

A security had the following returns over the last four years. Compute the standard deviation of these historical returns.

Return (%)

19

5

17

-5

Group of answer choices

11.10%

11.00%

10.90%

11.20%

10.80%

A security had the following returns over the last four years. Compute the geometric mean return.

Return (%)

2

15

2

7

Group of answer choices

6.27%

5.97%

6.17%

6.37%

6.07%

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 7

percent and the market risk premium (rM - rRF) is 2 percent.  Which security would be the best

investment? (Assume you must choose just one.)

Group of answer choices

a. Expected Return = 9.01%, Beta = 2, Required Return = 11%, Expected Less Required Return = -1.99%

c. Expected Return = 5.04%, Beta = 0.5, Required Return = 8%, Expected Less Required Return = -2.96%

e. Expected Return = 11.50%, Beta = 1, Required Return = 9%, Expected Less Required Return = 2.50%

d. Expected Return = 8.74%, Beta = 0.3, Required Return = 7.6%, Expected Less Required Return = 1.14%

b. Expected Return = 7.06%, Beta = 0.3, Required Return = 7.6%, Expected Less Required Return = -0.54%

Answer 1

ANSWER:

= 9%

=11.20%

ANSWER:

=6.37%

ANSWER:

The security for which the expected return exceeds the required return by the largest amount, will be the best investment alternative.

As, Expected less Required Return is maximum(i.e 2.50%) for security e.

Therefore, E is the best option.

e. Expected Return = 11.50%, Beta = 1, Required Return = 9%, Expected Less Required Return = 2.50%