Quiz Corporate Accounting - 1
1. The market has an expected rate of return of 10.7 percent. The long-term
government bond is expected to yield 5.8 percent and the U.S. Treasury bill is
expected to yield 3.9 percent. The inflation rate is 3.6 percent. What is the market
risk premium?
Answer :
Market Risk Premium = Expected Market Return - Risk Free Return
= 10,7% - 3,9%
= 6,8%
3. You recently purchased a stock that is expected to earn 22 percent in a booming
economy, 9 percent in a normal economy, and lose 33 percent in a recessionary
economy. There is a 5 percent probability of a boom and a 75 percent chance of a
normal economy. What is your expected rate of return on this stock?
Answer :
Step 1: Calculate the probability of a recessionary economy
Probability of a Recessionary Economy = Total Probability - (Probability of
Boom + Probability of Normal Economy)
= 100% - (5% + 75%)
= 20%
Step 2: Calculate the expected return on stock
Expected Return on Stock = Probability of Boom x Return of Boom +
Probability of Normal Economy + Return in a Normal Economy + Probability
of a Recessionary Economy x Return in Recessionary Economy
= (5% x 22%) + (75% x 9%) + (20% x -33%)
= 1,1% + 6,75% - 6,6%
= 1,25%
6. The principle of diversification tells us that:
Answer : Concentrating an investment in two or three large stocks will eliminate all
of the unsystematic risk.
9. Which one of the following indicates a portfolio is being effectively diversified?
Answer : a decrease in the standard deviation(SD) of the portfolio.
Quiz Corporate Accounting - 1 1
1. The market has an expected rate of return of 10.7 percent. The long-term
government bond is expected to yield 5.8 percent and the U.S. Treasury bill is
expected to yield 3.9 percent. The inflation rate is 3.6 percent. What is the market
risk premium?
Answer :
Market Risk Premium = Expected Market Return - Risk Free Return
= 10,7% - 3,9%
= 6,8%
3. You recently purchased a stock that is expected to earn 22 percent in a booming
economy, 9 percent in a normal economy, and lose 33 percent in a recessionary
economy. There is a 5 percent probability of a boom and a 75 percent chance of a
normal economy. What is your expected rate of return on this stock?
Answer :
Step 1: Calculate the probability of a recessionary economy
Probability of a Recessionary Economy = Total Probability - (Probability of
Boom + Probability of Normal Economy)
= 100% - (5% + 75%)
= 20%
Step 2: Calculate the expected return on stock
Expected Return on Stock = Probability of Boom x Return of Boom +
Probability of Normal Economy + Return in a Normal Economy + Probability
of a Recessionary Economy x Return in Recessionary Economy
= (5% x 22%) + (75% x 9%) + (20% x -33%)
= 1,1% + 6,75% - 6,6%
= 1,25%
6. The principle of diversification tells us that:
Answer : Concentrating an investment in two or three large stocks will eliminate all
of the unsystematic risk.
9. Which one of the following indicates a portfolio is being effectively diversified?
Answer : a decrease in the standard deviation(SD) of the portfolio.
Quiz Corporate Accounting - 1 1
