Author Question: The company that prints unemployment insurance checks is named Countercyclical Printing, Inc ... (Read 33 times)

kshipps · **on:** Jul 10, 2018

The company that prints unemployment insurance checks is named Countercyclical Printing, Inc Countercyclical Printing's beta is -0.75, the risk free rate is 8, and the risk premium on the market is 7.

What is the equilibrium expected rate of return on Countercyclical Printing's stock?
A) -8.75
B) -3.25
C) 2.75
D) 4.50
E) 5.25

Question 2

You are considering buying a share of stock in a firm that has the following two possible payoffs with the corresponding probability of occurring.

The stock has a purchase price of 50.00. You forecast that there is a 40 chance that the stock will sell for 70.00 at the end of one year. The alternative expectation is that there is a 60 chance that the stock will sell for 30.00 at the end of one year. What is the expected percentage return on this stock, and what is the return variance?
A) -8.00, 15.36
B) 4.00, 30.72
C) 8.00, 15.36
D) -4.00, -30.72

AmberC1996 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

C

Answer to Question 2

Answer: A
Explanation: A) Expected payoff = Expected payoffi probabilityi = .40 70.00 + .60 30 = 46.00.
E(r) = = = -8.00
Variance = (0.40)(0.40 - (-.08))2 + (0.60)(-0.40 - (-0.08))2 = 0.1536, or 15.36.