Assignment

1. The risk per unit of return is measured by the
median.
standard deviation.
coefficient of variation.
variance.

2. The expected return on Bevo stock is 12.6 percent. If the expected return on the market is 10 percent and the beta for Bevo is 1.4, then what is the risk-free rate?
2.0%
2.5%
3.5%
3.0%

3. Julio purchased a stock one year ago for $27. The stock is now worth $32, and the total return to Julio for owning the stock was 37 percent. What is the dollar amount of dividends that he received for owning the stock during the year?
$7 $7
$4
$5
$6

4. Babs purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Babs needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needed to have to reach her objective?
$3,750
$4,750
$5,250
$4,250

5. The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore?
19.20%
24.00%
11.20%
32.00%

6. The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz?
10.80%
8.40%
13.80%
19.20%

Essay

On the basis of interim results from a clinical trial, Merck pulled Vioxx off the market. The results indicated that patients who have been taking the drug for 18 months have twice the risk of suffering a heart attack or stroke than those taking a placebo. Vioxx had worldwide sales of $2.5 billion last year. While Merck's action was generally lauded, critics argue that earlier studies indicated this issue as well. The stock market reacted swiftly, reducing the price from $45 to $33. Merck and its investors braced for the inevitable lawsuits from those who believe they were harmed by the drug. Beyond the legal liabilities, Merck also faced challenges from expiring patents on successful drugs and the risky business of developing and marketing new drugs. (Key words: Efficient Capital Markets, Risk and Return)

1. Why did Merck's price fall so significantly? Try to incorporate concepts from session 4 and current session

2. As CEO of Merck, Raymond Gilmartin made the decision to stop sales of Vioxx. Should he have withheld this information since it would have a clear negative effect on share price and he had an obligation to maximize the value of these shares?