Assume That the Market Is in Equilibrium and That Stock

question 11

Multiple Choice

Assume that the market is in equilibrium and that stock betas can be estimated with historical data.The returns on the market,the returns on United Fund (UF) ,the risk-free rate,and the required return on the United Fund are shown below.Based on this information,what is the required return on the market,r_M? $\begin{array} { c c r } \text { Year } & \text { Market } & \text { UF } \\ 2011 & - 9 \% & - 14 \% \\ 2012 & 11 \% & 16 \% \\ 2013 & 15 \% & 22 \% \\ 2014 & 5 \% & 7 \% \\ 2015 & - 1 \% & - 2 \% \end{array}$
tRF: $7.00 \%$ $\quad$ $\quad$ IUnited $15.00 \%$

• A)10.57%
• B)11.13%
• C)11.72%
• D)12.33%
• E)12.95%

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Definitions:

Elasticity of Demand

An indicator of the degree to which demand for a product changes in response to a variation in its price, shown as a percentage.

Markup

The amount added to the cost price of goods to cover overhead and profit; a percentage over the cost.

Sales Tax

A levy that a government places on the sale of products and services, usually determined as a portion of the selling price.

Marginal Cost

The extra financial obligation associated with the production of an additional good or service unit.