Question 1

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock?
A)0.75
B)0.80
C)0.94
D)1.00
E)1.10

Accepted Answer

F1F1F1S1F1F1F10_p = 1.0 = (1/3)(0) + (1/3)(F1F1F1S1F1F1F10x) + (1/3)(1.9); F1F1F1S1F1F1F10x = 1.1

Question 2

Suppose you observe the following situation:  Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?
A)13.99 percent
B)14.42 percent
C)14.67 percent
D)14.78 percent
E)15.01 percent

Accepted Answer

R_f : (0.12 - R_f)/0.8 = (0.16 - R_f)/1.1; R_f = 1.33 percentR_M: 0.12 = 0.0133 + 0.8(R_M - 0.0133); R_M = 14.67 percent

Question 3

A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock?
A)71 percent
B)77 percent
C)84 percent
D)89 percent
E)92 percent

Accepted Answer

F1F1F1S1F1F1F10_p = 0.85 = 1.2x + (1 -x)(0); B_p = 71 percent

Question 4

A stock has an expected return of 11 percent, the risk-free rate is 6.1 percent, and the market risk premium is 4 percent. What is the stock's beta?
A)1.18
B)1.23
C)1.29
D)1.32
E)1.35

Accepted Answer

E(R_i) = 0.11 = 0.61 + F1F1F1S1F1F1F10_i(0.04); F1F1F1S1F1F1F10_i = 1.23

Question 5

Consider the following information on Stocks I and II:  The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of stock I is _____ and the beta of stock II is _____.
A)2.08; 2.47
B)2.08; 2.76
C)3.21; 3.84
D)4.47; 3.89
E)4.47; 4.26

Accepted Answer

E(R_I) = 0.06(0.15) + 0.25(0.35) + 0.69(0.43) = 0.3932B_I: 0.3932 = 0.036 + B_I (0.08); B_I = 4.47E(R_II) = 0.06(-0.35) + 0.25(0.35) + 0.69(0.45) = 0.0377B_II: 0.0377 = 0.036 + B_II (0.08); B_II = 4.26

Question 6

Suppose you observe the following situation:  Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?
A)8.8 percent
B)9.5 percent
C)12.6 percent
D)17.9 percent
E)20.0 percent

Accepted Answer

E(R_A) = 0.22(-0.12) + 0.48(0.10) + 0.30(0.23) = .0906E(R_B) = 0.22(-0.27) + 0.48(0.05) + 0.30(0.28) = .0486Slope_SML = (.0906 - 0.486)/0.21 = 20 percent

Question 7

Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in Stock B. What is the standard deviation of your portfolio given the following information? 
A)12.38 percent
B)12.64 percent
C)12.72 percent
D)12.89 percent
E)13.73 percent

Accepted Answer

E(R_p)_Boom = 0.26(0.25) + 0.48(0.25) + 0.26(0.45) = 0.302E(R_p)_Good = 0.26(0.10) + 0.48(0.13) + 0.26(0.11) = 0.117E(R_p)_Poor = 0.26(0.03) + 0.48(0.05) + 0.26(0.05) = 0.0448E(R_p)_Bust = 0.26(-0.04) + 0.48(-0.09) + 0.26(-0.09) = -0.077E(R_p) = 0.25(0.302) + 0.25(0.117) + 0.25(0.0448) + 0.25(-0.077) = 0.0967F1F1F1S1F1F1F10_p² = 0.25(0.302 - 0.0967)² + 0.25(0.117 - 0.0967)² + 0.25(0.0448 - 0.0967)² + 0.25(-0.077 - 0.0967)² = 0.018856F1F1F1S1F1F1F10_p = F1F1F1S1F1F1F100.018856 = 13.73 percent

Question 8

Consider the following information on three stocks:  A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 3.8 percent?
A) 11.47 percent
B) 12.38 percent
C) 16.67 percent
D) 24.29 percent
E) 29.99 percent

Accepted Answer

E(R_p)_Boom = 0.35(0.55) + 0.35(0.35) + 0.30(0.65) = 0.51E(R_p)_Normal = 0.35(0.44) + 0.35(0.18) + 0.30(0.04) = 0.229E(R_p)_Bust = 0.35(0.37) + 0.35(-0.17) + 0.30(-0.64) = -0.122E(R_p) = 0.45(0.51) + 0.50(0.229) + 0.05(-0.122) = 0.3379RP_i = 0.3379 - 0.038 = 29.99 percent

Quiz 13: Return, Risk, and the Security Market Line

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?

A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock?

A stock has an expected return of 11 percent, the risk-free rate is 6.1 percent, and the market risk premium is 4 percent. What is the stock's beta?

Consider the following information on Stocks I and II: The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of stock I is _ and the beta of stock II is _.

Suppose you observe the following situation: Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?

Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in Stock B. What is the standard deviation of your portfolio given the following information?

Consider the following information on three stocks: A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 3.8 percent?