Question 1

Suppose you have $3,600 to invest in Securities A and B.Security A has an expected return of 6 percent and a beta of 0.5.Stock B has an expected return of 20 percent and a beta of 1.8.What is the expected return on the portfolio if the portfolio beta is 2.0?
A) 24.00%
B) 23.65%
C) 22.15%
D) 22.22%

Accepted Answer

Portfolio weight in A,11ea8229_34d0_2ec9_bbd8_f5716ca306ce_TB1726_11,Weight in B = 1 - (-0.1538)= 1.1538
Portfolio expected return, 11ea8229_34d0_55da_bbd8_89fbec55bbe6_TB1726_00

Question 2

Which one of the following is NOT part of the Fama French factor model?
A) Market portfolio
B) Book to market value
C) Inflation
D) Size of stock

Accepted Answer

The Fama French factor model includes the market portfolio, book to market value, and size of stock as factors, but inflation is not a factor in the model.

Question 3

Suppose the returns on Security A are linearly related to four risk factors: F1,F2,F3,and F4.The required rate of return on Security A can be determined as follows:  
.The risk-free rate is 4.5 percent.What is the required rate of return of Security A,where b1,b2,b3,and b4 are 0.4,0.8,0.6,and 0.7,respectively,and F1,F2,F3,and F4 are 5 percent,6 percent,10 percent,and 8 percent,respectively? 
A) 18.40%
B) 20.60%
C) 22.90%
D) 24.30%

Accepted Answer

Security A's required return = 4.5% + 0.4*5% + 0.8*6% + 0.6*10% + 0.7*8% = 22.90%

Question 4

The expected return on the market is 12 percent with a standard deviation of 16 percent and the risk-free rate is 4.5 percent.Which of the following portfolios are overpriced?
  
A) 1 and 3 only
B) 1 and 4 only
C) 2 and 3 only
D) 2 and 4 only

Accepted Answer

Market risk premium = 12% - 4.5% = 7.5%
 11ea8229_34d0_7cec_bbd8_b149581a5618_TB1726_00

Question 5

Stock Z has a beta of 0.9 and a required rate of return of 12 percent.What is the market expected return if the risk-free rate is 5.25 percent?
A) 7.50%
B) 12.75%
C) 13.33%
D) 18.58%

Accepted Answer

Market risk premium 11ea8229_34d1_1933_bbd8_37848dce72dd_TB1726_11 Market return = 7.5% + 5.25% = 12.75%

Question 6

Suppose you have $4,000 to invest in Stocks X and Y.Stock X has an expected return of 13.5 percent and a beta of 1.2.Stock Y has an expected return of 18 percent and a beta of 2.How much should you invest in Stock X if you wish to have a portfolio beta of 1.8?
A) $1,000
B) $1,750
C) $2,250
D) $2,500

Accepted Answer

Weight in stock X=(1.8-2)/(1.2-2)=0.25
Amount in stock X = $4,000 F1F1F1S1F1F1F10 0.25 = $1,000

Question 7

The market expected return is 14 percent with a standard deviation of 12 percent.The risk-free rate is 5.5 percent.Security A has just paid a dividend of $1.50,which is expected to grow at a rate of 10 percent per year indefinitely.What is the current price of Security A if it has a beta of 1.4?
A) $9.93
B) $10.93
C) $20.27
D) $22.30

Accepted Answer

Security A's return 11ea8229_34d1_8e67_bbd8_551cdd10092e_TB1726_00 Security A's current price 11ea8229_34d1_8e68_bbd8_453516df991f_TB1726_00

Question 8

What is the main criticism of the CAPM referred to as Roll's critique?
A) The stock market is not efficient.
B) The CAPM does not hold because beta is not a good measure of risk.
C) The market portfolio is impossible to estimate.
D) The CAPM does not hold empirically.

Accepted Answer

Roll's critique argues that the CAPM is untestable because the true market portfolio, which should include all investable assets, is impossible to observe or estimate accurately.

Question 9

The risk-free rate is 4.5 percent.The expected return on the market is 13 percent with a standard deviation of 15 percent.What is the required rate of return for Stock X if it has a beta of 1.4?
A) 16.40%
B) 18.20%
C) 20.50%
D) 22.70%

Accepted Answer

Required return for stock X,11ea8229_34d0_f221_bbd8_0dd3cd6f18d0_TB1726_00

Question 10

Security A is estimated to be linearly related to four risk factors: F₁,F₂,F₃,and F₄ such that its required rate of return can be expressed as ER_(A) = m_o + n₁F₁ + n₂F₂ + n₃F₃ + n₄F₄,where m_o is the risk-free rate.If the risk-free rate is 5.5 %,what is the required rate of return of Security A,where n₁,n₂,n₃,and n₄ are 0.3,0.6,0.9,and 0.12,respectively,and F₁,F₂,F₃,and F₄ are 6 %,7 %,10 %,and 8 %,respectively? A) 19.22% B) 21.46% C) 22.90% D) 27.11%

Accepted Answer

ER_(A) = 5.5% + 0.3*6% + 0.6*7% + 0.9*10% + 0.12*8% = 0.2146 F1S1S1W1F1F1F10 21.46%

Question 11

A portfolio is composed of $2,000 invested in Stock A,$3,000 in Stock B,$4,000 in Stock C,and $5,000 in Stock D.What is the beta of the portfolio if the betas of Stock A,B,C,and D are 0.9,1.6,1.8 and 1.2,respectively?
A) 1.03
B) 1.26
C) 1.41
D) 1.65

Accepted Answer

Total portfolio value = $2,000 + $3,000 + $4,000 + $5,000 = $14,000
Portfolio beta, 11ea8229_34d0_07b8_bbd8_dde728e58b60_TB1726_00

Question 12

The market expected return is 14 percent with a standard deviation of 18 percent.The risk-free rate is 6 percent.Security XYZ has just paid a dividend of $1 and has a current price of $13.95.What is the beta of Security XYZ if its dividend is expected to grow at 6 percent per year indefinitely?
A) 0.85
B) 0.90
C) 0.95
D) 1.05

Accepted Answer

Stock XYZ's expected return 11ea8229_34d1_6755_bbd8_6781fa96b2d9_TB1726_00 Stock XYZ's beta 11ea8229_34d1_6756_bbd8_2b999c5f8d91_TB1726_00

Question 13

Stock XYZ has a beta of 1.6 and a required rate of return of 15.75 percent.What is the risk-free rate if the market return is 12 percent?
A) 3.25%
B) 3.75%
C) 4.50%
D) 5.75%

Accepted Answer

Risk free rate 11ea8229_34d1_4044_bbd8_c1a2ab50189d_TB1726_00

Question 14

In the above question,F₁ F₂_, and F₃ were reasonably accurate estimates based on previous analysis and F₄ was not.Empirical data showed that the return on security A was actually 24.50%.What is a reasonable estimate for F4? (Assume reasonable values for n₁,n₂,n₃,and n₄) A) 27.11% B) 33.33% C) 31.25% D) 40.37%

Accepted Answer

ER_(A) = [24.50% - (5.5% + 0.3*6% + 0.6*7% + 0.9*10%)]/ 0.12 = 0.3333 F1S1S1W1F1F1F10 33.33%

Question 15

Stock Y has a beta of 0.8 and a required rate of return of 10 percent.What is the market risk premium if the risk-free rate is 5 percent?
A) 5.00%
B) 4.75%
C) 6.25%
D) 7.50%

Accepted Answer

Market risk premium 11ea8229_34d0_f222_bbd8_5f7b247d7abd_TB1726_00

Question 16

SML-CAPM Question:
Antigone Inc.paid out a dividend of $1.75,and analysts expect it to grow at 6% for the foreseeable future.The market rate is 17%,the T-Bill rate is quoted at 4%,and Antigone stock is selling at $15.50 (beta 1.2).Answer the following questions:
a) What is the expected return on Antigone stock?
b) Are Antigone shares overpriced, underpriced, or correctly priced?
c) Is Antigone stock above, below, or on the SML?
d) What is the equilibrium price of Antigone stock?

Accepted Answer

The answer of SML-CAPM Question:
Antigone Inc.paid out a dividend of...

Question 17

Suppose the returns on Security B are linearly related to four risk factors: F1,F2,F3,and F4.The required rate of return on Security B can be determined as follows:  
.The risk-free rate is 5 percent.What is the risk premium for F4,if the required return of Security B is 20 percent,b1,b2,b3,and b4 are 0.5,0.7,0.6,and 0.9,respectively,and F1,F2,and F3 are 4.25 percent,5.75 percent,and 6.5 percent,respectively? 
A) 4.95%
B) 5.50%
C) 7.42%
D) 11.06%

Accepted Answer

Risk premium for F4 11ea8229_34d2_51bb_bbd8_bbb3fff26361_TB1726_00

Question 18

The expected return on the market is 14 percent with a standard deviation of 18 percent and the risk-free rate is 5 percent.Which of the following portfolios are underpriced?
  
A) 1 and 2 only
B) 1 and 3 only
C) 2 and 3 only
D) 3 and 4 only

Accepted Answer

Market risk premium = 14% - 5% = 9%
 11ea8229_34d0_a3fe_bbd8_3b9a82410f18_TB1726_00

Question 19

Which one of the following is NOT a difference between APT and CAPM models?
A) Risk factors
B) Arbitrage principle
C) Market portfolio
D) Pricing risk

Accepted Answer

Both APT and CAPM are used for pricing risk, so this is not a difference between the two models.

Question 20

The expected return on the market is 12 percent with a standard deviation of 20 percent and the risk-free rate is 4 percent.Which of the following portfolios are correctly priced?
  
A) 1 and 2 only
B) 1 and 4 only
C) 2 and 3 only
D) 3 and 4 only

Accepted Answer

Market risk premium = 12% - 4% = 8%
 11ea8229_34d0_cb10_bbd8_f1ddb9524a50_TB1726_00

Quiz 9: The Capital Asset Pricing Model Capm

Suppose you have $3,600 to invest in Securities A and B.Security A has an expected return of 6 percent and a beta of 0.5.Stock B has an expected return of 20 percent and a beta of 1.8.What is the expected return on the portfolio if the portfolio beta is 2.0?

Which one of the following is NOT part of the Fama French factor model?

The expected return on the market is 12 percent with a standard deviation of 16 percent and the risk-free rate is 4.5 percent.Which of the following portfolios are overpriced?

Stock Z has a beta of 0.9 and a required rate of return of 12 percent.What is the market expected return if the risk-free rate is 5.25 percent?

Suppose you have $4,000 to invest in Stocks X and Y.Stock X has an expected return of 13.5 percent and a beta of 1.2.Stock Y has an expected return of 18 percent and a beta of 2.How much should you invest in Stock X if you wish to have a portfolio beta of 1.8?

The market expected return is 14 percent with a standard deviation of 12 percent.The risk-free rate is 5.5 percent.Security A has just paid a dividend of $1.50,which is expected to grow at a rate of 10 percent per year indefinitely.What is the current price of Security A if it has a beta of 1.4?

What is the main criticism of the CAPM referred to as Roll's critique?

The risk-free rate is 4.5 percent.The expected return on the market is 13 percent with a standard deviation of 15 percent.What is the required rate of return for Stock X if it has a beta of 1.4?

A portfolio is composed of $2,000 invested in Stock A,$3,000 in Stock B,$4,000 in Stock C,and $5,000 in Stock D.What is the beta of the portfolio if the betas of Stock A,B,C,and D are 0.9,1.6,1.8 and 1.2,respectively?

The market expected return is 14 percent with a standard deviation of 18 percent.The risk-free rate is 6 percent.Security XYZ has just paid a dividend of $1 and has a current price of $13.95.What is the beta of Security XYZ if its dividend is expected to grow at 6 percent per year indefinitely?

Stock XYZ has a beta of 1.6 and a required rate of return of 15.75 percent.What is the risk-free rate if the market return is 12 percent?

In the above question,F1 F2, and F3 were reasonably accurate estimates based on previous analysis and F4 was not.Empirical data showed that the return on security A was actually 24.50%.What is a reasonable estimate for F4? (Assume reasonable values for n1,n2,n3,and n4)

Stock Y has a beta of 0.8 and a required rate of return of 10 percent.What is the market risk premium if the risk-free rate is 5 percent?

The expected return on the market is 14 percent with a standard deviation of 18 percent and the risk-free rate is 5 percent.Which of the following portfolios are underpriced?

Which one of the following is NOT a difference between APT and CAPM models?

The expected return on the market is 12 percent with a standard deviation of 20 percent and the risk-free rate is 4 percent.Which of the following portfolios are correctly priced?

In the above question,F₁ F₂_, and F₃ were reasonably accurate estimates based on previous analysis and F₄ was not.Empirical data showed that the return on security A was actually 24.50%.What is a reasonable estimate for F4? (Assume reasonable values for n₁,n₂,n₃,and n₄)