Exam 8: An Introduction to Asset Pricing Models

Exhibit 8.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.5. Calculate the risk premium per unit of risk for the three portfolios above assuming the risk-free rate is 4.0%. A B C

An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 4.0% and the expected return on the stock index is 15%. Calculate the expected return on the portfolio.

If the assumption that there are no transaction costs is relaxed, the SML will be a

Beta is a measure of unsystematic risk.

The capital market line is the tangent line between the risk free rate of return and the efficient frontier.

Exhibit 8.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks. -Refer to Exhibit 8.2. What is your investment strategy concerning the three stocks?

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. The average proxy return is

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. Calculate the expected return on the portfolio.

A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty.

All of the following questions remain to be answered in the real world except

Using the S&P index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate.

Securities with returns that lie above the security market line are undervalued.

The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the

The "true" market portfolio is unknown.

A completely diversified portfolio would have a correlation with the market portfolio that is

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. What is the beta for Radtron using the proxy index?

The portfolios on the capital market line are combinations of the risk-free asset and the market portfolio.

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. The average true return is

Beta is a measure of: