Exam 8: An Introduction to Asset Pricing Models

Recently your broker has advised you that he believes that the stock of Casey Incorporated is going to rise from $55.00 to $70.00 per share over the next year. You know that the annual return on the S&P 500 has been 12.5% and the 90-day T-bill rate has been yielding 6% per year over the past 10 years. If beta for Casey is 1.3, will you purchase the stock?

As the number of securities in a portfolio increases, the amount of systematic risk

Exhibit 8.4 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.4. What are the expected returns for stocks X, Y, and Z for the next period based on the above prices and dividends? X Y Z

The standard deviation for the risk-free security is equal to zero.

Exhibit 8.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks. -Refer to Exhibit 8.7. What are the estimated rates of return for the three stocks (in the order A, B, C)?

If an individual owns only one security the most appropriate measure of risk is:

Exhibit 8.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.1. If you expected the return on the Market Index to be 12%, what would you expect the return on RA Computer to be?

The expected return for a stock, calculated using the CAPM, is 10.5%. The market return is 9.5% and the beta of the stock is 1.50. Calculate the implied risk-free rate.

There can be only one zero-beta portfolio.

Exhibit 8.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks. -Refer to Exhibit 8.7. What are the required rates of return for the three stocks (in the order A, B, C)?

Assume that as a portfolio manager the beta of your portfolio is 1.4 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

The rate of return on a risk free asset should equal the

The separation theorem divides decisions on ____ from decisions on ____.

In the presence of transactions costs, the SML will be

If an incorrect proxy market portfolio such as the S&P index is used when developing the security market line, the slope of the line will tend to be underestimated.

The betas for the market portfolio and risk-free security are: Market Risk-free

Since many of the assumptions made by the capital market theory are unrealistic, the theory is not applicable in the real world.

Correlation of the market portfolio and the zero-beta portfolio will be linear.

Exhibit 8.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks. -Refer to Exhibit 8.7. What is your investment strategy concerning the three stocks?