Exam 8: Portfolio Theory and the Capital Asset Pricing Model

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the standard deviation (S.D.) of return for FC and MC.

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. What is the variance of the portfolio with 50% of the funds invested in FC and 50% in MC (approximately)?

How does an investor earn more than the return generated by the tangency portfolio and still stay on the security market line?

The arbitrage pricing theory (APT) implies that the market portfolio is efficient.

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the covariance between the returns of FC and MC.

If the covariance of Stock A with Stock B is - 100, what is the covariance of Stock B with Stock A?

If the correlation coefficient between Stock A and Stock B is +0.6, what is the correlation between Stock B with Stock A?

The distribution of daily returns for a stock would be closely related to the lognormal distribution.

Briefly explain the Fama-French Three-Factor Model.

If a stock is under priced it would plot:

Beta measures the marginal contribution of a stock to the risk of a well-diversified portfolio.

If two investments offer the same expected return, most investors would prefer the one with higher variance.

If the beta of Exxon Mobil is 0.65, risk-free rate is 4% and the market rate of return is 14%, calculate the expected rate of return from Exxon:

Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 16% and a standard deviation of returns of 20%. The risk-free asset has an interest rate of 4%; calculate the expected return on the resulting portfolio:

In theory, the CAPM requires that the market portfolio consist of all common stocks.

Explain the term market risk.

Given the following data for a stock: risk-free rate = 4%; factor-1 beta = 1.5; factor-2 beta = 0.5; factor-1 risk-premium = 8%; factor-2 risk-premium = 2%. Calculate the expected rate of return on the stock using the two-factor APT model.

A stock with a beta of zero would be expected to:

By combining lending and borrowing at the risk-free rate with the efficient portfolios, we can I. extend the range of investment possibilities II. change efficient set of portfolios from being curvilinear to a straight line. III. provide a higher expected return for any level of risk except the tangential portfolio

The security market line (SML) is the graph of: