Exam 8: Portfolio Theory and the Capital Asset Pricing Model

Given the following data for a stock: beta = 1.5; risk-free rate = 4%; market rate of return = 12%; and Expected rate of return on the stock = 15%. Then the stock is:

The distribution of returns, measured over a short interval of time, like daily returns, can be approximated by:

Investments A and B both offer an expected rate of return of 12%. If the standard deviation of A is 20% and that of B is 30%, then investors would:

The distribution of returns, measured over long intervals, like annual returns, can be approximated by

The correlation measures the:

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard Deviation of returns of 20% and a risk-free asset with an interest rate of 4%; calculate the expected Return on the resulting portfolio:

Where would under priced and overpriced securities plot on the SML (security market line)?

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 20% and a standard deviation of returns of 16%. The risk-free asset has an interest rate of 4%; calculate standard deviation of the resulting portfolio:

Briefly explain the term "security market line."

Beta of Treasury bills is:

A "factor" in APT is a variable that: