Exam 11: Risk and Return: the Capital Asset Pricing Model

Idaho Slopes (IS) and Dakota Steppes (DS) are both seasonal businesses. IS is a downhill skiing facility, while DS is a tour company that specializes in walking tours and camping. The equally likely returns on each company over the next year is expected to be: The variances of IS and DS are:

Returns for the IC Company and for the S&P 500 Index over the previous 4-year period are given below: What are the average returns on IC and on the S&P 500 index? If you had invested $1.00 in IC, how much would you have had after 4 years? What is the correlation between the returns on IC and the S&P?

Given the following information on 3 stocks: Using the CAPM, calculate the expected return for Stock's A, B, and C. Which stocks would you recommend purchasing? BA = .0070/.0064 = 1.094; ra = .07 + (.18-.07)1.094 = .1903 BB = .0045/.0064 = 0.703; rb = .07 + (.18-.07)0.703 = .1473 BC = .0013/.0064 = 0.203; rc = .07 + (.18-.07)0.203 = .0923 Indifferent on A as .1903 _.19. Would buy B as.15 > .1473. Would not buy C as.09 < .0923.

Idaho Slopes (IS) and Dakota Steppes (DS) are both seasonal businesses. IS is a downhill skiing facility, while DS is a tour company that specializes in walking tours and camping. The equally likely returns on each company over the next year is expected to be: The means of IS and DS are:

A portfolio contains four assets. Asset 1 has a beta of.8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%, what is the beta of the portfolio, the expected return on the portfolio and the market?

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:

Which one of the following would indicate a portfolio is being effectively diversified?

Standard deviation measures ________________ risk.

The diagram below represents an opportunity set for a two asset combination. Indicate the correct efficient set with labels; explain why it is so.

As we add more securities to a portfolio, the ____ will decrease:

The measure of beta associates most closely with:

The diversification effect of a portfolio of two stocks:

A portfolio is made up of 75% of stock 1, and 25% of stock 2. Stock 1 has a variance of.08, and stock 2 has a variance of.035. The covariance between the stocks is -.001. Calculate both the variance and the standard deviation of the portfolio.

Idaho Slopes (IS) and Dakota Steppes (DS) are both seasonal businesses. IS is a downhill skiing facility, while DS is a tour company that specializes in walking tours and camping. The equally likely returns on each company over the next year is expected to be: The covariance between the IS and DS returns is:

You have plotted the data for two securities over time on the same graph, ie., the month return of each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have:

The standard deviation of a portfolio will tend to increase when:

When a security is added to a portfolio the appropriate return and risk contributions are:

Explain in words what beta is and why it is an important tool of security valuation.

Draw and explain the relationship between the opportunity set for a two asset portfolio when the correlation is: [Choose from -1, -.5, 0, +.5, and +1]

If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a variance that is: