Exam 8: An Introduction to Asset Pricing Models

The variance of returns for a risky asset is 25%.The variance of the error term,Var(e),is 8%.What portion of the total risk of the asset,as measured by variance,is systematic?

The expected return for Zbrite stock calculated using the CAPM is 15.5%.The risk free rate is 3.5% and the beta of the stock is 1.2.Calculate the implied market risk premium.

Calculate the expected return for C Inc.which has a beta of 0.8 when the risk free rate is 0.04 and you expect the market return to be 0.12.

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

The Capital Market Line (CML)can be thought of as the new Efficient Frontier.

Assume that the risk-free rate of return is 3% and the market portfolio on the Capital Market Line (CML)has an expected return of 11% and a standard deviation of 14%.How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8%?

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.

A stock has a beta of 1.25.The risk free rate is 5% and the return on the market is 6%.The estimated return for the stock is 14%.According to the CAPM you should

Exhibit 8.1 Use the Information Below for the Following Problem(S) Rates of Return Year RA Computer Markat Index 1 13 17 2 9 15 3 -11 6 4 10 8 5 11 10 6 6 12 -Refer to Exhibit 8.1.The equation of the characteristic line for RA is

Your broker has advised you that he believes that the stock of Brat Inc.is going to rise from $20 to $22.15 per share over the next year.You know that the annual return on the S&P 500 has been 11.25% and the 90-day T-bill rate has been yielding 4.75% per year over the past 10 years.If beta for Brat is 1.25,will you purchase the stock?

The correlation coefficient between the market return and a risk-free asset would

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

A friend has some reliable information that the stock of Puddles Company is going to rise from $43.00 to $50.00 per share over the next year.You know that the annual return on the S&P 500 has been 11% and the 90-day T-bill rate has been yielding 5% per year over the past 10 years.If beta for Puddles is 1.5,will you purchase the stock?

Exhibit 8.4 Use the Information Below for the Following Problem(S) Stack Beta Current Prica Expertad Prica Expertad Dividend [.8 \ 12.50 \ 13.10 \ 0.80 Y 1.1 \ 2.25 9.76 \ 0.20 Z 2.1 \ 25.70 \ 30.04 \ 0.00 -Refer to Exhibit 8.4.Which of the following statements is correct?

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

Which of the following would most closely resemble the true market portfolio?

In the presence of transactions costs,the SML will be

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

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

Calculate the expected return for B Services which has a beta of 0.83 when the risk free rate is 0.05 and you expect the market return to be 0.12.