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

You would like to combine a risky stock with a beta of 1.5 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills?

The characteristic line is graphically depicted as:

The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom economy,8% in a normal economy,and only 2% in a recessionary economy. The probabilities of these economic states are 20% for a boom,70% for a normal economy,and 10% for a recession. What is the variance of the returns on the common stock of Flowers by Flo?

According to the CAPM,the expected return on a risky asset depends on three components. Describe each component,and explain its role in determining expected return.

If the correlation between two stocks is -1,the returns:

Which one of the following is an example of unsystematic risk?

What is the standard deviation of the returns on a stock given the following information?

A portfolio is entirely invested into Buzz's Bauxite Boring equity,which is expected to return 16%,and Zum's Inc. bonds,which are expected to return 8%. 60% of the funds are invested in Buzz's and the rest in Zum's. What is the expected return on the portfolio?

If a stock portfolio is well diversified,then the portfolio variance:

A portfolio is:

A security that is fairly priced will have a return _____ the Security Market Line.

Why are some risks diversifiable and some nondiversifiable? Give an example of each.

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period?

A stock with an actual return that lies above the security market line:

What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal?

Draw the SML and plot asset C such that it has less risk than the market but plots above the SML,and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.

Diversification will not lower the ____ risk:

Quantpiks has been a hot stock the last few years,but is risky. The expected returns for Quantpiks are highly dependent on the state of the economy as follows: The expected return on Quantpiks is:

You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 10.2%. Stock A has an expected return of 12% while stock B is expected to return 7%. What is the portfolio weight of stock A?

You recently purchased a stock that is expected to earn 12% in a booming economy,8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom,a 75% chance of a normal economy,and a 10% chance of a recession. What is your expected rate of return on this stock?