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

The Rotor Co. stock is expected to earn 14% in a recession,6% in a normal economy,and lose 4% in a booming economy. The probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%. What is the expected rate of return on this stock?

You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How much needs to be invested in stock B if you want a portfolio beta of .90?

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

The elements in the off-diagonal positions of the variance/covariance matrix are:

A stock with a beta of zero would be expected to have a rate of return equal to:

Kali's Ski Resort,Inc. stock is quite cyclical. In a boom economy,the stock is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period. The probability of a recession is 15%. There is a 30% chance of a boom economy. The remainder of the time,the economy will be at normal levels. What is the standard deviation of the returns on Kali's Ski Resort,Inc. stock?

The diversification effect of a portfolio of two stocks:

The beta of an individual security is calculated by:

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

The market has an expected rate of return of 10.2%. The long-term government bond is expected to yield 4.2% and the U.S. Treasury bill is expected to yield 3.8%. The inflation rate is 3.1%. What is the market risk premium?

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

If investors possess homogeneous expectations over all assets in the market portfolio,when riskless lending and borrowing is allowed,the market portfolio is defined to:

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

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 standard deviation of Quantpiks returns is

Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%?

In the first chapter,it was stated that financial managers should act to maximize shareholder wealth. Why are the efficient markets hypothesis (EMH),the CAPM,and the SML so important in the accomplishment of this objective?

Zelo,Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock?

Risk that affects a large number of assets,each to a greater or lesser degree,is called _____ risk.

You would like to combine a risky stock with a beta of 1.8 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?

For a highly diversified equally weighted portfolio with a large number of securities,the portfolio variance is: