Exam 8: Portfolio Theory and the Capital Asset Pricing Model

Assume the following data for a stock: Beta = 0.5; risk-free rate = 4 percent; market rate of return = 12 percent; and expected rate of return on the stock = 10 percent.Then the stock is

IInvestments A and B both offer an expected rate of return of 12.The standard deviation of A is 30 percent and that of B is 20 percent.If an investor wishes to invest in either A or B, then the investor should

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were as follows: FC: -5 percent, 15 percent, 20 percent; MC: 8 percent, 8 percent, 20 percent.If FC and MC are combined into a portfolio with 50 percent of the funds invested in each stock, calculate the expected return on the portfolio.

Assume the following data for a stock: Beta = 0.9; risk-free rate = 4 percent; market rate of return = 14 percent; and expected rate of return on the stock = 13 percent.Then the stock is

Most investors dislike uncertainty.

Briefly explain the term security market line.

The security market line (SML) is the graph of

Suppose the beta of Amazon is 2.2, the risk-free rate is 5.5 percent, and the market risk premium is 8 percent.Calculate the expected rate of return for Amazon.

In addition to common stocks, the addition of real estate (as an investment alternative) will likely expand the efficient frontier to a better risk-return trade-off.