Exam 11: Return, risk, and the Capital Asset Pricing Model Capm

Draw a graph that represents an opportunity set for a two-asset combination.Indicate four points on the graph as follows: (1)the minimum variance portfolio.(2)point (A)which represents the best return to risk combination,(3)point (B)which provides the same return but with more risk than point (A)and,(4)point (C)which has the same risk but a lower return than point (A).Lastly,indicate the efficient frontier.

Stock S is expected to return 12 percent in a boom and 6 percent in a normal economy.Stock T is expected to return 20 percent in a boom and 4 percent in a normal economy.There is a probability of 40 percent that the economy will boom; otherwise,it will be normal.What is the portfolio variance if 30 percent of the portfolio is invested in Stock S and 70 percent is invested in Stock T?

The principle of diversification tells us that:

The slope of the security market line is the:

A portfolio is entirely invested into BBB stock,which is expected to return 16.4 percent,and ZI bonds,which are expected to return 8.6 percent.Stock BBB comprises 48 percent of the portfolio.What is the expected return on the portfolio?

Stock A has a beta of .69 and an expected return of 9.27 percent.Stock B has a beta of 1.13 and an expected return of 11.88 percent.Stock C has a beta of 1.48 and an expected return of 15.31 percent.Stock D has a beta of .71 and an expected return of 8.79 percent.Lastly,Stock E has a beta of 1.45 and an expected return of 14.04 percent.Which one of these stocks is most accurately priced if the risk-free rate of return is 3.6 percent and the market rate of return is 10.8 percent?

Standard deviation measures ________ risk while beta measures ________ risk.

Stock A has an expected return of 12 percent and a variance of .0203.The market has an expected return of 11 percent and a variance of .0093.What is the beta of Stock A if the covariance of Stock A with the market is .0137?

Risk that affects at most a small number of assets is called ________ risk.

You have plotted the monthly returns for two securities for the past five years on the same graph.The pattern of the movements of each of the two securities generally rose and fell to the same degree in step with each other.This indicates the securities have:

Stock S is expected to return 12 percent in a boom,9 percent in a normal economy,and 2 percent in a recession.Stock T is expected to return 4 percent in a boom,6 percent in a normal economy,and 9 percent in a recession.The probability of a boom is 10 percent while the probability of a recession is 25 percent.What is the standard deviation of a portfolio which is comprised of $4,500 of Stock S and $3,000 of Stock T?

As we add more diverse securities to a portfolio,the ________ risks of the portfolio will decrease.

Your portfolio is comprised of 30 percent of Stock X,50 percent of Stock Y,and 20 percent of Stock Z.Stock X has a beta of .64,Stock Y has a beta of 1.48,and Stock Z has a beta of 1.04.What is the portfolio beta?

RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent if the economy goes into a recessionary period.The probability of a boom is 55 percent while the probability of a recession is 45 percent.What is the standard deviation of the returns on RTF stock?

A portfolio consists of three stocks.There are 540 shares of Stock A valued at $24.20 share,310 shares of Stock B valued at $48.10 a share,and 200 shares of Stock C priced at $26.50 a share.Stocks A,B,and C are expected to return 8.3 percent,16.4 percent,and 11.7 percent,respectively.What is the expected return on this portfolio?

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

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

Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession.Stock B is expected to return 11 percent in a normal economy and 5 percent in a recession.The probability of the economy being normal is 75 percent and being recessionary is 25 percent.What is the covariance of these two securities?

An efficient set of portfolios is comprised of:

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