Exam 9: The Capital Asset Pricing Model Capm

Security A is estimated to be linearly related to four risk factors: F₁,F₂,F₃,and F₄ such that its required rate of return can be expressed as ER_(A) = m_o + n₁F₁ + n₂F₂ + n₃F₃ + n₄F₄,where m_o is the risk-free rate.If the risk-free rate is 5.5 %,what is the required rate of return of Security A,where n₁,n₂,n₃,and n₄ are 0.3,0.6,0.9,and 0.12,respectively,and F₁,F₂,F₃,and F₄ are 6 %,7 %,10 %,and 8 %,respectively?

Explain the separation theorem.

The expected returns for Securities ABC and XYZ are 8 percent and 13 percent,respectively.The standard deviation is 12 percent for ABC and 18 percent for XYZ.There is no relationship between the returns on the two securities.The market return is 12.5 percent with a standard deviation of 16 percent.The risk-free rate is 5 percent.Which of the following is not an efficient portfolio as determined by the lowest Sharpe ratio?

By combining the risk-free asset and the efficient frontier,the _____________ will be created.

Stock Z has a beta of 0.9 and a required rate of return of 12 percent.What is the market expected return if the risk-free rate is 5.25 percent?

What is the difference between the capital market line (CML)and the security market line (SML)?

The expected return on the market is 12 percent with a standard deviation of 20 percent.The risk-free rate is 4.5 percent.What is the Sharpe ratio of a portfolio with an expected return of 10.5 percent and a standard deviation of 12 percent?

SML-CAPM Question: Antigone Inc.paid out a dividend of $1.75,and analysts expect it to grow at 6% for the foreseeable future.The market rate is 17%,the T-Bill rate is quoted at 4%,and Antigone stock is selling at $15.50 (beta 1.2).Answer the following questions: a) What is the expected return on Antigone stock? b) Are Antigone shares overpriced, underpriced, or correctly priced? c) Is Antigone stock above, below, or on the SML? d) What is the equilibrium price of Antigone stock?

Which of the following is a FALSE statement about the security market line (SML)?

Use the following two statements to answer this question:

If two stocks had the same beta,but Stock A had high non-systematic risk and Stock B had low non-systematic risk,would rational investors expect a higher return from holding one of these securities?

Use the following two statements to answer this question:

A portfolio consists of two securities: a 90-day T-bill and the S&P/TSX Composite.The expected return on the T-bill is 4.5 percent.The expected return on the S&P/TSX Composite is 12 percent with a standard deviation of 20 percent.What is the portfolio standard deviation if the expected return for this portfolio is 15 percent?

What is the difference between CAPM and APT?

Marie has $10,000 to invest.She decided to borrow some funds at the risk-free rate of 6 percent to increase her investment in a portfolio with an expected return of 25 percent and a standard deviation of 30 percent.What is the expected return and standard deviation for her portfolio if she borrowed 50 percent of the portfolio value?

An efficient portfolio has a 18% expected return.If the expected market return is 11% (with a standard deviation of 18%),and the risk-free rate is 5.5 %,what is the standard deviation of the portfolio?

What is the beta of a portfolio if 20 percent of the funds are invested in Stock A with a beta of 2,30 percent in Stock B with a beta of 0.8,15 percent in Stock C with a beta of 2.2,and the remainder in Stock D with a beta of 1.4?

Use the following three statements to answer this question:

Stock X has a standard deviation of 25 percent and a correlation coefficient of 0.7 with market returns.The expected return of the market is 12 percent with a standard deviation of 15 percent.The risk-free rate is 5 percent.What is the required return of Stock X?

The risk-free rate is 4 percent.The expected return on the market portfolio is 12 percent with a standard deviation of 16 percent.Which security is over,under,or correctly priced?