Exam 9: The Capital Asset Pricing Model Capm

A risk-averse investor has an opportunity to invest in the following securities: Security A costs $10 today and will have a value of $25 if the market goes up and $0 if the market goes down; Security B costs $8 today and will have a value of $12 if the market goes up and $6 if the market goes down; and Security C costs $5 today and will have a value of $20 if the market goes up and -$20 if the market goes down.If there is a 40 percent chance that the market will go up and the risk-free rate is zero,which security(ies)will the investor prefer?

Stock Y has a standard deviation of 22 percent and a covariance with the market of 0.081.The expected return of the market is 14 percent with a standard deviation of 18 percent.The risk-free rate is 5.25 percent.What is the beta of Stock Y?

Suppose you have $5,000 to invest in a risk-free asset and the market portfolio.The expected return on the market portfolio is 13.5 percent with a standard deviation of 18 percent.The risk-free rate is 4.25 percent.How much of your funds should be in the risk-free asset if the portfolio has an expected return of 10 percent?

Which one of the following is NOT a difference between APT and CAPM models?

Suppose the returns on Security B are linearly related to four risk factors: F1,F2,F3,and F4.The required rate of return on Security B can be determined as follows: .The risk-free rate is 5 percent.What is the risk premium for F4,if the required return of Security B is 20 percent,b1,b2,b3,and b4 are 0.5,0.7,0.6,and 0.9,respectively,and F1,F2,and F3 are 4.25 percent,5.75 percent,and 6.5 percent,respectively?

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

What is the beta of a portfolio if 40 percent of the funds are invested in a risk-free asset and the balance of the funds is invested in the market portfolio?

What is the expected value from an investment that is equally likely to move from $100 to $180 or $100 to $70?

According to the Capital Asset Pricing Model (CAPM),which one of the following statements is NOT true?

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 of the S&P/TSX Composite is 18 percent with a standard deviation of 30 percent.What is the portfolio expected return if the standard deviation for this portfolio is 50 percent?

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.What is the Sharpe ratio of a portfolio with 40 percent of the funds in ABC and 60 percent in XYZ?

"There may be some truth in the CAPM,but my sister-in-law bought a stock last year that earned a 20 percent return,much higher than what was expected using the CAPM." Evaluate this criticism.

Use the following three statements to answer this question: