Under the following conditions, what are the expected returns for stocks X and Y? $\begin{array}{ll} \lambda^{0}=0.05 & b_{x, 1}=0.90 \\ k_{1}=0.03 & b_{x, 2}=1.60 \\ k_{2}=0.04 & b_{y, 1}=1.50 \\ & b_{y, 2}=0.85 \end{array}$

A) 14.1% and 12.9% B) 12.5% and 19.5% C) 19.5% and 18.5% D) 21.2% and 18.5% E) None of the above A) 14.1% and 12.9% B) 12.5% and 19.5% C) 19.5% and 18.5% D) 21.2% and 18.5% E) None of the above

Exhibit 7-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) You expect the risk-free rate (RFR) to be 3% and the market return to be 8%. You also have the following information about three stocks. \[\begin{array} { c c c c c } \text { STOCK } & \text { BETA } & \begin{array} { c } \text { CURRENT } \\ \text { PRICE } \end{array} & \begin{array} { c } \text { EXPECTED } \\ \text { PRICE } \end{array} & \begin{array} { c } \text { EXIPECTED } \\ \text { DIVIDEND } \end{array} \\ \hline \mathbf { X } & 1.25 & \$ 20 & \$ 23 & \$ 1.25 \\ \mathbf { Y } & 1.50 & \$ 27 & \$ 29 & \$ 3.25 \\ \mathbf { Z } & 0.90 & \$ 35 & \$ 38 & \$ 1.00 \end{array}\] -Refer to Exhibit 7-2. What is your investment strategy concerning the three stocks?

A) Buy X and Y, sell Z. B) Sell X, Y and Z. C) Sell X and Z, buy Y. D) Buy X, Y and Z. E) Buy X and Z, sell Y. A) Buy X and Y, sell Z. B) Sell X, Y and Z. C) Sell X and Z, buy Y. D) Buy X, Y and Z. E) Buy X and Z, sell Y.

Exhibit 7-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) \[\begin{array}{c} \underline {\text { Rates of Return }}\\ \begin{array} { c c c } \text { Year } & \text { RA Computer } & \text { Market Index } \\ \hline 1 & 13 & 17 \\ 2 & 9 & 15 \\ 3 & - 11 & 6 \\ 4 & 10 & 8 \\ 5 & 11 & 10 \\ 6 & 6 & 12 \end{array} \end{array}\] -Refer to Exhibit 7-1. Compute the correlation coefficient between RA Computer and the Market Index.

A) -0.32 B) 0.78 C) 0.66 D) 0.58 E) 0.32 A) -0.32 B) 0.78 C) 0.66 D) 0.58 E) 0.32

Exhibit 7-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) You expect the risk-free rate (RFR) to be 3% and the market return to be 8%. You also have the following information about three stocks. \[\begin{array} { c c c c c } \text { STOCK } & \text { BETA } & \begin{array} { c } \text { CURRENT } \\ \text { PRICE } \end{array} & \begin{array} { c } \text { EXPECTED } \\ \text { PRICE } \end{array} & \begin{array} { c } \text { EXIPECTED } \\ \text { DIVIDEND } \end{array} \\ \hline \mathbf { X } & 1.25 & \$ 20 & \$ 23 & \$ 1.25 \\ \mathbf { Y } & 1.50 & \$ 27 & \$ 29 & \$ 3.25 \\ \mathbf { Z } & 0.90 & \$ 35 & \$ 38 & \$ 1.00 \end{array}\] -Refer to Exhibit 7-2. What are the estimated rates of return for the three stocks (in the order X, Y, Z)?

A) 21.25%, 8.33%, 11.43% B) 6.20%, 2.20%, 8.20% C) 16.50%, 5.50%, 22.00% D) 9.25%, 10.5%, 7.5% E) 15.00%, 3.50%, 7.30% A) 21.25%, 8.33%, 11.43% B) 6.20%, 2.20%, 8.20% C) 16.50%, 5.50%, 22.00% D) 9.25%, 10.5%, 7.5% E) 15.00%, 3.50%, 7.30%

Exhibit 7-3 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) \[\begin{array} { c c c c } \text { Period } & \begin{array} { c } \text { Return } \\ \text { of Radtran } \\ \text { (Percent) } \end{array} & \begin{array} { c } \text { Ppecific Index } \\ \text { (Percent) } \end{array} & \begin{array} { c } \text { True } \\ \text { General Index } \\ \text { (Percent) } \end{array} \\ \hline 1 & 10 & 12 & 15 \\ 2 & 12 & 10 & 13 \\ 3 & - 10 & - 8 & - 8 \\ 4 & - 4 & - 10 & 0 \end{array}\] -Refer to Exhibit 7-3. What is the average return for Radtron?

A) 1% B) 2% C) 3% D) 4% E) 5% A) 1% B) 2% C) 3% D) 4% E) 5%

Exhibit 7-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) \[\begin{array} { c c c } \text { Stack } & \text { Factor 1 Loading } & \text { Factor 2 Loading } \\ \hline \mathbf { X } & - 0.55 & 1.2 \\ \mathbf { Y } & - 0.10 & 0.85 \\ \mathbf { Z } & 0.35 & 0.5 \end{array}\] The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50. -Refer to Exhibit 7-8. If you know that the actual prices one year from now are stock X $55, stock Y 52, and stock Z $57, then

A) stock X is undervalued, stock Y is undervalued, stock Z is undervalued. B) stock X is undervalued, stock Y is overvalued, stock Z is overvalued. C) stock X is overvalued, stock Y is undervalued, stock Z is undervalued. D) stock X is undervalued, stock Y is overvalued, stock Z is undervalued. E) stock X is overvalued, stock Y is overvalued, stock Z is undervalued. A) stock X is undervalued, stock Y is undervalued, stock Z is undervalued. B) stock X is undervalued, stock Y is overvalued, stock Z is overvalued. C) stock X is overvalued, stock Y is undervalued, stock Z is undervalued. D) stock X is undervalued, stock Y is overvalued, stock Z is undervalued. E) stock X is overvalued, stock Y is overvalued, stock Z is undervalued.

Exam 7: Asset Pricing Models: Capm and Apt

Recently you have received a tip that the stock of Bubbly Incorporated is going to rise from $57 to $61 per share over the next year. You know that the annual return on the S&P/TSX composite index has been 9.25% and the 90-day T-bill rate has been yielding 3.75% per year over the past 10 years. If beta for Bubbly is 0.85, will you purchase the stock?

(Multiple Choice)

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Question 81

The introduction of lending and borrowing severely limits the available risk/return opportunities.

(True/False)

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Question 82

One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate.

(True/False)

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Question 83

Under the following conditions, what are the expected returns for stocks X and Y? =0.05 =0.90 =0.03 =1.60 =0.04 =1.50 =0.85

(Multiple Choice)

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Question 84

If the wrong benchmark (or market portfolio) is selected then

(Multiple Choice)

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Question 85

Studies have shown that a well diversified investor needs as few as five stocks.

(True/False)

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Question 86

Exhibit 7-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) You expect the risk-free rate (RFR) to be 3% and the market return to be 8%. You also have the following information about three stocks. STOCK BETA CURRENT PRICE EXPECTED PRICE EXIPECTED DIVIDEND 1.25 \ 20 \ 23 \ 1.25 1.50 \ 27 \ 29 \ 3.25 0.90 \ 35 \ 38 \ 1.00 -Refer to Exhibit 7-2. What is your investment strategy concerning the three stocks?

(Multiple Choice)

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Question 87

Studies strongly suggest that the CAPM be abandoned and replaced with the APT.

(True/False)

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Question 88

Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5% and the expected return on the stock index is 15%. The estimated return on the asset is 20%. Calculate the alpha for the asset.

(Multiple Choice)

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Question 89

The variance of returns for a risky asset is 25%. The variance of the error term, Var(e) is 8%. What portion of the total risk of the asset, as measured by variance, is systematic?

(Multiple Choice)

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Question 90

What does WRF = -0.50 mean?

(Multiple Choice)

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Question 91

In a macro-economic based risk factor model, which factor would be one of many appropriate factors?

(Multiple Choice)

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Question 92

Exhibit 7-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Year RA Computer Market Index 1 13 17 2 9 15 3 -11 6 4 10 8 5 11 10 6 6 12 -Refer to Exhibit 7-1. Compute the correlation coefficient between RA Computer and the Market Index.

(Multiple Choice)

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Question 93

Exhibit 7-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) You expect the risk-free rate (RFR) to be 3% and the market return to be 8%. You also have the following information about three stocks. STOCK BETA CURRENT PRICE EXPECTED PRICE EXIPECTED DIVIDEND 1.25 \ 20 \ 23 \ 1.25 1.50 \ 27 \ 29 \ 3.25 0.90 \ 35 \ 38 \ 1.00 -Refer to Exhibit 7-2. What are the estimated rates of return for the three stocks (in the order X, Y, Z)?

(Multiple Choice)

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Question 94

Consider the following two factor APT model E(R) = λ₀ + λ₁b₁ + λ₂b₂?

(Multiple Choice)

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Question 95

Consider the following list of risk factors: 1. monthly growth in industrial production 2. return on high book to market value portfolio minus return on low book to market value portfolio 3. change in inflation 4. excess return on stock market portfolio 5. return on small cap portfolio minus return on big cap portfolio 6. unanticipated change in bond credit spread Which of the following factors would you use to develop a macroeconomic-based risk factor model?

(Multiple Choice)

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Question 96

Exhibit 7-3 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Period Return of Radtran (Percent) Ppecific Index (Percent) True General Index (Percent) 1 10 12 15 2 12 10 13 3 -10 -8 -8 4 -4 -10 0 -Refer to Exhibit 7-3. What is the average return for Radtron?

(Multiple Choice)

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Question 97

Exhibit 7-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) Stack Factor 1 Loading Factor 2 Loading -0.55 1.2 -0.10 0.85 0.35 0.5 The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50. -Refer to Exhibit 7-8. If you know that the actual prices one year from now are stock X $55, stock Y 52, and stock Z $57, then

(Multiple Choice)

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Question 98

Since the market portfolio is reasonable in theory, it is easy to implement when testing or using the CAPM.

(True/False)

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Question 99

The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors.

(True/False)

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Question 100

The introduction of lending and borrowing severely limits the available risk/return opportunities.

One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate.

Under the following conditions, what are the expected returns for stocks X and Y? =0.05 =0.90 =0.03 =1.60 =0.04 =1.50 =0.85

If the wrong benchmark (or market portfolio) is selected then

Studies have shown that a well diversified investor needs as few as five stocks.

Studies strongly suggest that the CAPM be abandoned and replaced with the APT.

Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5% and the expected return on the stock index is 15%. The estimated return on the asset is 20%. Calculate the alpha for the asset.

The variance of returns for a risky asset is 25%. The variance of the error term, Var(e) is 8%. What portion of the total risk of the asset, as measured by variance, is systematic?

What does WRF = -0.50 mean?

In a macro-economic based risk factor model, which factor would be one of many appropriate factors?

Exhibit 7-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Year RA Computer Market Index 1 13 17 2 9 15 3 -11 6 4 10 8 5 11 10 6 6 12 -Refer to Exhibit 7-1. Compute the correlation coefficient between RA Computer and the Market Index.

Consider the following two factor APT model E(R) = λ₀ + λ₁b₁ + λ₂b₂?

Exhibit 7-3 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Period Return of Radtran (Percent) Ppecific Index (Percent) True General Index (Percent) 1 10 12 15 2 12 10 13 3 -10 -8 -8 4 -4 -10 0 -Refer to Exhibit 7-3. What is the average return for Radtron?

Since the market portfolio is reasonable in theory, it is easy to implement when testing or using the CAPM.

The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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