Exam 11: Return and Risk: the Capital Asset Pricing Model Capm

A portfolio contains four assets.Asset 1 has a beta of .7 and represents 35 percent of the portfolio.Asset 2 has a beta of 1.3 and represents 20 percent of the portfolio.Asset 3 has a beta of 1.1 and is 25 percent of the portfolio.Asset 4 has a beta of 2.16.What is the portfolio beta?

PPO stock has a beta of 1.12 and an expected return of 12.64 percent.The risk-free rate of return is 3.85 percent.What is the expected return on the market?

A portfolio contains two assets.The first asset represents 25 percent of the portfolio and has a beta of 1.4.If the portfolio beta is 1.25,what is the beta of the second asset?

Assume you are looking at a security market line graph.Where would an overpriced stock with a beta of .98 plot on that graph?

Unsystematic risk:

According to the CAPM,the expected return on a risky asset depends on three components.Describe each component,and explain its role in determining expected return.

Securities with zero or negative correlations are desired by many investors for their portfolio holdings.How might you go about identifying such securities?

If an optimal portfolio of risky assets can be identified,why should investors mix that portfolio with risk-free securities?

You recently purchased a stock that is expected to earn 15 percent in a booming economy,9 percent in a normal economy and lose 5 percent in a recessionary economy.There is a 15 percent probability of a boom,a 75 percent chance of a normal economy,and a 10 percent chance of a recession.What is your expected rate of return on this stock?

Which one of the following is the best example of systematic risk?

RTF stock is expected to return 13 percent in a normal economy and lose 8 percent in a recession.The probability of a recession is 25 percent.What is the variance of the returns on RTF stock?

The systematic risk of the market is assigned a:

Assume the risk-free rate and the market risk premium are both positive.Trevor currently owns a portfolio comprised of risky and risk-free securities.The portfolio has an expected return of 11.2 percent,a standard deviation of 16.2 percent,and a beta of 1.21.He has decided that he would prefer a higher expected return.Which one of these actions should he take?

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

A stock with a beta of zero would be expected to have a rate of return equal to:

The principle of diversification tells us that:

There is a 10 percent probability the economy will boom,a 65 percent probability it will be normal,and a 25 percent probability it will be recessionary.For these economic states,Stock A has deviations from its expected returns of .07,.02,and -.12,respectively.Stock B has deviations from its expected returns of .05,.01,and -.04,for the three economic states,respectively.What is the covariance of the two stocks?

The portfolio expected return considers which of the following factors? I.The amount of money currently invested in each individual security II.Various levels of economic activity III.The performance of each stock given various economic scenarios IV.The probability of various states of the economy occurring