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15 Jan 2018

Security Standard deviation Beta
A. .35 1.45

B. .28 1.06

C. .44 1.22

Which of the following is correct?

A. Security C has the greatest total risk because it has the largest standard deviation.

B. Security A has the greatest total risk because it has the largest Beta.

C. Security A has the greatest diversifiable risk because it has the largest Beta

D. Security B has the lowest total risk because it has the lowest beta

E. And equally weighted portfolio of ABC will have the same systematic risk as the market portfolio

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17 Jan 2018

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1. If we are able to eliminate all of the unsystematic or diversifiable risk in a portfolio then, what is the result?

a.

a risk-free portfolio
b.
a portfolio that has an expected return of zero
c.

a portfolio that contains only systematic risk

2. A portfolio consists 20% of a risk-free asset and 80% of a stock. The risk-free return is 4%. The stock has an expected return of 15% and a standard deviation of 30%. Whatâs the expected return of the portfolio?

a.
9.5%
b.
15.0%
c.
12.8%

d.
2%

3. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return?

a.
12%
b.
19.5%
c.

17%

4. For what value of the correlation coefficient for the returns of a pair of stocks will the benefits of diversification the largest?

a.

1.0
b.

-1.0
c.

0.0
d.

0.5

5. Which of the following is an example of systematic risk?
a.
IBM posts lower than expected earnings.
b.
The overall stock market becomes more risky due to super fasting trading algorithms.
c.

Intel announces record earnings.

6. According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to

a.
zero
b.
the expected risk premium on the market portfolio
c.
the expected return on the market portfolio
d.
the risk-free rate

7. A portfolio has 40% invested in Asset 1, 50% invested in Asset 2 and 10% invested in Asset 3. Asset 1 has a beta of 1.2, Asset 2 has a beta of 0.8 and Asset 3 has a beta of 1.8, whatâs the beta of the portfolio?

a.
0.80
b.
1.06
c.
1.27

8. Suppose you can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios has the best return relative to risk. (Hint: Calculate Sharpe Ratios the ratio of risk premium to standard deviation for each portfolio)

a.
portfolio with a standard deviation of 15% and an expected return of 12%
b.
portfolio with a standard deviation of 12% and an expected return of 9%
c.
portfolio with a standard deviation of 25% and an expected return of 18%
d.
portfolio with a standard deviation of 19% and an expected return of 15%

9. Which statements are TRUE regarding risk and return?

Statement I:
Diversification is the process of removing systematic risk from a portfolio.
Statement II:
In general, the greater the risk, the greater the return required by an investor.
Statement III:
Investors should focus on real returns if they are concerned about the purchasing power of their wealth.

a.
Statements II and III only
b.
Statement I only
c.
Statements I and III only
d.
Statements I and II only

10. The beta of the risk-free asset is:
a.

1.0
b.

0.5
c.

0.0
d.

-1.0

Choose the correct answer:

The beta of an efficient portfolio: a. must be 1 since an efficient portfolio is perfectly positively correlated with the market portfolio.

b. is proportional to 1, depending on the proportion invested in the market portfolio.

c. is equivalent to the portfolio's standard deviation, since standard deviation is the measure of risk for an efficient portfolio.

d. is always less than 1.

Security A has a greater level of systematic risk than security B. The expected equilibrium return for A must be greater than that for B because:

a. B's price will fall as investors realize that B offers lower returns.

b. if it is not, then A's price will fall and B's price will rise as investors sell A and buy B.

c. the Security Market Line is negatively sloped.

d. the standard deviation of A's return is greater than B's.

In case of a simple CAPM being used to estimate a time series data:

a. the mean of a residual risk should be equal to zero.

b. the regression coefficient should be equal to zero.

c. the difference between the market return and the riskfree rate of return should be equal to zero.

d. the beta of the portfolio should be equal to zero.

In a CAPM framework, prohibiting short sales:

a. will prohibit investors from holding the market portfolio in equilibrium.

b. will make the security market line steeper.

c. will encourage investors to hold more riskless assets.

d. will not change the equilibrium.

Market portfolio has an expected return of 11% and volatility of 20%. Risk-free rate is 3%. Security X and Y have betas of 1.4 and 0.9 respectively.

a) According to CAPM, what are the expected return of X and Y?

E(rm)-rf = 11% - 3% = 8%

3% +1.4*8% = 14.2%

3% +1.4 *8% = 10.2%

b) What should be X worth today, if X pays a dividend of $1.2 one year from today and is priced at 30 one year from today? The required rate of return is the expected return using CAPM from part a).

c) If security X has expected return of 15%, is it underprice/overprice/fairly priced according to CAPM? What is its alpha?

d) Plot SML and label X, Y and Market portfolio on the line.

e) What is the beta of a portfolio with 50% in X and 50% in Y?

f)What is the beta of a portfolio with 55% in Market portfolio and 45% in risk-free asset?

g) You are investing in a complete portfolio. The complete portfolio is composed of risk-free asset and a risky portfolio, P, constructed with 20% in X and 80% in Y. It turns out that your complete portfolio has an expected rate of return of 9.4%. What is the beta of your complete portfolio? (hint: you may or may not use all information to solve this problem)

Q2. Stock A has a beta of 1 and standard deviation of 50%. Market portfolio has a standard deviation of 20%. What is the correlation of stock A with the market portfolio? How much of stock Aâs total risk is due to market risk?

Q3. Assume the risk-free rate is 8% and the expected rate of return on the market is 18%. A stock has an expected return of 6%. What is its beta?

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