ADMS 3530 Study Guide - Weighted Arithmetic Mean, Capital Asset Pricing Model, Risk Premium

74 views4 pages

orchidguinea-pig143

10 Apr 2013

School

York University

Department

Administrative Studies

Course

ADMS 3530

Professor

Lois King

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

11. 20: a only, b only, c only, a and c only, a, b, and c. A: e(r) = 4% + 1. 25(6%) = 11. 50% < 12. 60% B: e(r) = 4% + 0. 80(6%) = 8. 80% = 8. 80% C: e(r) = 4% + 1. 06(6%) = 10. 36% < 11. 20: you own two risky assets, both of which plot on the security market line. Asset a has an expected return of 12% and a beta of 0. 8. If your portfolio beta is the same as the market portfolio, what proportion of your funds are invested in asset a: 0. 33, 0. 50, 0. 67, 1. 33, 1. 67. 1= 0. 8a + (1 a)1. 4; a = 0. 67: suppose that two firms, a and b, are considering the same project which has the same risk as firm b"s overall operations. Firm a has a beta of 1. 4, while firm b"s beta is 1. 1.

Related Questions

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

he risk free rate is 4%, and the expected return on the market is 12%. There is also an asset X with a Beta of 1.5.What is the return on portfolio 1 consisting of 40% of asset X and the rest in an asset with no risk? What is the return on portfolio 2 which is equally weighted in the risk free asset, the market portfolio, and asset X?

Select one:

a. The E(R) on portfolio 1 is 13.6% and the E(R) on portfolio 2 is 10.67%

b. The E(R) on portfolio 1 is 16% and the E(R) on portfolio 2 is 8.8%

c. The E(R) on portfolio 1 is 8.8% and the E(R) on portfolio 2 is 16%

d. The E(R) on portfolio 1 is 16% and the E(R) on portfolio 2 is 8.8%

e. The E(R) on portfolio 1 is 8.8% and the E(R) on portfolio 2 is 10.67%

indigoleopard345

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?

ADMS 3530 Study Guide - Weighted Arithmetic Mean, Capital Asset Pricing Model, Risk Premium

Document Summary

Get access

Related Documents

ADMS 3530 Lecture Notes - Lecture 10: Tetrafluoromethane, Oil Platform, Opportunity Cost

ADMS 3530 Study Guide - Quiz Guide: Vestment, Insider Trading, Efficient-Market Hypothesis

ADMS 3530 Lecture Notes - United States Treasury Security, Risk-Free Interest Rate, Risk Premium

Related Questions