The Capital Asset Pricing Model

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B. II only

C. III only

D. I and II only

Answer: A Type: Difficult, Concept

How options were determined:

A.

Investment

E0(Value)

E(Payoff)

I

($36*40% + $8*60%)/1.05 = $18.29

$18.29 – $18 = $0.29

II

($12*40% + $16*60%)/1.05 = $13.71

$13.71 – $14 = –$0.29

III

($30*40% + $5*60%)/1.05 = $14.29

$14.29 – $15 = –$0.71

A risk averse investor prefers investment I because he needs a risk premium to be induced to enter a risky situation.

B. Arbitrary

C. Arbitrary

D. Arbitrary

- What is the expected return for a portfolio that has $2,500 invested in a risk-free asset with 5 percent rate of return, and $7,500 invested in a risky asset with a 17 percent rate of return and a 28 percent standard deviation?

A. 8.00%

B. 10.75%

C. 14.00%

D. 22.25%

Answer: C Type: Easy, Calculation

How options were determined:

A. Crisscross weights and returns

B. A) and D) combined

C. Portfolio expected return, [pic 1]

D. Standard deviation of risky asset used as return in the computation

- What is the standard deviation for a portfolio that has $3,500 invested in a risk-free asset with 5 percent rate of return, and $6,500 invested in a risky asset with a 15 percent rate of return and a 22 percent standard deviation?

A. 7.70%

B. 9.75%

C. 5.25%

D. 14.30%

Answer: D Type: Easy, Calculation

How options were determined:

A. Crisscross weights and standard deviation

B. Risky asset return used as standard deviation in the computation

C. A) and B) combined

D. Weight in risky asset, [pic 2]

Portfolio standard deviation, [pic 3]

- What are the expected return and standard deviation for a portfolio that has $2,000 invested in a risk-free asset with 5.25 percent rate of return, $8,000 invested in a risky asset with a 21 percent rate of return and a 35 percent standard deviation?

A. Expected return = 17.85%; standard deviation = 28.00%

B. Expected return = 28.00%; standard deviation = 17.85%

C. Expected return = 7.00%; standard deviation = 8.40%

D. Expected return = 8.40%; standard deviation = 7.00%

Answer: A Type: Easy, Calculation

How options were determined:

A. Weight in risky asset, [pic 4]

Portfolio expected return, [pic 5]

Portfolio standard deviation, [pic 6]

B. Reverse expected returns and standard deviations in A.

C. Reverse expected returns and standard deviations in D.

D. Crisscross weights and returns/standard deviations

- A portfolio consists of two securities: a 90-day T-bill and Stock X. The expected return on the 90-day T-bill is 4.5 percent. The expected return on Stock X is 12 percent with a standard deviation of 20 percent. What is the portfolio standard deviation if the expected return for this portfolio is 15 percent?

A. 8.13%

B. 12.00%

C. 16.80%

D. 28.00%

Answer: D Type: Medium, Calculation

How options were determined:

A. Transpose X’s standard deviation with return in the computation of portfolio weight and portfolio standard deviation

B. Borrowing at risk free rate treated as investing in the computation of portfolio weights

C. Stock return used as standard deviation in the computation of portfolio standard deviation

D. Weight in stock X, [pic 7], weight in risk free asset = 1 – 1.4 = –0.4

[pic 8]

- A portfolio consists of two securities: a 90-day T-bill and Stock Y. The expected return on the 90-day T-bill is 4.5 percent. The expected return of Stock Y 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?

A. 12.60%

B. 27.00%

C. 30.00%

D. 47.00%

Answer: B Type: Medium, Calculation

How options were determined:

A. Standard deviations of stock Y and portfolio inverted in the computation of portfolio weights

B.