Warm up Problems for Topic 4 (CAPM)
**These questions are designed to represent elementary principles, and are NOT representative of problems that you
will find on any exams.
1. You purchase stock A, which has a covariance with the market portfolio of 40%. The expected return on the market portfolio
is 14%, the risk free rate is 6%, and the standard deviation of the market is 50%.
1a)
What is the beta of the stock?
1b)
What is the risk premium on the market portfolio?
1c)
What is the expected return on stock A?
2. You have $1000 to invest. You know that the risk free rate is 6%, and the standard deviation of the market portfolio is 50%.
You can invest in the following securities.
Stock A
Stock B
Expected Return
?
12%
Variance
25%
36%
Covariance (with market portfolio)
12.5%
37.5%
Beta
0.5
?
2a)
What is the beta of Stock B?
2b)
What is the return on the market portfolio?
2c)
What is the expected return on Stock A?
2d)
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 Fall '09
 Variance, Capital Asset Pricing Model, Probability theory, Stock B, Stock A

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