Assignment 2 - Assignment II Due on December 1 1. Which of...

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Assignment II Due on December 1 1. Which of the following statements are true? i. Beta of the market portfolio is 0. ii. Beta of the risk free asset is 1. iii. Higher the beta, lower the required rate of return. A. i and ii B. i and iii C. ii and iii D. All the above E. None of the above 2. Which of the following statements are true? i. The straight line connecting the risk free rate and the point of tangency on the efficient frontier is called the Capital Market Line. ii. Irrespective of the risk preferences of the investors, they would choose the same portfolio of risky assets on the efficient frontier (market portfolio), and differ only in the proportions they allocate between the risk free asset and the market portfolio.
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iii. Portfolios which plot above the CML are unattainable and those below are inferior. A. i and ii B. i and ii C. ii and iii D. All the above E. None of the above 3. The betas of stocks A, B, and C are 0.75, 1.10, and 1.25 respectively. The risk free rate is 4% and the expected return on the market is 7.5%. If money is distributed among the three stocks in the ratio 2:3:4, what is the required rate of return on the portfolio? (Note that you have to calculate the weights from the given proportions). A. 6.79% B. 8.83% C. 6.48% D. 9.08% E. 7.81% 4. Which of the following statements are true?
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i. The CML gives the relationship between risk and return only for efficient portfolio, and risk is measured by standard deviation of returns (valid only for efficient portfolios). ii. Efficient portfolios are well diversified and therefore have hardly any unsystematic risk. For such portfolios, standard deviation of returns is a good measure of risk. However, this is not so for inefficient portfolio which have a lot of unsystematic risk. The risk of such portfolios is better measured by beta, which is a measure of systematic risk. Beta can be used to measure risk of both efficient and inefficient portfolios. iii. The SML gives the relationship between risk and return for any individual asset or portfolio (efficient or inefficient). For SML, the relevant risk is systematic risk which is measured by beta. A. i and ii B. i and iii C. ii and iii D. All the above E. None of the above 5. If the risk free rate is 4% and the expected return on the market is 9%, which of the following stocks is undervalued (i.e., the expected return is greater than the required rate of return)? i.
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This note was uploaded on 10/16/2010 for the course COMM Comm 308 taught by Professor Ravimateti during the Fall '09 term at Concordia Canada.

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Assignment 2 - Assignment II Due on December 1 1. Which of...

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