MIT Sloan School of Management
J. Wang
15.407
E52456
Fall 2003
Problem Set 8: Portfolio Choice
Due: December 2, 2003
1.
(BKM) Are the following true or false?
(a) Stocks with a beta of zero offer an expected rate of return of zero.
(b) The CAPM implies that investors require a higher return to hold highly volatile
securities.
(c) You can construct a portfolio with a beta of 0
.
75 by investing 0
.
75 of the investment
budget in bills and the remainder in the market portfolio.
2.
(BKMrevised) IN 1999 the rate of return on shortterm government securities (perceived
to be riskfree) was about 5%.
Suppose the expected rate of return required by the
market for a portfolio with a beta of 1 is 13%. According to the CAPM:
(a) What is the expected rate of return on the market portfolio?
(b) What would be the expected rate of return on a stock with
β
= 0?
(c) Suppose you consider buying a share of stock at $100. The stock is expected to
pay $5 dividend next year and you expect it to sell then for $108. You calculated
the
β
of the stock to be 0.5. Is the stock overpriced or underpriced?
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 Fall '03
 Wang
 Risk premium, Market Portfolio

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