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MIT Sloan School of Management
J. Wang
15.407
E52456
Fall 2003
Problem Set 8: Portfolio Choice
Solution
1.
(a) False. Stocks with zero beta oﬀers the risk free rate.
(b) False. Investors require a risk premium only for bearing systematic risk (undiver
siﬁable or market) risk.
(c) False. Since beta is linear, you can construct a portfolio with beta of 0
.
75 by buying
75% market portfolio (which has beta 1) and 25% in Tbills.
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) The market portfolio has the same expected return as a portfolio of beta of 1, that
is, 13%.
(b) That will be the same as the riskfree asset, 5%.
(c) Expected return is 13%(include dividend), and that is higher than normal for a
stock with beta of only 0
.
5. Therefore the stock is underpriced.
3.
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This note was uploaded on 01/19/2011 for the course 15 15.407 taught by Professor Wang during the Fall '03 term at MIT.
 Fall '03
 Wang

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