Topic 6 FINC 2011 Tutorial Solutions

Topic 6 FINC 2011 Tutorial Solutions - FINC 2011 Corporate...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
FINC 2011 Corporate Finance I Tutorial Questions and Solutions Topic 6 – Capital Asset Pricing Model (CAPM) DQ 15 In relation to the CAPM, indicate for each of the following statements whether it is  true or false and explain why. (a)    Investors do not differ in their attitudes toward risk. A N S W E R False - Investors are assumed to be predominantly risk averse however this does not exclude the possibility of risk neutrality or risk seeking behavior. Even within the class of risk aversion, the degree of risk aversion varies from individual to individual, with some investors prepared to accept relatively low investment returns as they are relatively less willing to bear investment risk, and vice versa. (b)    In equilibrium, all risky assets are priced such that their expected return  lies on the security market line. A N S W E R True - in equilibrium all assets are priced according to their systematic risk and as such their returns will plot on the SML. (c) If a stock’s expected return is 4% and the expected return on the market  portfolio is 15%, the stock’s beta must be negative. A N S W E R False - this situation could exist for small positive values of β and risk free rate (eg. consider r f = 2% and β = 0.15). (d)  Two securities with the same expected returns can have different betas. A N S W E R False - if the CAPM holds, the risk-free rate is the same and the return on the market is the same, then two stocks with the same expected return will have the same beta.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
(e) Two securities  with the  same  standard deviations  can  have different  betas. A N S W E R True - standard deviation includes both market risk and unique risk. (f) Two securities that have the same correlation coefficients with the market  portfolio will have the same betas. A N S W E R Depends – if the standard deviations of both the stocks are the same, then beta will be the same. If they’re not the same, then the statement above is false. (g)  The return on a share with a beta of zero is expected to vary directly with   the return on the market portfolio. A N S W E R
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/22/2011 for the course FINC 2011 taught by Professor Craigmellare during the Three '10 term at University of Sydney.

Page1 / 6

Topic 6 FINC 2011 Tutorial Solutions - FINC 2011 Corporate...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online