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Unformatted text preview: FIN350 ICW No. 3---- CAPM 1. The capital asset pricing model A) provides a risk-return trade-off in which risk is measured in terms of the market volatility. B) provides a risk-return trade-off in which risk is measured in terms of beta. C) measures risk as the coefficient of variation between security and market rates of return D) depicts the total risk of a security 2. Sibling Incorporated has a beta of 1.0. If the expected return on the market is 14 percent, what is the expected return on Sibling Incorporated's stock? A) 10% B) 14% C) 18% D) cannot be determined without the risk-free rate 3. You determine that XYZ common stock will return 15 percent. XYZ has a beta of 1.5. The risk-free rate is 5 percent, and the market expected return is 15 percent. Which of the following is most likely to happen: A) You and other investors will buy up XYZ stock and its price will rise. B) You and other investors will sell XYZ stock and its return will fall. C) You and other investors will buy up XYZ stock and its return will rise. D) You and other investors will sell XYZ stock and its price will fall. Expected return=15% < required return=5%+1.5*(15%-5%)=20%, stock is over valued 4. If you hold a $1.3 million portfolio made up of the following stocks: Market value Beta Stock A .2 million 1.5 B .5 million 1.2 C .6 million .8 What is the beta of the portfolio? A) 1.17 B) 1.14 C) 1.38 D) 1.06 E) cannot be determined from the information given 0.2/1.3*1.5+0.5/1.3*1.2+0.6/1.3*0.8=1.06 1 5. Which of the following is/are true of the Capital Asset Pricing Model? A) It uses the T-bill rate as the risk-free rate B) It uses beta as a measure of market risk C) all of the above 6. Stock A has a beta of 1.5 and stock B has a beta of 0.5. Which of the following statements must be true a bout these securities? a) When held in isolation, Stock A has greater risk than Stock B. b) Stock B would be a more desirable addition to a portfolio than Stock A....
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