# week09_TutorialAnswers - SCHOOL OF BANKING AND FINANCE...

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FINS 1613 Tutorial Answers 1 SCHOOL OF BANKING AND FINANCE FINS1613 BUSINESS FINANCE Semester 2, 2010 TUTORIAL ANSWERS WEEK 9 – Beta and CAPM Multiple-choice Questions 1. 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 about these securities? (Assume the market is in equilibrium.) 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. c. Stock A would be a more desirable addition to a portfolio than Stock B. d. The expected return on Stock A will be greater than that on Stock B. e. The expected return on Stock B will be greater than that on Stock A. Answer is d. 2. What is the expected return on asset A if it has a beta of 1.2, the expected return on the market is 10%, and the risk-free rate is 4%? a. 8.8% b. 9.0% c. 10.0% d. 11.2% e. Not enough information Answer is d. Capital Asset Pricing Model (CAPM) ( ) ( ) ˆˆ ˆ 4% 1.2 10% 4% 11.2% i RF i M RF k k bk k = +− = + −=

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