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Unformatted text preview: CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE FIN 70-391 Prof. Spencer Martin Problem Set 4B: Extra Practice With CAPM A Multiple Choice Warmup 1. What would be the beta of Microsoft stock? (a) 0.00 (b) A positive number (c) A negative number 2. What is the beta of a portfolio with E [ r p ]- r f = 60% , if r f = 10% and E [ r M ]- r f = 20% ? (a) 2.00 (b) 1.50 (c) 1.33 (d) 3.00 3. Assuming the CAPM holds, which one of the following is true? (a) Investors never want to invest in an asset with a negative beta since it offers an expected return less than the riskless rate. (b) One cannot build an efficient portfolio which has a higher expected return than the market. (c) Investors always demand a higher risk premium on assets with a higher beta. (d) One can build a portfolio of beta 0.75 by investing 75% of ones money in T-Bills and the rest in the market. B Workout Problems 1. Cinstematic Risk Movie star Troy McClure, whom you might remember from such educational films as Lead Paint: Delicious But Deadly and Smoke Yourself Thin, discusses his portfolio allocation with his lawyer...
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- Spring '08