Chapter_11_12_13_sol

Bbetarepresentstheamountbywhichrisksthataffecttheovera

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Unformatted text preview: : [RxCML] = rf + x(E[RMkt] - rf) E .14 = .05 + x(.12 - .05) x = .09 / .07 = 1.286 So the portfolio is long 129% market and short 29% risk-free asset SD(RxCML)= xSD(RMkt) 1.286(.16) = .2057 = 20.6% 26) Which of the following statements is false? A) The risk premium of a security is equal to the market risk premium (the amount by which the marketʹs expected return exceeds the risk-free rate), divided by the amount of market risk present in the securityʹs returns measured by its beta with the market. B) We refer to the beta of a security with the market portfolio simply as the securities beta. C) There is a linear relationship between a stockʹs beta and its expected return. D) A security with a negative beta has a negative correlation with the market, which means that this security tend to perform will when the rest of the market is doing poorly. Answer: A Explanation: A) The risk premium of a security is equal to the market risk premium (the amount by which the market’s expected return exceeds the risk-free rate), multiplied by the amount of market risk present in the security’s returns measured by its beta with the market. B) C) D) Use the information for the question(s) below. Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%. Monsters Inc. has a 24% volatility and a correlation with the market of .60, while California Gold Mining has a 32% volatility and a correlation with the market of -.7. Assume the CAPM assumptions hold. 27) Monstersʹ required return is closest to: A) 10.0% B) 13.0% C) 11.5% D) 15.5% Answer: C Explanation: A) B) C) (.24)(.6) SD ( RMonsters )Corr ( RMonsters, Rmkt ) = = .80 bMonsters = .18 SD( Rmkt ) ri = rf + b(E[RMkt] - rf) = .05 + .8(.13 - .05) =.114 D) 12.4 Determing Beta 28) Which of the following stateme...
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This document was uploaded on 02/02/2014.

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