a.
b.
c.
d.
e.
0.085
0.090
0.092
0.097
None of the above
ANS: C
Weight
.20
.25
.30
.25
PTS: 1
Expected Return
.06
.08
.10
.12
WiRi
.012
.020
.030
.030
.092
OBJ: Multiple Choice Problem
Exhibit 7.13
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A

ANS: B
PTS: 1
OBJ: Multiple Choice
22. A completely diversified portfolio would have a correlation with the market portfolio that is
a. Equal to zero because it has only unsystematic risk.
b. Equal to one because it has only systematic risk.
c. Less than

ANS: A
rA,B = (A,B) [(A)( B)] = (0.0009) (0.10)(0.09) = .1000
PTS: 1
OBJ: Multiple Choice Problem
31. Between 1980 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA
indexes were 0.08 and 0.10, respectively, and the covariance of

37. Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is
0.05 and you expect the market return to be 0.11.
a. 10.6%
b. 12.1%
c. 13.6%
d. 14.0%
e. 16.2%
ANS: D
k = 0.05 + 1.5 (0.11 0.05) = 0.1400 = 14.00%
PTS: 1
O

Stock
A
B
Rit
9.7
10.4
Rmt
10.0
8.0
ai
0
0
Beta
0.7
1.4
Rit = return for stock i during period t
Rmt = return for the aggregate market during period t
68. Refer to Exhibit 6.6. What is the abnormal rate of return for Stock A during period t using
only the

ANS: D
Since the market portfolio has a beta of 1, the market premium is .08 under the proxy and .06
under the true. Thus, your return is
(proxy) k = .07 + 1.1 (.08) = .158 = 15.8%
According to the true SML it should be:
(true) K = .06 + 1.1 (.06) = 12.6%