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1- CAPM Assumptions CAPM assumptions include all but which one of the following?

1- CAPM Assumptions CAPM assumptions include all but which one of the following?

a. No individual's buy/sell decisions affect a stock's price.

b.Information is costless and equally available to all investors

c. There are no taxes or transaction costs.

d. Investors have heterogeneous expectations about security returns


2- CAPM Implications The CAPM implies that

I. all investors who invest in risky assets will hold the same portfolio of risky assets.

II. the risk premium of an individual security is a function of the security's contribution to the risk of the market portfolio.

III. there is one unique market wide price of risk.

IV. all investors hold equal proportions of the risky and the riskless asset in their complete portfolio.

a)I and II only

b)I, II and IV only

c)I, II and III only

d)II and III only


3- CAPM Calculations A stock has a beta of 1.22 when the risk free rate is 2.5% and the expected return on the market is 11.5%. The stock's required rate of return is equal to ______.

a.10.98%

b.15.22%

c.14.55%

d.13.48%


4- Alpha and Pricing The risk free rate is 1.75% and the market price of risk is 6%. A stock with a beta of 1.05 has an expected dividend yield of 6% and an expected capital gain of 3%. This stock's alpha is equal to ______ and the stock is ________.

a. +11.75%; overpriced

b. 0.95%; underpriced

c. -11.75%; underpriced

d. -0.95%; overpriced


5- Alpha and the CAPM A stock with a beta of 0.79 has an expected return of 13% and an alpha of 1.49% when the market expected return is 14% . What must be the risk free rate that satisfies these conditions?

a. 2.16%

b. 2.14%

c. 2.15%

d. 2.17%


6- Portfolio Beta An investor places $11,000 in Stock A, $10,000 in Stock B and $16,000 in Stock C. Stock A has a beta of 0.95, Stock B has a beta of 1.2 and Stock C has a beta of 1.45. What is the resulting portfolio beta?

a.1.35

b. 1.23

c. 1.18

d. 1.26


7- Sharpe Ratios and the CAPM Portfolio A has an expected return of 16% and a standard deviation of 26% when the risk free rate is 6%. The market portfolio has an expected return of 14% and a standard deviation of 23%. Based on this data, which of the following conclusions are correct?


I. This situation is inconsistent with the CAPM

II. The Sharpe ratio for Portfolio A = 0.3846

III. The Sharpe ratio for the market portfolio = 0.3478

IV. This situation is consistent with the CAPM 


a) I, II, IV

b) I, II, III

c) II, III, IV

d) II, III


8- CAPM and Security Pricing Stock A has an expected return of 26% and a beta of 2.1. Stock B has an expected return of 26% and a beta of 1.7 when the risk free rate is 6%. Which of the following statements are correct?


I. Stock A is underpriced relative to Stock B

II. Stock B is underpriced relative to Stock A

III. This situation is inconsistent with the CAPM

IV. This situation is consistent with the CAPM


a) I and IV only

b) I and III only

c) II and III only

d}) II and IV only


Working With the CAPM You believe that a stock is fairly priced according to the CAPM. The stock has a beta of 2.0 when the market risk premium is 7.0% and the risk free rate is 1.0%. If the stock's dividend yield is 3.1% what is the stock's expected capital gain yield?

a) 8.0%

b) 11.90%

c) 15.40%

d) 4.9%

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