18．Jim Williams, CFA, manages individual investors' portfolios for Clarence Farlow Associates. Clarence Farlow Jr., CEO of Clarence Farlow Associates, is looking for some new investment ideas. Farlow is obsessive about value, however, and never buys stocks that look expensive. He has assigned Williams to assess the investment merits of several securities. Specifically, Williams has collected the following data for three possible investments. Stock | Price Today | Forecasted Price* | Dividend | Beta | Alpha | 25 | 31 | 2 | 1.6 | Omega | 105 | 110 | 1 | 1.2 | Lambda | 10 | 10.80 | 0 | 0.5 | *Forecast Price = expected price one year from today. |
Williams plans to value the three securities using the security market line, and has assembled the following information for use in his valuation: §
Securities markets are in equilibrium. §
The prime interest rate is expected to rise by about 2% in the year ahead. §
Inflation is expected to be 1% over the upcoming year. §
The expected return on the market is 12% and the risk-free rate is 4%. §
The market portfolio's standard deviation is 40%. Williams eventually decides to construct a portfolio consisting of 10 shares of Alpha, 2 shares of Omega, and 20 shares of Lambda. Based on valuation via the SML, which of the following statements is most accurate? A) Neither Alpha nor Lambda is correctly priced. B) Both Alpha and Omega are overpriced. C) Williams should buy Alpha but not Omega. D) None of the stocks is underpriced. The correct answer was C) SML valuation hinges on the relationship between the forecasted return (FR) and expected return (ER). FR = (ending price - beginning price + dividends) / beginning price. ER = RFR + β (RMkt - RFR). §
For Alpha: FR = (31 - 25 + 2) / 25 = 32%, ER = 4 + 1.6 (12 - 4) = 16.8%.
Since FR > ER, stock is underpriced. §
For Omega: FR = (110 - 105 + 1) / 105 = 5.7%, ER = 4 + 1.2 (12 - 4) = 13.6%.
Since FR < ER, stock is overpriced. §
For Lambda: FR = (10.8 -10 + 0) / 10 = 8%, ER = 4 + 0.5 (12 - 4) = 8%.
Since FR = ER, stock is correctly priced. 19．The covariance of Omega with the market portfolio is closest to: A) 0.576. B) 0.480. C) 0.375. D) 0.192. The correct answer was D) Beta = covi,M / market portfolio variance, so covi,M = 1.2 x (0.4)2 = 0.192. 20．Williams calculates the required return for Omega. According to the CAPM the required return is closest to: A) 5.7%. B) 12.0%. C) 13.6%. D) 14.6%. The correct answer was C) The required return (RR) uses the equation of the SML: risk-free rate + Beta x (expected market rate - risk-free rate). For Omega, RR = 4 + 1.2 x (12 - 4) = 13.6%. The expected return of 5.7% need not be the same as the required return under CAPM. 21．The capital market line: A) helps determine asset allocation. B) uses nondiversifiable risk. C) graphs the capital asset pricing model. D) has a slope equal to the market risk premium. The correct answer was A) The purpose of the CML is to determine the percentages allocated to the market portfolio and the risk-free asset. The other three answers reflect characteristics of the security market line. | 
发表于 2008-4-14 17:46
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