nayizhenfeng

 

Which of the three securities identified by Williams would plot on the capital market line(CML)?

A) Alpha.  

B) Omega. 

C) Lambda.  

D) None of the securities would plot on the CML.

nayizhenfeng

 

The correct answer is D

 

By definition, all stocks and portfolios (other than the market portfolio) fall below the CML. (Only the market portfolio is efficient).

nayizhenfeng

 

7、Which of the following statements about the security market line (SML) is least accurate?

A) The market portfolio consists of all risky assets.  

B) Securities that plot above the SML are undervalued. 

C) Securities that plot on the SML have no intrinsic value to the investor.  

D) The risk-free rate defines where the SML intersects the vertical axis.

nayizhenfeng

 

The correct answer is C

 

Securities that fall on the SML are properly priced. They have value to an investor in that they still earn a return.

nayizhenfeng

 

The correct answer is A

 

24 = 8 + β (16 ? 8)

24 = 8 + 8β

16 = 8β

16 / 8 = β

β = 2

nayizhenfeng

 

6、An analyst 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
*Forecasted Price = expected price one year from today.

The expected return on the market is 12% and the risk-free rate is 4%.

According to the security market line (SML), which of the three securities is correctly priced?

 

A) Alpha.  

B) Omega. 

C) Lambda.  

D) None of the securities are correctly priced.

nayizhenfeng

 

4、A security’s systematic risk is proportional to:

A) the standard deviation of its return.  

B) the variance of its return. 

C) its diversifiable risk.   

D) the covariance of its return with the return on the market portfolio.

nayizhenfeng

 

The correct answer is D

 

The measure of systematic risk is beta, and beta is proportional to the covariance of a security’s return with the return on the market portfolio.

nayizhenfeng

 

5、The expected rate of return is 1.5 times the 16% expected rate of return from the market. What is the beta if the risk free rate is 8%?

A) 2.  

B) 4. 

C) 3.  

D) 5.

nayizhenfeng

 

3、Jim Sheehan manages a diversified portfolio containing forty stocks. The portfolio beta is 1.05. Jim is considering adding the stock of ABC Inc. to the portfolio, and would fund the purchase with cash already in the portfolio. ABC Inc. has a beta of 1.20, and is currently not part of the portfolio. Which statement about the resulting portfolio is TRUE?

A) Systematic risk would decrease, but the unsystematic risk would be unchanged.  

B) Both systematic risk and unsystematic risk would be unchanged. 

C) Systematic risk would increase, but the unsystematic risk would be unchanged.   

D) Both systematic risk and unsystematic risk would both increase.