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2、 An investor is evaluating the following possible portfolios. Which of the following portfolios would least likely lie on the efficient frontier?

Portfolio	Expected Return	Standard Deviation
A	26%	28%
B	23%	34%
C	14%	23%
D	18%	14%
E	11%	8%
F	18%	16%

A) C, D, and E.  

B) A, E, and F. 

C) A, B, and C.  

D) B, C, and F.

nayizhenfeng

 

The correct answer is D

 

Portfolio B cannot lie on the frontier because its risk is higher than that of Portfolio A's with lower return. Portfolio C cannot lie on the frontier because it has higher risk than Portfolio D with lower return. Portfolio F cannot lie on the frontier cannot lie on the frontier because its risk is higher than Portfolio D.

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3、The capital market line results from combining the efficient frontier with a risk-free asset. Given the availability of risky assets and a risk-free asset, the best combinations of risk and return are represented by:

A) the efficient frontier of risky assets.  

B) combinations of the market portfolio and risk-free borrowing or lending. 

C) combinations of the minimum variance portfolio of risky assets and the risk-free asset.  

D) combinations of the market portfolio and minimum variance portfolio of risky assets.

nayizhenfeng

 

The correct answer is B

 

The best combinations of risk and return are represented by combinations of the market portfolio and risk-free borrowing or lending.

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4、The intercept and slope of the capital market line are:

A) RM and [E(RP) ? RF] / σP, respectively.  

B) RF and [E(RM) ? RF] / σM, respectively. 

C) RF and [E(RP) ? RF] / σM, respectively.  

D) RM and [E(RM) ? RP] / σM, respectively.

nayizhenfeng

 

The correct answer is B

The CML is expressed by the following equation:

The line begins at the vertical axis at R_F. With each increase in σ_P, the expected return increases by [E(R_M) ? R_F] / σ_M.

nayizhenfeng

 

AIM 3: Summarize the concepts of beta, the security market line (SML), and the capital asset pricing model (CAPM), and describe how they are related to the determination of the expected return of a security or portfolio of securities.

1、The beta of stock D is -0.5. If the expected return of Stock D is 8%, and the risk-free rate of return is 5%, what is the expected return of the market?

A) -1.0%.  

B) +3.0%. 

C) +3.5%.  

D) -4.0%.

nayizhenfeng

 

The correct answer is A

 

RRStock = Rf + (RMarket ? Rf) × BetaStock, where RR = required return, R = return, and Rf = risk-free rate

A bit of algebraic manipulation results in:

RMarket = [RRStock ? Rf ? (BetaStock × Rf)] / BetaStock = [8 ? 5 ? (-0.5 × 5)] / -0.5 = 0.5 / -0.5 = -1%

nayizhenfeng

 

2、Total Quality Inc. has a beta of 1.15. If the expected return on the market is 12 percent, and the risk-free rate is 6 percent, what is the expected return for Total Quality?

A) 12.90%.  

B) 10.15%. 

C) 11.69%.  

D) 14.00%.

nayizhenfeng

 

The correct answer is A

 

Expected return = Rf + β(RM – Rf) = 6 + 1.15 (12-6) = 12.90%