1. You believe stock X has a good news that is not currently reflected in to its price yest. Then, what is correct in the following?
a. The expected return on X will be located above the SML (Security Market Line)
b. The expected return on X will be located on the SML
c. The expected return on X will be located below the SML
d. None of a, b, and c are correct.
2. Consider the “mean-variance analysis”. What is correct in the followings?
a. The minimum variance portfolio is the optimal risk portfolio
b. Sharpe ratio cannot be determined for the minimum variance portfolio
c. The minimum variance portfolio is the market portfolio
d. The capital allocation line is tangent to the market portfolio
3. Assume that the CAPM holds well. A single index model stock S shows following estimation results. If you have to determine the net present value (NPV) of a project that has a similar risk as stock S, then what is the appropriate cost of capital (required rate of return) to be used for the calculation of the NPV?
Alpha=5.3%
Beta=1.2
Risk-free rate= 2.5%
Forecast of market excess return= 5%
a. Less than 6%
b. Higher than 6% but less than 9%
c. Higher than 9% but less than 12%
d. Higher than 12%
4. If the expected rate of return on a stock is lower than the required rate of return, then what is false in the followings?
a. The stock market is not in equilibrium
b. Relevant information is not fully reflected
c. The stock is underpriced
d. The stock price will change soon