Q1. Consider the multi-factor APT with two factors. The risk premiums on the factor 1 and factor 2 portfolios are respectively 5% and 3%. Stock A has a beta of 1.4 on factor 1, and a beta of 0.5 on factor 2. The expected return on stock A is 14%. If no arbitrage opportunities exist, the risk-free rate of return is __________.
A) 5.0%
B) 5.5%
C) 6.0%
D) 6.5%
Q2. Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is __________.
A) -1.7%
B) 3.7%
C) 5.5%
D) 8.7%
Q3. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should __________.
A) buy stock X because it is overpriced
B) buy stock X because it is underpriced
C) sell short stock X because it is overpriced
D) sell short stock X because it is underpriced
Q4. Asset A has an expected return of 15% and a Sharpe ratio of .4. Asset B has an expected return of 20% and a Sharpe ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and _______.
A) asset A
B) asset B
C) no risky asset
D) can't tell from the data given
Q5. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, __________.
A) SDA Corp. stock is underpriced
B) SDA Corp. stock is fairly priced
C) SDA Corp. stock's alpha is -0.75%
D) SDA Corp. stock alpha is 0.75%
Q6. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1.00. Portfolio Y has an expected return of 9.5% and a beta of 0.25. In this situation, you would conclude that portfolios X and Y __________.
A) are in equilibrium
B) offer an arbitrage opportunity
C) are both underpriced
D) are both fairly priced
Q7. What is the expected return on a stock with a beta of 0.8, given a risk free rate of 3.5% and an expected market return of 15.6%?
A) 3.8%
B) 13.2%
C) 15.6%
D) 19.1%
Q8. If the only data available is that the beta of a stock is 1.4, what is the likely return on an investment in this stock if the market falls 5%?
A) -6%
B) -5%
C) +5%
D) +6%
Q9. The risk premium for exposure to aluminum commodity prices is 4% and the firm has a beta relative to aluminum commodity prices of 0.6. The risk premium for exposure to GDP changes is 6% and the firm has a beta relative to GDP of 1.2. If the risk free rate is 4.0%, what is the expected return on this stock?
A) 10.0%
B) 11.5%
C) 13.6%
D) 14.0%