A1. For each of the following statements indicate whether the statement is true or false and explain why.
a) The CAPM implies that only unsystematic risk is priced in the market.
b) The expected return of a zero beta security is zero.
c) The CAPM implies that the relation between systematic risk and expected return is always linear.
B1. Assume that the CAPM is correct and a security’s beta has been estimated as 1.2. The riskfree rate of return is 6% and the security’s expected rate of return is 18%. This implies that the market risk premium is closest to:
a) 6.0%.
b) 10.0%.
c) 12.0%.
d) 16.0%.
B2. Assume that the CAPM is correct and the betas of securities X and Y are 0.8 and 1.2, respectively. The expected returns for these securities are 15% and 20%. This implies that the riskfree rate is closest to:
a) 5.0%.
b) 10.0%.
c) 12.5%.
d) 15.0%.
B3. Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%. Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down. Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down. Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down.
The expected return on a security with a beta of 0 is closest to:
a) -4.0%
b) 0.0%
c) 3.2%
d) 4.0%