1. The market portfolio has an expected return of 18% and the risk-free rate is 6%. An investor borrows $100 at the risk-free rate and invests this and a further $100 of his own in the market portfolio. What is his expected return?
A) 19.6% B) 18.6% C) 21.6% D) 30.0%
2. Laura has one risk-free asset and one risky stock in her portfolio. The risk-free asset has an expected return of 3.2%. The risky asset has a beta of 1.3 and an expected return of 14.9%. What is the expected return on the portfolio if the portfolio beta is 0.975?
A) 9.83% B) 10.73% C) 7.65% D) 11.98%
3. You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming year. The market is expected to return 11.4% and T-bills return 3.8%. According to CAPM, which one of these statements is correct given this information?
A) The risk premium on the stock is too low given the stock's beta. B) The stock is currently underpriced. C) The stock plots to the left of the market on a security market line graph. D) The stock plots below the security market line.
4. Stock A has a beta of 1.45 and an expected return of 13.43 percent. Stock B has a beta of 0.95 and an expected return of 10.27 percent. Assume that both stocks are correctly priced. Given this, the risk-free is ________percent and the market return is __________ percent.
A) 4.10;11.53 B) 4.02;11.53 C) 4.27;10.59 D) 4.09;12.35
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