Question 1

Consider the following data for assets A and B: $\bar { R } _ { A } = 12 \%$ ; $\bar { R } _ { B } = 8 \%$ ; $\sigma _ { \mathrm { A } } = 10 \%$ ; $\sigma _ { B } = 4 \%$ ; $\rho _ { A B } = - 1.0$ 
a. If only assets A and B are available, draw the efficient frontier.
b. If the riskless lending and borrowing rate is 10%, why is this a disequilibrium situation and what is the arbitrage that will restore equilibrium?

Accepted Answer

The answer of Consider the following data for assets A...

Question 2

Consider the following data:
 $\begin{array}{lccc}
&\underline{\text { ABC }} & \underline{\text { XYZ}}&\underline{\text { Market }}\
\text { Price } & \$ 20 & \$ 50 & - \
\text { Dividend } & \$ 0.40 & \$ 2 & 6 \% \
\text { Beta } & 1.5 & 1.0 & 1.0 \
\text { Alpha } & -1.0 \% & 2.0 \% & -
\end{array}$ The riskless rate is 10%,and the expected return on the market is 20%.Your portfolio consists of 50,000 shares of ABC and 10,000 shares of XYZ. 
a. Give the values of the following statistics for your portfolio: dividend yield; expected prices for ABC and XYZ in one year; beta; and alpha.
b. Suppose you are in the 40% effective marginal tax bracket and you plan to hold your portfolio more than one year. What is the expected after-tax return on your portfolio? What is the expected after-tax return on the market portfolio?

Accepted Answer

The answer of Consider the following data:
 \(\begin{array}{lccc}
&\underline{\text { ABC...

Question 3

You use the single-factor model $R _ { i t } = \alpha _ { i } + \beta _ { i } R _ { m t } + e _ { i t }$ and have obtained the following estimates for stock A and stock B: $\begin{array} { l l l l } \text { Stock } & \alpha & \beta & \sigma _ { e } \ \text { A } & 2 \% & 1.3 & 30 \% \ \text { B } & 10 \% & 1.2 & 40 \% \end{array}$ You also estimate that the expected return on the market portfolio is 16%,the standard deviation of the market portfolio is 20%,and the riskless rate is 8%. a. Based on the single-factor model, what are the expected returns and standard deviations of stock A and stock B? b. Based on the single-factor model, the Security Market Line, and the Capital Market Line, state whether each of the following statements is completely true, completely false, or uncertain. Explain your answers. 1) In any given year, stock B is certain to outperform stock A. 2) An investor would consider stock B to be riskier than stock A. 3) Stock A is undervalued. 4) If an investor had to select one investment to combine with the riskless asset, the investor would prefer stock A to the market portfolio.

Accepted Answer

The answer of You use the single-factor model \(R _...

Question 4

For questions 1-3 use the information from the following table
$\begin{array} { l c c l } 
\text { Security } & \text { Return } & \text { Standard Deviation } & \text { Beta } \
\text { A } & 16 \% & 20 \% & 1.2 \
\text { B } & 12 \% & 25 \% & 0.8 \
\text { Risk-free asset } & 4 \% & 2 ? ? & \text { ??? }
\end{array}$
-What is the portfolio expected return and the portfolio beta if
you invest 35% in A,45% in B and 20% in the risk-free asset?

Accepted Answer

The answer of 
For questions 1-3 use the information from...

Question 5

Discuss whether the following statement is true or false:
It is possible for a stock to have an expected rate of return that is negative.

Accepted Answer

In a situation where the Beta of a stock is negative,it means that the market and the stock prices are having a negative correlation.This implies that when the markets rate increases,the stock rate moves down leading to a negative rate of return for a particular period.Usually,this occurs when the stock has a high degree of negative correlation.

Question 6

If one accepts the Sharpe single-index model,and the simple form of the CAPM holds,what is $\alpha _ { i }$ (the intercept term in the Sharpe single-index model)equal to?

Accepted Answer

The answer of If one accepts the Sharpe single-index model,and...

Question 7

For questions 1-3 use the information from the following table
$\begin{array} { l c c l } 
\text { Security } & \text { Return } & \text { Standard Deviation } & \text { Beta } \
\text { A } & 16 \% & 20 \% & 1.2 \
\text { B } & 12 \% & 25 \% & 0.8 \
\text { Risk-free asset } & 4 \% & 2 ? ? & \text { ??? }
\end{array}$
-Which of A and B has the least total risk? Which of A and B has the least
systematic risk?

Accepted Answer

The answer of 
For questions 1-3 use the information from...

Question 8

For questions 1-3 use the information from the following table
$\begin{array} { l c c l } 
\text { Security } & \text { Return } & \text { Standard Deviation } & \text { Beta } \
\text { A } & 16 \% & 20 \% & 1.2 \
\text { B } & 12 \% & 25 \% & 0.8 \
\text { Risk-free asset } & 4 \% & 2 ? ? & \text { ??? }
\end{array}$
-What is the value of systematic risk for a portfolio with 2/3 of
the funds invested in A and 1/3 of the funds invested in B?

Accepted Answer

The answer of 
For questions 1-3 use the information from...

Question 9

An efficient portfolio has an expected return of 20%.The riskless rate is 5%,the return on the market portfolio is 15%,and the standard deviation of the market portfolio is 20%.What is the efficient portfolio's beta,standard deviation,and correlation coefficient with the market portfolio?

Accepted Answer

The answer of An efficient portfolio has an expected return...

Question 10

Discuss whether the following statement is true or false:
A very risk-averse investor should buy predominantly low-beta stocks.

Accepted Answer

A very risk-averse investor will buy low-beta stocks as well as stocks which are risk free in nature.It is always desired to have a portfolio which is diversified and not leaning on either of the sides.

Question 11

Consider the following data for funds A,B,C,and D: $\bar { R } _ { A } = 20 \%$ ; $\bar { R } _ { B } = 15 \%$ ; $\bar { R } _ { C } = 10 \%$ ; $\bar { R } _ { D } = 18 \%$ ; $\beta _ { \mathrm { A } } = 1.5$ ; $\beta _ { B } = 1.0$ ; $\beta _ { C } = 0.8$ ; $\beta _ { D } = 1.2$ .
Assume that the zero-beta form of the CAPM is a reasonable description of reality and that funds A and B are accurately priced.Which funds' returns are not in equilibrium and by how much? What is the arbitrage that would restore equilibrium?

Accepted Answer

The answer of Consider the following data for funds A,B,C,and...

Question 12

Consider the following data for securities A and B: $\bar { R } _ { A } = 20 \%$ ; $\bar { R } _ { B } = 10 \%$ ; $\beta _ { \mathrm { A } } = 1.5$ ; $\beta _ { B } = 0.5$ .
Assume that the zero-beta CAPM holds and that all securities are in equilibrium.Plot the Security Market Line.Be sure to label all points.

Accepted Answer

The answer of Consider the following data for securities A...

Question 13

Plot the standard CAPM and the zero-beta CAPM on the same diagram.Be sure to label all points.

Accepted Answer

The answer of Plot the standard CAPM and the zero-beta...

Question 14

Discuss whether the following statement is true or false:
Under the assumption of a CAPM with no riskless lending or borrowing,every investor holds the same portfolio of risky assets.

Accepted Answer

In a situation where there is no riskless lending or borrowing,and all investors have homogeneous expectations,they must all face the same efficient frontier.In equilibrium,if securities or portfolios happened to lie on a straight line in expected return Beta space,all combinations of securities or portfolios would lie on the same line.Hence,all investors will hold the same portfolio of risky assets.

Question 15

Consider the following data for stocks A and B: $\bar { R } _ { \mathrm { A } } = 10 \%$ ; $\bar { R } _ { B } = 19 \%$ ; $\sigma _ { \mathrm { A } } = 3 \%$ ; $\sigma _ { B } = 5 \%$ ; $\beta _ { \mathrm { A } } = 0.6$ ; $\beta _ { B } = 1.4$ ; $\rho _ { A B } = 0.4$ 
a. Calculate the expected return, variance, and beta of a portfolio constructed by investing 1/3 of your funds in stock A and 2/3 in stock B.
b. If the riskless rate of return were 5%, what percentage of money invested in risky stocks should an investor place in each stock (assuming A and B are the only risky assets available)?
c. If the security market line describes equilibrium, and stocks A and B are in equilibrium, what is the return on the market portfolio and the riskless rate of interest?
d. If an investor can lend and borrow at the riskless rate determined in part c, but is restricted to holding only one of the two risky stocks in this problem, which stock should be held?

Accepted Answer

The answer of Consider the following data for stocks A...

Question 16

Discuss the two mutual fund theorem.Show why it arises.(A diagram may help.)

Accepted Answer

The answer of Discuss the two mutual fund theorem.Show why...

Question 17

Discuss whether the following statement is true or false:
If the post-tax form of the CAPM holds,then a tax-free institution should hold the market portfolio.

Accepted Answer

If returns are determined by the equilibrium model as shown in the equation 11ea83f1_e7f0_8d15_b5a5_7dd4f519eca2_TB6527_00 ,it should be possible to derive optimal portfolios for any investor as a function of the tax rates paid on capital gains and dividends.Individuals hold widely diversified portfolios that resemble the market portfolio.However,since tax-free institutions have a competitive advantage when they hold dividend stocks,their portfolios will resemble the market portfolio but will be tilted in favor of dividends stocks.

Question 18

You believe that Beta Alpha Watch Company will be worth $100 per share one year from now.How much are you willing to pay for one share today if the riskless rate is 8%,the expected return on the market is 18%,and the company's beta is 2?

Accepted Answer

The answer of You believe that Beta Alpha Watch Company...

Question 19

The expected return on the market portfolio is 20% and the riskless rate is 10%.XYZ gold mining has a beta of -0.2.What is the expected return on a short sale of 100 shares of XYZ,assuming you can get the proceeds of your short sale? What if you can't?

Accepted Answer

The answer of The expected return on the market portfolio...

Question 20

Consider the following data for Dodger Corp.and the S&P 500:
 $\begin{array}{|c|c|c|}
\hline \text { Year } & \text { Dodger Corp. Price } & \text { S\&P } 500 \text { Level } \
\hline {1979} & 40.00 & 150.00 \
\hline 1980 & 36.00 & 150.00 \
\hline 1981 & 34.20 & 145.50 \
\hline 1982 & 20.52 & 160.05 \
\hline 1983 & 22.57 & 163.25 \
\hline 198 & 22.34 & 159.99 \
\hline
\end{array}$
 
a. What is your estimate of beta for Dodger Corp.?
b. What portion of the firm's total variance is systematic, and what portion is unsystematic?
c. What is the required rate of return for Dodger Corp. if the riskless rate is 7% and the market risk premium is 8%?

Accepted Answer

The answer of Consider the following data for Dodger Corp.and...

Quiz 3: Models of Equilibrium in the Capital Markets

Discuss whether the following statement is true or false: It is possible for a stock to have an expected rate of return that is negative.

If one accepts the Sharpe single-index model,and the simple form of the CAPM holds,what is αi\alpha _ { i }αi​ (the intercept term in the Sharpe single-index model)equal to?

An efficient portfolio has an expected return of 20%.The riskless rate is 5%,the return on the market portfolio is 15%,and the standard deviation of the market portfolio is 20%.What is the efficient portfolio's beta,standard deviation,and correlation coefficient with the market portfolio?

Discuss whether the following statement is true or false: A very risk-averse investor should buy predominantly low-beta stocks.

Plot the standard CAPM and the zero-beta CAPM on the same diagram.Be sure to label all points.

Discuss whether the following statement is true or false: Under the assumption of a CAPM with no riskless lending or borrowing,every investor holds the same portfolio of risky assets.

Discuss the two mutual fund theorem.Show why it arises.(A diagram may help.)

Discuss whether the following statement is true or false: If the post-tax form of the CAPM holds,then a tax-free institution should hold the market portfolio.

You believe that Beta Alpha Watch Company will be worth $100 per share one year from now.How much are you willing to pay for one share today if the riskless rate is 8%,the expected return on the market is 18%,and the company's beta is 2?

The expected return on the market portfolio is 20% and the riskless rate is 10%.XYZ gold mining has a beta of -0.2.What is the expected return on a short sale of 100 shares of XYZ,assuming you can get the proceeds of your short sale? What if you can't?

If one accepts the Sharpe single-index model,and the simple form of the CAPM holds,what is $\alpha _ { i }$ (the intercept term in the Sharpe single-index model)equal to?