Instruction: Choose the best answer. CAPM: E(Ri) = Rf + ßi * (E(Rm) – Rf) The be
ID: 2779832 • Letter: I
Question
Instruction: Choose the best answer.
CAPM: E(Ri) = Rf + ßi * (E(Rm) – Rf)
The beta of a portfolio = the weighted average of individual securities’ betas
1. Stocks A, B, and C have betas of 1.5, 0.4, and 0.9 respectively. What is the beta of a portfolio that invests 30% in stock A, 50% in stock B, and 20% in stock C?
A) 0.830
B) 0.933
C) 1.000
D) 1.125
2. Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 16%. What is the expected return on a stock with a beta of 1.2?
A) 6%
B) 12%
C) 18%
D) 19.2%
E) 25.2%
3. Consider the CAPM. The risk-free rate is 5% and the market risk premium is 10%. What is the beta on a stock with an expected return of 12%?
A) 0.5
B) 0.7
C) 1.2
D) 1.4
4. Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate?
A) 2%
B) 6%
C) 8%
D) 12%
5. Consider a portfolio that invests equally in the market portfolio and the risk-free asset. What is the beta of this portfolio?
A) -1
B) -0.5
C) 0
D) 0.5
E) 1
Explanation / Answer
1.Beta of portfolio=Respective betas*respecitve investmwnt weights
=(1.5*0.3)+(0.4*0.5)+(0.9*0.2)=0.83
2.
Expected return=Risk free rate+Beta*(Market rate-Risk free rate)
=6+1.2*(16-6)=18%
3.Expected return=Risk free rate+Beta*Market risk premium
12=5+Beta*10
Hence Beta=(12-5)/10=0.7
4.
20=Rf+1.2*(18-Rf)
20=Rf+21.6-1.2Rf
Hence Rf=(21.6-20)/(1.2-1)=8%
5.
Beta of risk free assets=0.
Beta of market =1
Hence portfolio beta=(1/2)=0.5