33. Suppose the yield on short-term government securities (perceived to be risk-

Question

33. Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 13.0%. According to the capital asset pricing model:

What is the expected return on the market portfolio? (Round your answer to 1 decimal place.)

35) Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________.

a) 5.5%      b) 8.7%    c) -1.7%       d) 3.7%

43) You consider buying a share of stock at a price of $13. The stock is expected to pay a dividend of $1.42 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $16. The stock's beta is 1.8, rf is 14%, and E[rm] = 24%. What is the stock's abnormal return?

a) 11%     b) 2%       c)18%    d) 0%

46) You have a $54,000 portfolio consisting of Intel, GE, and Con Edison. You put $21,600 in Intel, $13,600 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?

a) 0.808      b) 1.050       c) 1.365      d)0.995

52) 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%, then you should _________.

sell short stock X because it is underpriced

sell short stock X because it is overpriced

buy stock X because it is overpriced

buy stock X because it is underpriced

Suppose you consider buying a share of stock at a price of $105. The stock is expected to pay a dividend of $9 next year and to sell then for $108. The stock risk has been evaluated at = –.5.

Using the SML, calculate the fair rate of return for a stock with a = –0.5.

Calculate the expected rate of return, using the expected price and dividend for next year. (Round your answer to 2 decimal places.)

Is the stock overpriced or underpriced?

What is the expected return on the market portfolio? (Round your answer to 1 decimal place.)

35) Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________.

a) 5.5%      b) 8.7%    c) -1.7%       d) 3.7%

43) You consider buying a share of stock at a price of $13. The stock is expected to pay a dividend of $1.42 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $16. The stock's beta is 1.8, rf is 14%, and E[rm] = 24%. What is the stock's abnormal return?

a) 11%     b) 2%       c)18%    d) 0%

46) You have a $54,000 portfolio consisting of Intel, GE, and Con Edison. You put $21,600 in Intel, $13,600 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?

a) 0.808      b) 1.050       c) 1.365      d)0.995

52) 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%, then you should _________.

sell short stock X because it is underpriced

sell short stock X because it is overpriced

buy stock X because it is overpriced

buy stock X because it is underpriced

Explanation / Answer

Question 35:

Alpha = Rp – (Rf + (Rm-Rf)xbeta)

          = 12% - (5% + (8%-5%)x1.10)

          = 12% - 8.30%

          = 3.70%

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