10. The expected return on the market portfolio is 19%. The risk-free rate is 10
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Question
10. The expected return on the market portfolio is 19%. The risk-free rate is 10%. The expected return on SDA Corp. common stock is 18%. The beta of SDA Corp. common stock is 1.70. Within the context of the capital asset pricing model, _________
a) SDA stock's alpha is 7.3% b) SDA Corp. stock's alpha is –7.30% c) SDA Stock is underpriced d) SDA stock is fairly priced
11. You run a regression of a stock's returns versus a market index and find the following:
Based on the data, you know that the stock _____.
a) has a beta precisely equal to .890
b) earned a positive alpha that is statistically significantly different from zero
c) has no systematic risk
d) has a beta that is likely to be anything between .6541 and 1.465 inclusive
12. The expected return of the risky-asset portfolio with minimum variance is _________.
a) zero b)the market rate of return c) The answer cannot be determined from the information given.
d) the risk-free rate
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:
a.
What is the expected return on the market portfolio? (Round your answer to 1 decimal place.)
Expected rate of return
%
b.
What would be the expected return on a zero-beta stock?
Expected rate of return
%
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.
c-1.
Using the SML, calculate the fair rate of return for a stock with a = –0.5.
Fair rate of return
%
c-2.
Calculate the expected rate of return, using the expected price and dividend for next year. (Round your answer to 2 decimal places.)
Expected rate of return
%
c-3.
Is the stock overpriced or underpriced?
a)
Underpriced
b)
Overpriced
10. The expected return on the market portfolio is 19%. The risk-free rate is 10%. The expected return on SDA Corp. common stock is 18%. The beta of SDA Corp. common stock is 1.70. Within the context of the capital asset pricing model, _________
a) SDA stock's alpha is 7.3% b) SDA Corp. stock's alpha is –7.30% c) SDA Stock is underpriced d) SDA stock is fairly priced
11. You run a regression of a stock's returns versus a market index and find the following:
Based on the data, you know that the stock _____.
a) has a beta precisely equal to .890
b) earned a positive alpha that is statistically significantly different from zero
c) has no systematic risk
d) has a beta that is likely to be anything between .6541 and 1.465 inclusive
12. The expected return of the risky-asset portfolio with minimum variance is _________.
a) zero b)the market rate of return c) The answer cannot be determined from the information given.
d) the risk-free rate
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:
Explanation / Answer
10)
Required return (CAPM) = Rf+×Rp
Rf is risk free return
Rp is risk premium
= Rs–[Rf+Rp×]
= 18%-[10%+(19%-10%)×1.70]
= -7.3%
Correct option is (B)
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