Answer two and only two of parts A, B, and C. For the two parts you choose to an

Question

Answer two and only two of parts A, B, and C. For the two parts you choose to answer, explain why the italicized statement is true or false (to receive full credit, you must explain why in two or three sentences or with an example).

A.) The stock price of Company X doubled over the past year, the stock price of Company Z decreased by over 50%. The market increased by 10%. If the stock market is efficient, the two stocks must have different Betas.

B.) Stock A has a standard deviation of 12%; Stock B has a standard deviation of 10%. According to the CAPM, the required return on Stock A must be higher than the required return on Stock B.

C.) Assuming that the stock market is efficient, an investor cannot double his or her money over the next two years.

Explanation / Answer

A.) The stock price of Company X doubled over the past year, the stock price of Company Z decreased by over 50%. The market increased by 10%. If the stock market is efficient, the two stocks must have different Betas.

True

Note : Since the Stock price of company X Doubled when market rises by 10% If the stock market is efficient

than the beta of company x is lower than market beta where as Stock price of company Z decrease by when market rises by 10% If the stock market is efficient than the beta of company Z is higher than market beta which lead to increase in required rate of return. and therefore both beta must have different as one is lower and another is higher thant market beta

B.) Stock A has a standard deviation of 12%; Stock B has a standard deviation of 10%. According to the CAPM, the required return on Stock A must be higher than the required return on Stock B.

False

Note : As per CAPM , there is only systematic risk i.e Beta, Unsystematick risk is being removed through diiversification of portfolio, if stock has Standard deviation of 12%; Stock B has a standard deviation of 10%

than it cannot be evaluated using CAPM that required return on Stock A must be higher than the required return on Stock B. As CAPM measures through Beta & not standard Deviation.

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