Homework Ch07 Circle the letter that represents the best answer. Show workings i
ID: 2785199 • Letter: H
Question
Homework Ch07
Circle the letter that represents the best answer. Show workings in overleaf for Q5 through Q10.
Name: ______________________________________________________________________________
(last) (first)
1. When will an asset’s required return be lower than risk-free rate?
A. It is not possible
B. Only when the asset’s returns are correlated perfectly positive with those of the market portfolio
C. Only when the asset’s returns are not correlated with those of the market portfolio
D. Only when the asset’s beta is negative
2. Along the CML, an investor can ____ by moving southwest, and ____ by moving northeast.
A. lend; borrow B. borrow; lend C. leverage; un-leverage D. borrow; leverage
3. The transition from CML to SML entails _______.
I. efficient diversification II. market risk tends to zero
III. unique risk tends to zero IV. perfectly negative correlation between an asset and market portfolio
A. I and II B. I and III C. II and IV D. I, II and III
4. The slope of the SML is known as ________.
I. excess market return II. market risk premium III. beta IV. risk premium
A. I B. II C. I and II D. III and IV
5. Given an asset’s actual return is 16% while its required return is 15%, then the Jensen’s alpha is _____ and the asset is _________-priced.
A. -1; under B. -1; over C. 1; over D. 1; under
Use the data below to answer Q6 through Q10. Given rf = 2% for all years.
rm
10%
12
9
16
14
18
ri
12%
15
14
20
18
20
6. What is asset i’s beta, i?
A. .87 B. .88 C. .89 D. .90
7. What is asset i’s alpha, i?
A. 4.5 B. 4.6 C. 4.7 D. 4.8
8. What is the unique risk of asset i, i.e., i2?
A. 1.0763 B. 1.0823 C. 1.1028 D. 1.1123
9. What percent of the variation of ri can be explained by variation of rm?
A. 93.8% B. 88.0 C. 89.6% D. 80.3
10. Given Blume’s adjusted beta, adjusted = (2/3)regression + (1/3)(1), the adjusted beta is _______.
A. .91 B. .92 C. .93 D. .94
rm
10%
12
9
16
14
18
ri
12%
15
14
20
18
20
Explanation / Answer
1.
When the asset’s beta is negative an asset’s required return be lower than risk-free rate.
Option (D) is correct answer.
2.
Along the CML, an investor can Lend by moving southwest, and Borrow by moving northeast.
Option (A) is correct answer.
3.
The transition from CML to SML entails, portfolio efficient diversification and market risk tends to zero.
Option (A) is correct answer.
4.
The slope of the SML is known as Market risk premium.
Option (B) is correct answer.
5.
Given an asset’s actual return is 16% while its required return is 15%, then the Jensen’s alpha is +1 and the asset is Under-priced.
Option (D) is correct answer.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.