1. A beta value of 0.5 for a security indicates a)the security has average syste

Question

1. A beta value of 0.5 for a security indicates

a)the security has average systematic risk

b)the security has above-average systematic risk

c)the security has no unsystematic risk

d)the security has below-average systematic risk

2. The only component of the CAPM equation that relates specifically to a company is

a)bX

b)kM

c)kRF

d)(kM - kRF)

3. The CAPM asserts that the only company specific factor affecting required return is

a)market risk

b)the risk-free rate

c)investment risk

rd)isk aversion

4. A portfolio is characterized by the following

Stock

$'s invested

Expected Return

Beta

X

$2,000

15%

2

Y

$8,000

12%

1.6

Z

$2,000

8%

1.2

a)

Calculate the portfolio's expected return.

b)

Calculate the beta of the portfolio.

c)

If the return on the market is 10% and the risk-free rate is 3%, what is the required return on the portfolio?

Stock

$'s invested

Expected Return

Beta

X

$2,000

15%

2

Y

$8,000

12%

1.6

Z

$2,000

8%

1.2

Explanation / Answer

1)

Beta is the systematic risk of the stock. Average risk in market is 1, Beta of the market is average risk. If the stock beta is less than 1, it is below average systematic risk.

Hence, correct option is d) the security has below-average systematic risk.

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