11. Which of the following assets should have a negative alpha in the static CAP

Question

11. Which of the following assets should have a negative alpha in the static CAPM a Stock A that beats the CAPM when GDP growth is high b Stock B that has higher expected return when default premium is low c Stock C that has higher beta in volatile periods d Stock D that that has lower beta when Treasury bill rate is high 12. You are splitting your investment between a mutual fund with expected return of 13% and standard deviation of 25% and the risk-free CD with fixed return of 3%. If your target standard deviation is 12%, what is your expected return and the weight of the mutual fund in your portfolio? 48% and 23% 48% and 48% 7.8% and 23% 78% and 48% b 13 The minimum variance portfolio (MVP) on the bullet has expected return of 4% and return of 9% and standard deviation of 14%, which of the following assets is clearly an inferior choice? a Asset A with expected return of 7% and standard deviation of 12% b Asset B with expected return of 5% and standard deviation of 10% c Asset C with expected return of 3% and standard deviation of 6% d Asset D with expected return of 8% and standard deviation of 15%

Explanation / Answer

11) Stock that beats the CAPM when the GDP growth is high has a high Beta. It is expected to have a lower alpha when GDP growth is static

12) Weight = 12/25 = 48%

Expected return =0.48*13+0.52*3=7.8%

Hence,D

13) Asset D is inferior since a portfolio with standard deviation of 14 and return of 9 exists. Standard deviation is lower than D's 15 and return higher than D's 8

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