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The correct answer is C

 

Since the portfolio is well diversified, the assumed level of unsystematic risk is zero. The addition of ABC Inc will increase the portfolio beta, and, hence, the level of systematic risk.

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2、Total Quality Inc. has a beta of 1.15. If the expected return on the market is 12 percent, and the risk-free rate is 6 percent, what is the expected return for Total Quality?

A) 12.90%.  

B) 10.15%. 

C) 11.69%.  

D) 14.00%.

nayizhenfeng

 

The correct answer is A

 

Expected return = Rf + β(RM – Rf) = 6 + 1.15 (12-6) = 12.90%

nayizhenfeng

 

The correct answer is B

The CML is expressed by the following equation:

The line begins at the vertical axis at R_F. With each increase in σ_P, the expected return increases by [E(R_M) ? R_F] / σ_M.

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AIM 3: Summarize the concepts of beta, the security market line (SML), and the capital asset pricing model (CAPM), and describe how they are related to the determination of the expected return of a security or portfolio of securities.

1、The beta of stock D is -0.5. If the expected return of Stock D is 8%, and the risk-free rate of return is 5%, what is the expected return of the market?

A) -1.0%.  

B) +3.0%. 

C) +3.5%.  

D) -4.0%.

nayizhenfeng

 

The correct answer is A

 

RRStock = Rf + (RMarket ? Rf) × BetaStock, where RR = required return, R = return, and Rf = risk-free rate

A bit of algebraic manipulation results in:

RMarket = [RRStock ? Rf ? (BetaStock × Rf)] / BetaStock = [8 ? 5 ? (-0.5 × 5)] / -0.5 = 0.5 / -0.5 = -1%

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3、The capital market line results from combining the efficient frontier with a risk-free asset. Given the availability of risky assets and a risk-free asset, the best combinations of risk and return are represented by:

A) the efficient frontier of risky assets.  

B) combinations of the market portfolio and risk-free borrowing or lending. 

C) combinations of the minimum variance portfolio of risky assets and the risk-free asset.  

D) combinations of the market portfolio and minimum variance portfolio of risky assets.

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The correct answer is B

 

The best combinations of risk and return are represented by combinations of the market portfolio and risk-free borrowing or lending.

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4、The intercept and slope of the capital market line are:

A) RM and [E(RP) ? RF] / σP, respectively.  

B) RF and [E(RM) ? RF] / σM, respectively. 

C) RF and [E(RP) ? RF] / σM, respectively.  

D) RM and [E(RM) ? RP] / σM, respectively.

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AIM 2: Describe the efficient frontier and the asset allocation decision both with and without the presence of a riskless asset.

1、All portfolios on the capital market line are:

A) distinct from each other.  

B) unrelated except that they all contain the risk-free asset. 

C) perfectly negatively correlated.  

D) perfectly positively correlated.