Chapter 7:

Problem 6: What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 15%?

• a. 15%
• b. More than 15%.
• c. Cannot be determined without the risk-free rate.

Problem 9: What must be the beta of a portfolio with E(rp) = 20%, if rf = 5% and E(rm) = 15%?

Chapter 8:

Problem 10: Which of the following sources of market inefficiency would be most easily exploited?

• a. A stock price drops suddenly due to a large block sale by an institution.
• b. A stock is overpriced because traders are restricted from short sales
• c. Stocks are overvalued because investors are exuberant over increased productivity in the economy.

Problem 11: Which of the following most appears to contradict the proposition that the stock market is weakly efficient? Explain.

• a. Over 25% of mutual funds outperform the market on average.
• b. Insiders earn abnormal trading profits.
• c. Every January, the stock market earns abnormal returns.