QUESTION 1 8 The expected return and betas for three stocks are given below: A 9.5 1.4 C 12 1.7 Market returns, R m: is 8% and risk-free rate is 3%. Which of the three stocks is undervalued according to the CAPM? A B C None There is not enough information to answer this question. QUESTION 19 The risk-free rate is 5%, and the expected market rate of return is 12%. A stock with a beta of 'l .2 is selling for $20 and will paya dividend of $1 at the end of the year. If the stock is expected to be priced at $22 at yearend, it is fairly valued undervalued, buy it now undervalued, short it now overvalued, buy it now overvalued, short it now QUESTION 20 If the CAPM is valid and all portfolios are priced correctly, which of the situations below is/are NOT possible? Consider each situation independently, and assume the risk-free rate is 5%. Situation A Portfolio Situation B Expected Return Portfolio Expected R... ABC 13.2% 1 .0 XYZ 14% 0.8 RISKFREE 5% MARKET 10% . ABC 11.5% 1.3 Situation A only Situation B only Situation A and B Neither situation QUESTION 21 According to the CAPM: An investor who is risk adverse should hold at least some of the riskfree asset in his portfolio. All investors who take on risk will hold the identical portfolios of risky assets. A stock with high risk, measured as standard deviation of returns, will have high expected returns in equilibrium. Individual investors are price setters. None of the above. QUESTION 22 According to the CAPM, which of the following is false regarding the market portfolio? O All securities in the market portfolio are held in proportion to their market values. It includes all risky assets in the world. It is always the minimum-variance portfolio on the efficient frontier. O It lies on the efficient frontier. O None of the above. QUESTION 23 Which of the following statements about the Capital Market Line is/are true? [1] Under CAPM assumptions, a rational investor will only invest in a portfolio along the CML. All portfolios along the CML have the same Sharpe Ratio. Investors with different risk aversion would invest in different portfolios along the CML. O I only O II only O I and II only O I and Ill only O I, II, and IIIQUESTION 24 Considerthe CAPM. The expected return on the market is 15%. The expected return on a stock with a beta of 1.5 is 21%. What is the risk- free rate? 2% 3% 4% 5% Not enough information QUESTION 25 Consider a single index model, the alpha of a stock is 2%, the beta is 1.1, and the market return is 12%. What is the idiosyncratic component of return given an actual return of 15%? 0.2% 0 -O.2% -2% Not enough information