Question 1:

The expected return and standard deviation of asset A are 14.4% and 20% respectively. The market has an expected return of 12% and standard deviation of 15%. The risk-free rate is 6%. The correlation of asset A and the market is 0.9. Bases on CAPM, asset A is most likely:

A) overpriced.

B) fairly priced.

C) underpriced.

Question 2:

An asset manager's portfolio had the following annual rates of return:

Year Return

2016 +8%

2017 -25%

2018 +12%

The geometric mean return is closest to:

Question 3:

Consider the single factor APT. Portfolio A has a beta of 0.3 and an expected return of 6%. Portfolio B has a beta of 0.9 and an expected return of 12%. The risk-free rate of return is 3%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________.

A) A; B

B) B; A

C) No arbitrage opportunity exists.