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Q1) Suppose that both X and Y are well-diversified portfolios and risk-free rate is 8%.  Portfolio X has expected return of 14% and beta of 1.00. Portfolio Y has expected return of 9.5% and beta of 0.25.  In this situation, you would conclude that portfolios X and Y __________.


A) Are in equilibrium


B) Offer arbitrage opportunity


C) Are both underpriced


D) Are both fairly priced


Q2) Expected return on market portfolio is 15%.  Risk-free rate is 8%.  Expected return on SDA Corp. common stock is 16%.  Beta of SDA Corp. common stock is 1.25.  In the context of capital asset pricing model, __________.


A) SDA Corp. stock is underpriced


B) SDA Corp. stock is fairly priced


C) SDA Corp. stock's alpha is -0.75%


D) SDA Corp. stock alpha is 0.75%


Q3) Asset A has expected return of 15% and Sharpe ratio of .4.  Asset B has expected return of 20% and Sharpe ratio of .3.  Risk-averse investor would favour portfolio using risk-free asset and _______.


A) Asset A


B) Asset B


C) No risky asset


D) Cannot tell from data given

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