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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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