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Q1) Consider CAPM. Risk-free rate is 5% and expected return on market is 15%. Compute the beta on a stock with expected return of 12%?


A) .5


B) .7


C) 1.2


D) 1.4


Q2) Consider multi-factor APT with two factors. Portfolio A has beta of 0. 5 on factor 1 and a beta of 1.25 on factor 2. Risk premiums on factors 1 and 2 portfolios are 1% and 7% respectively. Risk-free rate of return is 7%. Expected return on portfolio A is __________ if no arbitrage opportunities exist.


A) 13.5%


B) 15.0%


C) 16.25%


D) 23.0%


Q3) Security X has expected rate of return of 13% and a beta of 1.15. Risk-free rate is 5% and market expected rate of return is 15%. According to capital asset pricing model, security X is __________.


A) fairly priced


B) overpriced


C) underpriced


D) None of the above

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