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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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