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1) 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.  Within context of capital asset pricing model, __________.

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

B) SDA Corp. stock is fairly priced

C) SDA Corp. stock is underpriced

D) SDA Corp. stock alpha is 0.75%

2) Assume the multi-factor APT with two factors.  Risk premiums on factor 1 and factor 2 portfolios are respectively 5% and 3%. Stock A has a beta of 1.4 on factor 1, and a beta of 0.5 on factor 2.  The expected return on stock A is 14%.  If no arbitrage opportunities exist, risk-free rate of return is __________.

A) 5.0%

B) 5.5%

C) 6.0%

D) 6.5%

3) Security A has the expected rate of return of 12% and a beta of 1.10.  Market expected rate of return is 8% and the risk-free rate is 5%.  The alpha of the stock is __________.

A) -1.7%

B) 3.7%

C) 5.5%

D) 8.7%

4) The risk-free rate is 4%.  Expected market rate of return is 11%.  If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you must __________.

A) sell short stock X as it is overpriced

B) sell short stock X as it is underpriced

C) buy stock X as it is overpriced 

D) buy stock X as it is underpriced  

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