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