Q1. Consider the multi-factor APT with two factors.  The risk premiums on the 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, the risk-free rate of return is __________.

A) 5.0%

B) 5.5%

C) 6.0%

D) 6.5%

Q2. Security A has an expected rate of return of 12% and a beta of 1.10.  The 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%

Q3. The risk-free rate is 4%.  The 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 should __________.

A) buy stock X because it is overpriced

B) buy stock X because it is underpriced

C) sell short stock X because it is overpriced

D) sell short stock X because it is underpriced

Q4. Asset A has an expected return of 15% and a Sharpe ratio of .4.  Asset B has an expected return of 20% and a Sharpe ratio of .3.  A risk-averse investor would prefer a portfolio using the risk-free asset and _______.

A) asset A

B) asset B

C) no risky asset

D) can't tell from the data given

Q5. The expected return on the market portfolio is 15%.  The risk-free rate is 8%.  The expected return on SDA Corp. common stock is 16%.  The beta of SDA Corp. common stock is 1.25.  Within the context of the 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%

Q6. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.  Portfolio X has an expected return of 14% and a beta of 1.00. Portfolio Y has an expected return of 9.5% and a beta of 0.25.  In this situation, you would conclude that portfolios X and Y __________.

A) are in equilibrium

B) offer an arbitrage opportunity

C) are both underpriced

D) are both fairly priced

Q7. What is the expected return on a stock with a beta of 0.8, given a risk free rate of 3.5% and an expected market return of 15.6%?

A) 3.8%

B) 13.2%

C) 15.6%

D) 19.1%

Q8. If the only data available is that the beta of a stock is 1.4, what is the likely return on an investment in this stock if the market falls 5%?

A) -6%

B) -5%

C) +5%

D) +6%

Q9. The risk premium for exposure to aluminum commodity prices is 4% and the firm has a beta relative to aluminum commodity prices of 0.6. The risk premium for exposure to GDP changes is 6% and the firm has a beta relative to GDP of 1.2. If the risk free rate is 4.0%, what is the expected return on this stock?

A) 10.0%

B) 11.5%

C) 13.6%

D) 14.0%