1. Let the multi-factor APT with two factors.  Risk premiums on factor 1 and factor 2 portfolios are respectively 5% and 3%.  Stock A has beta of 1.4 on factor 1, and beta of 0.5 on factor 2.  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%

2. Security A has expected rate of return of 12% and beta of 1.10.  Market expected rate of return is 8% and risk-free rate is 5%.  Alpha of stock is __________.

A) -1.7%

B) 3.7%

C) 5.5%

D) 8.7%

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

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

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

A) Asset A

B) Asset B

C) No risky asset

D) Can't tell from the data given

5. 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 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%