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 __________.
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 __________.
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%