Question

Suppose the risk-free rate is 4%, and the market risk premium is 5% [NOTE: market risk premium means the whole term of E(r_m) - r_f ]. Suppose you bought a share of stock at a price of $40 at the beginning of a year. The stock paid a dividend of $4 during this year and you sold the stock for $39 at the end of the year. Suppose the stock’s CAPM beta is 0.5. Based on the information above, we know that this stock has a __(i)__ and it was __(ii)__ at the beginning of the year?

Question 4 options:

A)	(i) positive alpha; (ii) underpriced

B)	(i) positive alpha; (ii) overpriced

C)	(i) negative alpha; (ii) underpriced

D)	(i) negative alpha; (ii) overpriced

The common stock of National Fuel Gas (NFG), headquartered in Williamsville, NY. has a standard deviation of 40 percent as compared to the market standard deviation of 20 percent. The covariance of this stock with the market is 0.02. What is the beta of this stock?

Question 5 options:

A)

0.10

B)

0.25

C)

0.50

D)

1.00

E)

1.25

As the interest rate increases, the bond price __________.

Question 6 options:

A)	keeps unchanged

B)	increases at a diminishing rate

C)	decreases at a diminishing rate

D)	increases at an increasing rate

E)	decreases at an increasing rate

Answer 1

1. Required rate of return using CAPM =Risk Free Rate+Beta*Market risk premium =4%+0.5*5% =6.5%
Expected return =(Price at the end of year-Price at beginning + Dividend )/Price at beginning =(39-40+4)/40=7.5%
Alpha =7.5%-6.5% =1%
If alpha is positive stock is underpriced.
Option A is correct option (i) positive alpha; (ii) underpriced

2. Beta =Covariance/(Standard Deviation of NFG*Standard Deviation of NY) =0.02/(40%*20%) =0.25(Option a is correct option)

3.Option c is correct option. decreases at a diminishing rate