Question

1.) According to the CAPM, what is the expected return on a security given a market risk premium of 9%, a stock beta of 0.57, and a risk free interest rate of 1%? Put the answers in decimal place.

2.)   Consider the CAPM. The risk-free rate is 2% and the expected return on the market is 14%. What is the expected return on a portfolio with a beta of 0.5?   (Put answers in decimal points instead of percentage)

3.) A stock's beta will be negative if ____________.

	A.	its stock price has historically been very stable
	B.	market demand for the firm's shares is very low
	C.	its returns are positively correlated with market index returns
	D.	its returns are negatively correlated with market index returns

Answer 1

Answer 1

CAPM Formula;

Expected return = Risk Free Rate + Beta X market risk Premium(market rate - risk free rate)

Expected Return = 1% + .57 X(9%)

= 6.13%

Answer 2

Expected Portfolio Return= Risk Free Rate + Beta X market risk Premium(market rate - risk free rate)

= 2% + .5(14% - 2%)

= 2% + .5(12%)

= 2% + 6%

= 8%

Answer 3

A stock's beta will be negative if

(D) its returns are negatively correlated with market index returns

Reason ;- inverse relation with market