1.Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.

Company	$1 Discount Store		Everything $5
Forecast return	12%		11%
Standard deviation of returns	8%		10%
Beta	1.5		1.0

What would be the fair return for each company, according to the capital asset pricing model (CAPM)?

Company	Expected Return
$1 Discount Store	%
Everything $5	%

2.Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.

Company	$1 Discount Store		Everything $5
Forecast return	12%		11%
Standard deviation of returns	8%		10%
Beta	1.5		1.0

Characterize each company in the above table as underpriced, overpriced, or properly priced.

3.

Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate?

a. The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc.

b. The stock of Kaskin, Inc., has more total risk than Quinn, Inc.

c. The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc.

4.

A share of stock is now selling for $100. It will pay a dividend of $9 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 8% and the expected rate of return on the market is 18%.

5.Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________.

a. A; A

b. A; B

c. B; A

d. B; B