2. A stock's beta equals. The market return is expected to be 8 percent. The risk-free rate equals 3%. What is the expected return on the stock based on the CAPM?

A. 5 percent

B. 8 percent

C. 10 percent

D. 13 percent

3. Suppose, during a given year, the return on an equal-weighted portfolio consisting of the 500 stocks in the S&P 500 is lower than the actual return on the S&P 500 (which is value-weighted). This means that the return of smaller stocks is _________ the return of larger stocks during the year.

A) higher than

B) lower than

4. At time = 0 you purchase 100 shares of a stock for the market price of $12 per share. At time = 1 the stock is worth $15 per share. Sometime after time = 1, but before time = 2, the stock has a 3:1 split. At time = 2 you sell all your shares for the market price of $8 per share. What is the return on your stock investment over the second period (i.e. from time=1 through time=2)?

1. A) 60%

2. B) 10%

3. C) 100%

4. D) 50%

5. E) 47%

5. If the covariance of returns between a stock and the market equals zero, then what does the beta of the stock equal?

a) Zero

b) One

c) It is negative

d) It is positive

e) Need to know the variance of the market return to determine

6. Your portfolio earned the following returns for the years 1996 1999: 20%, 50%, 30%, and 10%. The risk-free return during the sample period is 6%. What is the Sharpe Ratio of your portfolio?

A) 0.586 B) 0.385 C) 0.013 D) The same as any other portfolio if the CAPM is correct

E) Cannot be determined without more information

7. Assume the CAPM is correct and also that markets are efficient. You are looking at two different stocks. ILX has a beta of 1.25 and Macrosquish has a beta of 1.95. Which statement is true about these investments?

A) ILX is always a better addition to your portfolio.

B) Macrosquish is always a better addition to your portfolio.

C) The expected return on ILX will be the higher of the two.

D) You cannot tell which of the two will have the higher expected return without

further information.

E) The ILX stock has the same Security Market Line (SML) slope as does the Macrosquish stock.