2. Consider the statement: "If we can identify a portfolio with a higher Sharpe ratio titan the S&P 500 Index portfolio, then we should reject the single-index CAPM." Do you agree or disagree ? Explain. 3. Are the following true or false ? Explain. (3) Stocks with a beta of zero offer an expected rate of return of zero. (b) The CAPM implies that investors require a higher return to hold highly volatile securities. (c} You can construct a portfolio with a beta of 0.75 by investing 0.75 of the investment budget in government bonds and the remainder in the market portfolio. 4. Here are data on 2 companies. The rate of government bond is 4% and the market risk premium is 6%. Com} an $1 Discount Store Eve thin $5 Forecast return 12% 1 1% Standard deviation of 6% 10% returns Beta 1 .5 l .0 What should be the expected rate of return for each company, according to the capital asset pricing model (CAPM) ? 5. Characterise each company in the previous problem as underpriced, overpriced or properly priced. 6. What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 15% '3 (a) l 5% (b) More than 15% (c} Cannot be determined without the risk-free rate. 7. Kaskin Inc. stock has a beta of 1.2 and Quim Inc. stock has a beta of 0.6. TWhich of the following statements is most accurate ? (a} The equilibrium expected rate of return is higher for Kaskin than for Quinn. (b) The stock of Kaskin has higher volatility than Quinn. (c) The stock of Quinn has more systematic risk than that of Kaskin. 9 What must be the beta of a portfolio with E(rp) = 20%, if rf = 5% and E(rm) = 15% ? 9. The market price of a security is $40. Its expected rate of return is 13%. The risk-free rate is 7%, and the market risk premium is 8%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity