Problem 1. Consider the following two stocks, A and B. Stock A has an expected return of 10%, 10% standard deviation, and a beta of 1.20. Stock B has an expected return of 14%, 25% standard deviation, and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy if we include the stock in a well diversified a portfolio because _________.

B, it offers better Sharpe ratio

B, it offers better alpha

A, it offers better alpha

A, it offers better Sharpe ratio

Problem 2. Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to changes in the market as the returns of Stock B.

A. Slightly less

B. 20% more

C. 20% less

D. Slightly more

Problem 3. Consider the CAPM. The risk-free rate is 1% and the expected return on the market is 8%. What is the expected return on a portfolio with a beta of 1.9? (Put answers in decimal points instead of percentage)

Problem 4. According to the CAPM, what is the expected return on a security given a market risk premium of 13%, a stock beta of 1.73, and a risk free interest rate of 2%? Put the answers in decimal place.

Problem 5. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

A. The covariance of the stock and bond portfolio will be positive.

B. The returns on the stock and bond portfolio tend to move together.

C. The returns on the stock and bond portfolio tend to move inversely.

D. The returns on the stock and bond portfolio tend to vary independently of each other.

Problem 6. Risk that can be eliminated through diversification is called ______.

A. firm-specific risk

B. Beta

C. Total risk

D. Systematic risk

Problem 7. You have a portfolio consisting of Intel, GE and Con Edison. You put 20% in Intel, 65% in GE and 15% in Con Edison. Intel, GE and Con Edison have betas of 1.62, 0.89 and 1.09 respectively. What is your portfolio beta?

Problem 8. A stock's beta will be negative if ____________.

A. its returns are positively correlated with market index returns

B. its returns are negatively correlated with market index returns

C. its stock price has historically been very stable

D. market demand for the firm's shares is very low