question 1:

The security market line (SML) shows the relationship between beta and expected return.

The following graph shows stocks' betas () and expected returns ():

Assume that the CAPM holds and expectations of stocks' returns and betas are correctly measured.

Which statement is NOT correct?

a.

The price of Stock B will fall, and the excess return of Stock B will rise.

b.

Stock A has a negative excess return (a negative alpha).

c.

Stock E is fairly priced.

d.

Stock C has the same systematic risk as the market portfolio.

e.

Rational investors should sell Stock D.

Question 2:

A firm has a debt-to-equity ratio of 1:1.

The firms debt beta is 0.2.

Five-year government bonds yield 5% pa with a coupon rate of 8% pa. The market's expected dividend return is 3% pa and its expected capital return is 7% pa.

The firm stocks next dividend is expected to be $1, paid one year from now. Dividends are expected to be paid annually and grow by 1% pa forever. The current stock price $10.

The corporate tax rate is 30%. Assume a classical tax system.

Which statement is NOT correct?

a.

The beta of the firms assets is 0.7.

b.

The firms after-tax WACC is 7.6% pa.

c.

The expected return on equity is 11% pa.

d.

The expected return on debt is 8.4% pa.

e.

The beta of the firm's equity is 1.2.

Question 3:

You buy a stock from the capital market.If the capital market is semi-strong efficient, which of the following statements is NOT correct?

a.

The technical analysis of publicly available information will lead to abnormal returns.

b.

Past returns cannot be used to predict future stock returns.

c.

The stock is fairly priced.

d.

Stock prices reflect all publicly available information.

e.

You cannot earn any abnormal returns above the required return by trading on public information.