1. True or False Stocks with a beta of zero offer an expected return of zero.

2. True or False The CAPM implies that investors require a higher return to hold securities with a high level of volatility.

3. True or False You can construct a portfolio with a beta of 0.75 by investing 75% of the investment in T-bills and the remainder in the market portfolio.

4. The estimated factor sensitivities for Pacific Energy and the risk premiums associated with those factors are given below:

Beta Risk premium

Factor 1 1.20 4.5%

Factor 2 -0.50 2.7%

Factor 3 -0.15 4.3%

Calculate the required return using these estimates. Assume the T-bill rate is 4.7%.

5. You are comparing the performance of two portfolios. The Acme Fund averaged a return of 20% with a beta of 1.5 and the Balta Fund averaged a return of 15% with a beta of 1.2. The T-bill rate was 5% and the market return during the period was 13%. Which portfolio performed better? Why?