Use the information below for Parts A -E .

Stock X, Y, and Z are all part of the S&P 500, or large cap US index. The S&P 500 is considered the market and each stocks beta measures the stocks sensitivity to the. A US ten year bond is a reasonable proxy for the risk free rate. Below is some information on a $400M Portfolio XYZ, which is comprised of Stocks X, Y, and Z.

	Stock X	Stock Y	Stock Z
Price Per Share ($)	$ 60.92	$ 45.61	$ 59.50
Weight in Portfolio XYZ ($M)	$ 100.0	$ 200.0	$ 100.0
Dividend Yield	0.00%	0.00%	2.00%
Variance of Returns	3.60x10^-3	1.00x10^-2	1.44x10^-2
Beta of Stock	0.80	1.25	1.50
Expected Total Return (CAPM)	6.70%	9.63%	11.25%
Risk Free Rate (US 10 Yr)	1.50%	1.50%	1.50%

A. Using the expected total return of each stock using the CAPM/SML, Portfolio XYZ will have an expected return of __________ and __________.

1. 9.2% ; 9.3% of market risk

2. 9.3% ; 9.3% of market risk

3. 9.3% ; less market risk than the S& P 500

4. 9.2% ; the same amount of market risk as the S&P 500

5. 9.3% ; more market risk than the S&P 500

B. Recall that the Total Return of a stock can be decomposed into dividend yield and capital gains yield. Use the CAPM/SML to predict each stocks closing price one year from today. One year from today, which of the following statements is (are) TRUE:

I. Stock Z is expected to close at the same price as Stock X

II Stock Z is expected to close at a lower price than Stock Y

III. Stock Y is expected to close at a higher price than Stock X

1. I

2. II

3. III

4. II, III

5. None of the statements

C. The excess return an investor requires to take on the added risk of investing S&P 500 as opposed to a 10 Year US bond (i.e. the market risk premium) is:

1. 6.50%

2. 8.00%

3. 8.25%

4. 9.50%

5. 9.75%

D. Unlike the Treynor Ratio (aka the risk-to-reward ratio on p. 369), the Sharpe Ratio uses total risk instead of systematic risk in the denominator of the calculation. Based on each stocks Sharpe Ratio:

1. Stock X is a better investment than Stock Y or Z

2. Stock Y is a better investment than Stock X or Z

3. Stock Z is a better investment than Stock Y or X

4. Stock Y & Z are both equally better than Stock X

5. Stock X, Y, & Z are equally good investments based on systematic risk

E. If you sold $100 M of Stock Z to buy $100 M of stock X, which of the following statements are TRUE:

I. The portfolios systematic risk would likely decrease

II The portfolios non-diversifiable risk would likely increase

III. The portfolios expected return will most likely increase

1. I

2. II

3. III

4. I&II

5. All of the statements