Question

The return on the market portfolio is 12% and the risk free rate is 4%. If a security has a level of systematic risk equal to 0.75, I Its equilibrium rate of return is 10% II Its eqilibrium rate of return is less than 12% because its risk is lower than M III Its equilibrium rate of return is greater than 4% because it is risky Question 2 A risk-averse investor Question 3 Security A has a standard deviation of 4.0. The risk free rate of return is 4%. If the market portfolio (M) has a Sharpe ratio of 2 , the equilibrium rate of return for A is Question 4 Security A has a systematic risk of Beta =0.75. The return on the market portfolio is 12% and the risk-free rate is 4%. If A has an observed return of 8% 1 A is over-priced II A is under-priced III A should be sold Question 5 Which of the following statements are true IThe higher the risk the higher the expected return II As rates of return increase, asset prices increase III There is a negative relationship between asset prices and rates of return Friday, September 2, 2022 10:13:46 AM CDT

Answer 1

1. II - Its equilibrium rate of return is less than 12% because its risk is lower than M

2. Would prefer lower risk investments and require higher expected returns to assume higher risks

3. 7%

4. II - A is under-priced

5. I - The higher the risk the higher the expected return.