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    Practice Question 6&7 S

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    The document contains practice questions about portfolio theory and the capital asset pricing model (CAPM). It includes questions about generating an efficient portfolio from stocks with given expected returns and standard deviations, calculating the capital market line given expected market returns and risk-free rates, and determining if a stock is overpriced or underpriced based on its expected returns, dividends, price, and beta.

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    Practice Question 6&7 S

    Uploaded by

    mehalbisht456
    10 views32 pages
    The document contains practice questions about portfolio theory and the capital asset pricing model (CAPM). It includes questions about generating an efficient portfolio from stocks with given expected returns and standard deviations, calculating the capital market line given expected market returns and risk-free rates, and determining if a stock is overpriced or underpriced based on its expected returns, dividends, price, and beta.

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    Financial Economics Sem 5

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    The document contains practice questions about portfolio theory and the capital asset pricing model (CAPM). It includes questions about generating an efficient portfolio from stocks with given expected returns and standard deviations, calculating the capital market line given expected market returns and risk-free rates, and determining if a stock is overpriced or underpriced based on its expected returns, dividends, price, and beta.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    10 views32 pages

    Practice Question 6&7 S

    Uploaded by

    mehalbisht456
    The document contains practice questions about portfolio theory and the capital asset pricing model (CAPM). It includes questions about generating an efficient portfolio from stocks with given expected returns and standard deviations, calculating the capital market line given expected market returns and risk-free rates, and determining if a stock is overpriced or underpriced based on its expected returns, dividends, price, and beta.

    Copyright:

    © All Rights Reserved
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    of 32

    Practice Questions

    Portfolio Theory and CAPM


    23E23E3E3
    23E23E3E3
    • Question
    Question:

    Suppose that the universe of available risky securities


    consists of a large number of stocks, identically distributed
    with E (r) = 15%, = 60%, and a common correlation
    coef cient of = 0.5 .

    a. What are the expected return and standard deviation of an


    equally weighted risky portfolio of 25 stocks?

    b. What is the smallest number of stocks necessary to


    generate an ef cient portfolio with a standard deviation equal
    to or smaller than 43%?
    fi
    𝜌
    fi
    𝝈
    (L7.1) (Capital market line) Assume that the expected rate of
    return on the market portfolio is 23% and the rate of return on T-
    bills (the risk-free rate) is 7%. The standard deviation of the
    market return is 32%.
    Assume that the market portfolio is ef cient.

    a) What is the equation of the capital market line?

    b) (i) If an expected return of 39% is desired, what is the


    standard deviation of this position?
    (ii) If you have $1000 to invest, how should you allocate it to
    achieve the above position

    c) If you invest $300 in the risk-free asset and $700 in the market
    portfolio, how much money should you expect to have at the end
    of the year?
    fi
    Q.
    Ans.
    Q. Suppose the rate of return on short-term government
    securities (perceived to be risk-free) is about 5%. Suppose
    also that the expected rate of return required by a portfolio
    with a beta of 1 is 12%. According to the capital asset pricing
    model:
    a. What is the expected rate of return on the market portfolio?
    b. What would be the expected rate of return on a stock with β
    = 0?
    c. Suppose you consider buying a share of stock at $40. The
    stock is expected to pay $3 dividends next year and you
    expect it to sell then for $41. The stock risk has been
    evaluated at β = -0.5. Is the stock overpriced or underpriced?

    (Source: Bodie Kane Marcus, 10 ed., Chapter 9 Q 21.)


    Q.

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