Chapter 2: Q13I. (page 226)
If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently.
The correct answer would be: “Not Possible”
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What must be the beta of a portfolio with E (r P ) = 20%, if rf = 5% and E ( r M ) = 15%?
Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis?
The following table (for CFA Problems 7 and 8 ) shows risk and return measures for two portfolios.
When plotting portfolio R relative to the capital market line, portfolio R lies:
a. On the CML.
b. Below the CML.
c. Above the CML.
d. Insufficient data given.
You’ve just decided upon your capital allocation for the next year, when you realize that you’ve underestimated both the expected return and the standard deviation of your risky portfolio by 4%. Will you increase, decrease, or leave unchanged your allocation to risk-free T-bills?
According to the theory of arbitrage:
a. High-beta stocks are consistently overpriced.
b. Low-beta stocks are consistently overpriced.
c. Positive alpha investment opportunities will quickly disappear.
d. Rational investors will pursue arbitrage consistent with their risk tolerance.
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