Chapter 2: Q17I. (page 143)
What do you think would happen to the expected return on stocks if investors perceived an increase in the volatility of stocks?
The investor would demand a higher risk premium.
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Which of the following statements is true? Explain.
a. It is possible that the APT is valid and the CAPM is not.
b. It is possible that the CAPM is valid and the APT is not.
According to CAPM, the expected rate of return of a portfolio with a beta of 1 and an alpha of 0 is:
a. Between r M and r f .
b. The risk-free rate, r f.
c.β( r M - r f ).
d. The expected return on the market, rM .
Question: The stock of Business Adventures sells for $40 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:
a. Calculate the expected holding-period return and standard deviation of the holding period return. All three scenarios are equally likely.
b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%.
Dollar-cost averaging means that you buy equal dollar amounts of a stock every period, for example, $500 per month. The strategy is based on the idea that when the stock price is low, your fixed monthly purchase will buy more shares, and when the price is high, fewer shares. Averaging over time, you will end up buying more shares when the stock is cheaper and fewer when it is relatively expensive. Therefore, by design, you will exhibit good market timing. Evaluate this strategy.
Use the following scenario analysis for stocks X and Y to answer CFA Questions
Question: What are the standard deviations of returns on stocks X and Y?
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