Chapter 2: Q28I. (page 228)
Assume both portfolios A and B are well diversified, that E ( r A ) = 14% and E ( r B ) = 14.8%. If the economy has only one factor, andβA= 1 whileβB = 1.1, what must be the risk-free rate?
The correct answer for risk free rate rf= 6%
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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 .
An investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of:
a. A dominance argument.
b. The mean-variance efficient frontier.
c. Arbitrage activity.
d. The capital asset pricing model.
Which of the following observations would provide evidence against the semi-strong form of the efficient market theory? Explain.
a. Mutual fund managers do not on average make superior returns.
b. You cannot make superior profits by buying (or selling) stocks after the announcement of an abnormal rise in dividends.
c. Low P/E stocks tend to have positive abnormal returns.
d. In any year approximately 50% of pension funds outperform the market.
“Highly variable stock prices suggest that the market does not know how to price stocks.” Respond.
According to the efficient market hypothesis:
a. High-beta stocks are consistently overpriced.
b. Low-beta stocks are consistently overpriced.
c. Positive alphas on stocks will quickly disappear.
d. Negative-alpha stocks consistently yield low returns for arbitrageurs
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