Chapter 2: Question 8-23I (page 260)
Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis?
The correct answer is “not necessarily a violation of the efficient market hypothesis”.
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Consider the following data for a one-factor economy. All portfolios are well diversified.
Suppose another portfolio E is well diversified with a beta of 2/3 and expected return of 9%. Would an arbitrage opportunity exist? If so, what would the arbitrage strategy be?
“If all securities are fairly priced, all must offer equal expected rates of return.” Comment
a. Suppose you forecast that the standard deviation of the market return will be 20% in the coming year. If the measure of risk aversion in Equation 5.13is A 5 4, what would be a reasonable guess for the expected market risk premium? b. What value of A is consistent with a risk premium of 9%? c. What will happen to the risk premium if investors become more risk tolerant? (LO 5-4)
If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently.
An analyst estimates that a stock has the following probabilities of return depending on the state of the economy. What is the expected return of the stock?
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