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4. (True or false) Suppose the CAPM holds. Suppose security X has a beta of 2 while security Y has a beta of 1. Then, assuming that the market risk premium (E(Rm) – r;) is positive, X should have a higher expected return than Y.

4. (True or false) Suppose the CAPM holds. Suppose security X has a beta of 2 while security Y has a beta of 1. Then, assuming that the market risk premium (E(Rm) – r;) is positive, X should have a higher expected return than Y.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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4. (True or false) Suppose the CAPM holds. Suppose security X has a beta of 2 while security Y has a beta of 1. Then, assuming that the market risk premium (E(Rm) – rf) is positive, X should have a higher expected return than Y. For the following two statements, decide whether the described phenomenon is a violation of the semi-strong form of the efficient market hypothesis, and why. 5. Apple has an annual product release event that is scheduled ahead of time. Apple stock prices almost always jump up on those events, presumably as investors learn about the new products of Apple at those events. 6. A bond issued by the Spartan government is traded on the market. The holder of one unit of the bond has claims to a $1,000 payment from the Spartan government one year later. The bond used to be trading at a price of $990. However, Sparta just lost the war with Athens, so the Spartan government was abolished and thus cannot repay at all. Further, the Athenian government repudiated any liability of the Spartan government. In response to this news, the price of the bond dropped to $400. 7. Suppose you are a long-horizon stock investor: you plan to hold stocks for long periods of time. You know that the stock market experiences booms and busts. Booms are often caused by other investors being overly optimistic, and busts are often caused by other investors being overly pessimistic and selling in panics. Is it more profitable for you to buy stocks in booms or busts? Why?
Transcribed Image Text:4. (True or false) Suppose the CAPM holds. Suppose security X has a beta of 2 while security Y has a beta of 1. Then, assuming that the market risk premium (E(Rm) – rf) is positive, X should have a higher expected return than Y. For the following two statements, decide whether the described phenomenon is a violation of the semi-strong form of the efficient market hypothesis, and why. 5. Apple has an annual product release event that is scheduled ahead of time. Apple stock prices almost always jump up on those events, presumably as investors learn about the new products of Apple at those events. 6. A bond issued by the Spartan government is traded on the market. The holder of one unit of the bond has claims to a $1,000 payment from the Spartan government one year later. The bond used to be trading at a price of $990. However, Sparta just lost the war with Athens, so the Spartan government was abolished and thus cannot repay at all. Further, the Athenian government repudiated any liability of the Spartan government. In response to this news, the price of the bond dropped to $400. 7. Suppose you are a long-horizon stock investor: you plan to hold stocks for long periods of time. You know that the stock market experiences booms and busts. Booms are often caused by other investors being overly optimistic, and busts are often caused by other investors being overly pessimistic and selling in panics. Is it more profitable for you to buy stocks in booms or busts? Why?
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