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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I'm stuck in Question 4
Transcribed Image Text:tal Asset Pricing and Arbitrage Pricing Theory
2. Consider the statement: "If we can identify a portfolio with a higher Sharpe ratio than
the S&P 500 Index portfolio, then we should reject the single-index CAPM." Do you
agree or disagree? Explain. (LO 7-1)
3. Are the following true or false? Explain. (LO 7-5)
a. Stocks with a beta of zero offer an expected rate of return of zero.
b. The CAPM implies that investors require a higher return to hold highly volatile
securities.
c. You can construct a portfolio with a beta of 0.75 by investing 0.75 of the investment
budget in T-bills and the remainder in the market portfolio.
4. Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.
Company
$1 Discount Store
Everything $5
Forecast return
12%
11%
Standard deviation of returns
8%
10%
Beta
H1.5
1.0
What should be the expected rate of return for each company, according to the capital
asset pricing model (CAPM)? (LO 7-1)
5. Characterize each company in the previous problem as underpriced, overpriced, or prop-
erly priced. (LO 7-2)
O What is the expected rate of return for a stock that has a beta of 1 if the expected return
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