Chapter 9, Problem 3PS

A

Summary Introduction

To determine:

whether following statement is true or false-

"Stock with Beta of zero offers an expected rate of return of zero."

Introduction:

Beta of a stock represents the sensitivity of its return with the change in the market return.

Summary Introduction

(B)

To determine:

whether following statement is true or false-

"The CAPM implies that investor require a higher return to hold highly volatile securities."

Introduction:

Expected return of the security as per CAPM is given by:

Expected return = Risk free rate + Beta of the security* Market risk premium

Summary Introduction

(C)

To determine:

whether following statement is true or false-

"You can construct a portfolio with beta of 0.75 by investing 0.75 of the investment budget in T-bills and remainder in the market portfolio."

Introduction:

Beta of the portfolio is the weighted average beta.