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3 Module 2 1. The tangency portfolio is defined as the portfolio of risky assets that has the … A) Smallest variance B) Highest expected return C) Highest Sharpe Ratio 2. The Capital Asset Pricing Model (CAPM) has the prediction that stock returns should be related to the … A) Standard deviation of a firm’s stock returns B) Idiosyncratic or firm‐specific risk of a firm’s stock C) Systematic or market risk of a firm’s stock 3. Suppose a stock is estimated to have a beta (E) of 0.5. This stock has the same risk as a portfolio that is … A) 100% invested in the risk‐free asset B) 50% invested in the risk‐free asset and 50% invested in the overall stock market C) 100% invested in the overall stock market D) 150% invested in the overall stock market and ‐50% in the risk‐free asset (i.e., borrowing to invest even more in the stock market) 4. Randomly adding more stocks to a portfolio will eventually reduce the variability of the portfolio performance to near zero as long as the returns of the stocks are … A) Independent of each other (i.e., have zero correlation) B) Positively related to each other (i.e., have positive correlation) 5. Historically, a portfolio consisting of small‐value stocks has yielded a positive alpha (D) in a CAPM regression. A) True B) False 6. In the CAPM, an asset with a small beta (E) will also have a low R‐squared in the CAPM regression. A) True B) False 7. The beta (E) of the risk‐free asset in the CAPM is … A) 0 B) 0.5 C) 1 8. Suppose a mutual fund yielded a return of 14% last year. Its CAPM beta (E) is 1.2. The risk‐ free rate was 5% last year and the stock market return was 10% last year. What is the required return (i.e., benchmark return) for the mutual fund in the CAPM? 4 A) 5 B) 6 C) 7 D) 8 E) 9 F) 10 G) 11 H) 12 I) 13 J) 14 9. Suppose a mutual fund yielded a return of 14% last year. Its CAPM beta (E) is 1.2. The risk‐ free rate was 5% last year and the stock market return was 10% last year. What is the alpha (D) of the mutual fund? A) ‐5 B) ‐4 C) ‐3 D) ‐2 E) ‐2 F) ‐1 G) 0 H) 1 I) 2 J) 3 K) 4 L) 5 10. Suppose a mutual fund yielded a return of 14% last year. The risk‐free rate was 5% last year and the stock market return was 10% last year. Its CAPM alpha (D) is 0. What is beta (E) for the mutual fund in the CAPM? A) 0.2 B) 0.4 C) 0.6 D) 0.8 E) 1 F) 1.2 G) 1.4 H) 1.6 I) 1.8 J) 2.0 11. Suppose a stock is estimated to have a beta (E) of 1.5. This stock has the same risk as a portfolio that is … A) 100% invested in the risk‐free asset 5 B) 50% invested in the risk‐free asset and 50% invested in the overall stock market C) 100% invested in the overall stock market D) 150% invested in the overall stock market and ‐50% in the risk‐free asset (i.e., borrowing to invest even more in the stock market) 12. Other than beta (E), what else should be able to predict stock returns in a CAPM setting? A) Volatility of returns B) Whether the firm has value or growth characteristics C) Firm age D) Firm size (measured by the market capitalization of equity) E) All these should predict returns in a CAPM world F) Nothing else should predict returns in a CAPM world

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