Question

Are the following statements true? Give brief but precise explanations for your answers.

a)Stock A has expected return 10% and standard deviation 15%, and stock B has expected return 12% and standard deviation 13%. Then, no investor will buy stock A.

b)Diversification means that the equally weighted portfolio is optimal.

c)The CAPM predicts that the expected return on the market portfolio is always greater than the return on the riskless asset.

d)The CAPM predicts that a security with a beta of zero offers zero expected return.

e)The CAPM predicts that investors demand higher expected rates of return from stocks that have a high (positive) sensitivity to fluctuations in the stock market.

f)An investor who puts $10000 in T-bills and $20000 in the market portfolio will have a beta of 2.0.

Answer 1

@ True As stock B provides higher Deturm in lower risk also if we can prove it hy lalculating the Coefficient of variunies. (told the better) BI Covo 2) 15 13 10 12 15 |-023 False 16 Diversification does not mean that equally weighted pootfolo is optimal. diversification only! help's in minimizing the risk of portfolio © True As per CAPM the market Risk premium (Rm -RA! multiplied by B or sensitivity of stock with market and add in RE (Riskless Retum) to calculate expected retum. Therefore (APM predicts that expected retum is always than | Octum Riskless casset. (d Felse As per CAPM the at least pronide return of risk less security with the return asset. beto zero euvel to the

e True : this con he more Jeney by exomple: Suppose there are Beto B of Az 2 Reum of market - Retum of Riskless asset a two & 12%. 107. securities A&B Beta (B) of B The expected CAPM. return is per RE +(RM-REB 10+(12-10) 2 - A 2 Ba 207 (12-01 » 12%. Merefore security A have high (B) Beta with highey expected Retum. (1/3x0) + (2/3x1) = 0.67 The heta will be