Exam 25: Portfolio Theory and Asset Pricing Models

You are given the following returns on "the market" and Stock F during the last three years.We could calculate beta using data for Years 1 and 2 and then, after Year 3, calculate a new beta for Years 2 and 3.How different are those two betas, i.e., what's the value of beta 2 ? beta 1? (Hint: You can find betas using the Rise-Over-Run method, or using your calculator's regression function.) Year Market Stock F 1 6.10\% 6.50\% 2 12.90\% -3.70\% 3 16.20\% 21.71\%

We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20.She is in the process of buying 100 shares of Safety Corp.at $10 a share and adding it to her portfolio.Safety has an expected return of 15.0% and a beta of 2.00.The total value of your current portfolio is $9,000.What will the expected return and beta on the portfolio be after the purchase of the Safety stock? $\quad\underline{\text {Ip}}\quad\quad\underline{\text {bp}}$ a. $11.69 \% ; 1.22$ b. $12.30 \% ; 1.28$ c. $12.92 \% ; 1.34$ d. $13.56 \% ; 1.41$ e. $14.24 \% ; 1.48$

The slope of the SML is determined by the value of beta.

A stock you are holding has a beta of 2.0 and the stock is currently in equilibrium.The required rate of return on the stock is 15% versus a required return on an average stock of 10%.Now the required return on an average stock increases by 30.0% (not percentage points).The risk-free rate is unchanged.By what percentage (not percentage points) would the required return on your stock increase as a result of this event?

For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels),

Which of the following statements is CORRECT?

Calculate the required rate of return for the Wagner Assets Management Group, which holds 4 stocks.The market's required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund's assets are as follows: Stock Investment Beta A \ 200,000 1.50 B 300,000 -0.50 C 500,000 1.25 D 1,000,000 0.75

If the returns of two firms are negatively correlated, then one of them must have a negative beta.

Which of the following is NOT a potential problem with beta and its estimation?

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.