Vous êtes sur la page 1sur 42

HTML

G o o g l e HTML
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
True/False
Page1

CHAPTER24
PortfolioTheory,AssetPricingModels,andBehavioral
Finance
PleaseseetheprefaceforinformationontheAACSB
letterindicators(F,M,
etc.)onthesubjectlines.

True/False
Easy:
(24.4)SML
FN
Answer:bEASY
1.
TheslopeoftheSMLisdeterminedbythevalueofbeta.
a.True
b.False
(24.4)SML
FN
Answer:aEASY
2.
IfyouplottedthereturnsofSelleck&Companyagainst
thoseofthe
marketandfoundthattheslopeofyourlinewas
negative,theCAPMwould
indicatethattherequiredrateofreturnonSellecks
stockshouldbe
lessthantheriskfreerateforawelldiversified
investor,assuming
thattheobservedrelationshipisexpectedtocontinuein
thefuture.
a.True
b.False
(24.5)Betacoefficient
FN

Answer:aEASY
3.
Ifthereturnsoftwofirmsarenegativelycorrelated,
thenoneofthem
musthaveanegativebeta.
a.True
b.False
(24.5)Betacoefficient
FN
Answer:bEASY
4.
Astockwithabetaequalto1.0haszerosystematic(or
market)risk.
a.True
b.False
(24.5)Betacoefficient
FN
Answer:aEASY
5.
Itispossibleforafirmtohaveapositivebeta,even
ifthe
correlationbetweenitsreturnsandthoseofanotherfirm
arenegative.
a.True
b.False

Page 2
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page2
True/False
Chapter24:PortfolioTheory
(24.5)Portfoliorisk
FN
Answer:aEASY
6.
Inportfolioanalysis,weoftenuseexpost(historical)
returnsand
standarddeviations,despitethefactthatweare
interestedinexante
(future)data.
a.True
b.False

Medium:
(24.2)Riskaversion
FN
Answer:aMEDIUM
7.
Ifinvestorsareriskaverseandholdonlyonestock,we
canconclude
thattherequiredrateofreturnonastockwhose
standarddeviationis
0.21willbegreaterthantherequiredreturnonastock
whosestandard
deviationis0.10.However,ifstocksareheldin
portfolios,itis
possiblethattherequiredreturncouldbehigheronthe
lowstandard
deviationstock.
a.True
b.False
(24.3)CAPM
FN
Answer:bMEDIUM
8.
TheCAPMisamultiperiodmodelwhichtakesaccountof
differencesin
securitiesmaturities,anditcanbeusedtodetermine
therequiredrate
ofreturnforanygivenlevelofsystematicrisk.
a.True
b.False
(24.4)SML
FN
Answer:bMEDIUM
9.
TheSMLrelatesrequiredreturnstofirmssystematic(or
market)risk.
Theslopeandinterceptofthislinecanbeinfluencedby
managerial
actions.
a.True
b.False
(24.4)SML
FN
Answer:bMEDIUM
10.TheYaxisinterceptoftheSMLindicatesthereturn

onanindividual
assetwhentherealizedreturnonanaverage(b=1)
stockiszero.
a.True
b.False
(24.5)Portfoliobeta
FN
Answer:bMEDIUM
11.Wewillalmostalwaysfindthatthebetaofa
diversifiedportfoliois
lessstableovertimethanthebetaofasinglesecurity.
a.True
b.False

Page 3
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
True/False
Page3
(24.7)ArbitragepricingtheoryFN
Answer:bMEDIUM
12.Arbitragepricingtheoryisbasedonthepremisethat
morethanone
factoraffectsstockreturns,andthefactorsare
specifiedtobe(1)
marketreturns,(2)dividendyields,and(3)changesin
inflation.
a.True
b.False

Page 4
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page4
ConceptualQuestions
Chapter24:PortfolioTheory

MultipleChoice:Conceptual
Easy:
(24.5)Riskaversion
CN
Answer:bEASY

13.Youhavethefollowingdataonthreestocks:
StockStandardDeviation
A
0.15
0.79
Beta
B
0.25
0.61
C
0.20
1.29
Asariskminimizer,youwouldchooseStockifitisto
beheldin
isolationandStockifitistobeheldaspartofa
well
diversifiedportfolio.
a.A;A.
b.A;B.
c.B;C.
d.C;A.
e.C;B.
(24.5)Riskmeasures
CN
Answer:dEASY
14.Whichisthebestmeasureofriskforanassetheld
inisolation,and
whichisthebestmeasureforanassetheldina
diversifiedportfolio?
a.Variance;correlationcoefficient.
b.Standarddeviation;correlationcoefficient.
c.Beta;variance.
d.Coefficientofvariation;beta.
e.Beta;beta.
(24.5)Betacoefficient
CN
Answer:cEASY
15.WhichofthefollowingisNOTapotentialproblem
withbetaandits
estimation?
a.Sometimesasecurityorprojectdoesnothaveapast
historywhichcan
beusedasabasisforcalculatingbeta.
b.Sometimes,duringaperiodwhenthecompanyis

undergoingachangesuch
astowardmoreleverageorriskierassets,thecalculated
betawillbe
drasticallydifferentthanthetrueorexpected
futurebeta.
c.Thebetaofthemarket,canchangeovertime,
sometimesdrastically.
d.Sometimesthepastdatausedtocalculatebetadonot
reflectthe
likelyriskofthefirmforthefuturebecauseconditions
havechanged.
e.Thereisawideconfidenceintervalaroundatypical
stocksestimated
beta.

Page 5
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
ConceptualQuestions
Page5
(24.5)Betacoefficient
CN
Answer:dEASY
16.StockAsbetais1.5andStockBsbetais0.5.
Whichofthefollowing
statementsmustbetrueaboutthesesecurities?(Assume
market
equilibrium.)
a.Whenheldinisolation,StockAhasgreaterriskthan
StockB.
b.StockBmustbeamoredesirableadditiontoa
portfoliothanStockA.
c.StockAmustbeamoredesirableadditiontoa
portfoliothanStockB.
d.TheexpectedreturnonStockAshouldbegreaterthan
thatonStockB.
e.TheexpectedreturnonStockBshouldbegreaterthan
thatonStockA.

Medium:
(24.2)Marketequilibrium
CN
Answer:aMEDIUM

17.Formarketstobeinequilibrium(thatis,forthere
tobenostrong
pressureforpricestodepartfromtheircurrentlevels),
a.Theexpectedrateofreturnmustbeequaltothe
requiredrateof
return;thatis,
r
r=
.
b.Thepastrealizedrateofreturnmustbeequaltothe
expectedrateof
return;thatis,
r
r=
.
c.Therequiredrateofreturnmustequaltherealized
rateofreturn;
thatis,
r
r=
.
d.allcompaniesmustpaydividends.
e.nocompaniescanbeindangerofdeclaringbankruptcy.
(24.4)CML
CN
Answer:eMEDIUM
18.WhichofthefollowingstatementsisCORRECT?
a.TheCapitalMarketLine(CML)isacurvedlinethat
connectsthe
riskfreerateandthemarketportfolio.
b.TheslopeoftheCMLis(rMrRF)/bM.
c.AllportfoliosthatlieontheCMLtotherightofM
areinefficient.
d.AllportfoliosthatlieontheCMLtotheleftofM
areinefficient.
e.TheslopeoftheCMLis(rMrRF)/M..
(24.5)PortfolioriskandreturnCN
Answer:cMEDIUM
19.Inaportfolioofthreedifferentstocks,whichof
thefollowingcould
NOTbetrue?
a.Theriskinessoftheportfolioislessthanthe
riskinessofeachof
thestocksiftheywereheldinisolation.

b.Theriskinessoftheportfolioisgreaterthanthe
riskinessofone
ortwoofthestocks.
c.Thebetaoftheportfolioislessthanthebetasof
eachofthe
individualstocks.
d.Thebetaoftheportfolioisgreaterthanthebetaof
oneortwoof
theindividualstocksbetas.
e.Thebetaoftheportfoliocannotbeequalto1.

Page 6
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page6
ConceptualQuestions
Chapter24:PortfolioTheory
(24.5)Betacoefficient
CN
Answer:dMEDIUM
20.Youhavethefollowingdataon(1)theaverageannual
returnsofthe
marketforthepast5yearsand(2)similarinformation
onStocksAandB.
Whichofthepossibleanswersbestdescribesthe
historicalbetasforA
andB?
YearsMarketStockA
1
0.03
0.16
0.05
StockB
20.05
0.20
0.05
3
0.01
0.18
0.05
40.10
0.25
0.05

5
0.06
0.14
0.05
a.bA>0;bB=1.
b.bA>+1;bB=0.
c.bA=0;bB=1.
d.bA<0;bB=0.
e.bA<1;bB=1.
(24.5)Betacalculation
CN
Answer:cMEDIUM
21.WhichofthefollowingstatementsisCORRECT?
a.ThetypicalR2forastockisabout0.3andthetypical
R2fora
portfolioisalsoabout0.3.
b.ThetypicalR2forastockisabout0.94andthe
typicalR2fora
portfolioisabout0.6.
c.ThetypicalR2forastockisabout0.3andthetypical
R2fora
largeportfolioisabout0.94.
d.ThetypicalR2forastockisabout0.94andthe
typicalR2fora
portfolioisalsoabout0.94.
e.ThetypicalR2forastockisabout0.6andthetypical
R2fora
portfolioisalsoabout0.6.
(24.5)Characteristicline
CN
Answer:eMEDIUM
22.WhichofthefollowingstatementsisCORRECT?
a.CharacteristiclineisanothernamefortheSecurity
MarketLine.
b.Thecharacteristiclineistheregressionlinethat
resultsfrom
plottingthereturnsonaparticularstockversusthe
returnsona
stockfromadifferentindustry.
c.Theslopeofthecharacteristiclineisthestocks
standard
deviation.
d.Thedistanceoftheplotpointsfromthe
characteristiclineisa

measureofthestocksmarketrisk.
e.Thedistanceoftheplotpointsfromthe
characteristiclineisa
measureofthestocksdiversifiablerisk.

Page 7
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
ConceptualQuestions
Page7
(24.6)TestsoftheCAPM
CN
Answer:aMEDIUM
23.WhichofthefollowingstatementsisCORRECT?
a.Testshaveshownthatthebetasofindividualstocks
areunstableover
time,butthatthebetasoflargeportfoliosare
reasonablystable
overtime.
b.RichardRollhasarguedthatitispossibletotest
theCAPMtoseeif
itiscorrect.
c.Testshaveshownthattherisk/returnrelationship
appearstobe
linear,buttheslopeoftherelationshipisgreaterthan
that
predictedbytheCAPM.
d.Testshaveshownthatthebetasofindividualstocks
arestableover
time,butthatthebetasoflargeportfoliosaremuch
lessstable.
e.Themostwidelycitedstudyofthevalidityofthe
CAPMisone
performedbyModiglianiandMiller.
(24.8)FamaFrenchmodel
CN
Answer:aMEDIUM
24.WhichofthefollowingarethefactorsfortheFama
Frenchmodel?
a.Theexcessmarketreturn,asizefactor,andabook
tomarket
factor.

b.Theexcessmarketreturn,adebtfactor,andabook
tomarket
factor.
c.Theexcessmarketreturn,asizefactor,andadebt.
d.Adebtfactor,asizefactor,andabooktomarket
factor.
e.Theexcessmarketreturn,anindustrialproduction
factor,anda
booktomarketfactor.

Hard:
(24.2)Portfoliosandrisk
CN
Answer:cHARD
25.Assumeaneconomyinwhichtherearethree
securities:StockAwithrA=
10%andA=10%;StockBwithrB=15%andB=20%;anda
risklessasset
withrRF=7%.StocksAandBareuncorrelated(rAB=0).
Whichofthe
followingstatementsismostCORRECT?
a.Theexpectedreturnontheinvestorsportfoliowill
probablyhave
anexpectedreturnthatissomewhatabove15%anda
standard
deviation(SD)ofapproximately20%.
b.Theexpectedreturnontheinvestorsportfoliowill
probablyhave
anexpectedreturnthatissomewhatbelow10%anda
standard
deviation(SD)ofapproximately10%.
c.Theexpectedreturnontheinvestorsportfoliowill
probablyhave
anexpectedreturnthatissomewhatbelow15%anda
standard
deviation(SD)thatisbetween10%and20%.
d.Theinvestorsrisk/returnindifferencecurvewillbe
tangenttothe
CMLatapointwheretheexpectedreturnisintherange
of7%to
10%.
e.Sincethetwostockshaveazerocorrelation
coefficient,the
investorcanformarisklessportfoliowhoseexpected
returnisin

therangeof10%to15%.

Page 8
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page8
ConceptualQuestions
Chapter24:PortfolioTheory

Page 9
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
Problems
Page9

MultipleChoice:Problems
Easy:
(24.5)Portfoliobeta
CN
Answer:bEASY
26.Youholdadiversifiedportfolioconsistingofa
$5,000investmentin
eachof20differentcommonstocks.Theportfoliobetais
equalto
1.12.Youhavedecidedtosellaleadminingstock(b=
1.00)at
$5,000netandusetheproceedstobuyalikeamountofa
steelcompany
stock(b=2.00).Whatisthenewbetaoftheportfolio?
a.1.1139
b.1.1700
c.1.2311
d.1.2927
e.1.3573
(24.5)Portfoliobeta
CN
Answer:bEASY
27.Assumethatyouholdawelldiversifiedportfolio
thathasanexpected
returnof12.0%andabetaof1.20.Youareinthe
processofbuying
100sharesofAlphaCorpat$10ashareandaddingitto

your
portfolio.Alphahasanexpectedreturnof15.0%anda
betaof2.00.
Thetotalvalueofyourcurrentportfoliois$9,000.What
willthe
expectedreturnandbetaontheportfoliobeafterthe
purchaseofthe
Alphastock?
rp
a.11.69%;1.22
bp
b.12.30%;1.28
c.12.92%;1.34
d.13.56%;1.41
e.14.24%;1.48
(24.5)Requiredrateofreturn
CN
Answer:dEASY
28.CalculatetherequiredrateofreturnforMercury,
Inc.,assumingthat
(1)investorsexpecta4.0%rateofinflationinthe
future,(2)the
realriskfreerateis3.0%,(3)themarketriskpremium
is5.0%,(4)
Mercuryhasabetaof1.00,and(5)itsrealizedrateof
returnhas
averaged15.0%overthelast5years.
a.10.29%
b.10.83%
c.11.40%
d.12.00%
e.12.60%

Page 10
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page10
Problems
Chapter24:PortfolioTheory

Medium:

(24.5)Requiredrateofreturn
CN
Answer:cMEDIUM

29.Youareholdingastockwithabetaof2.0thatis
currentlyin
equilibrium.Therequiredrateofreturnonthestockis
15%versusa
requiredreturnonanaveragestockof10%.Nowthe
requiredreturnon
anaveragestockincreasesby30.0%(notpercentage
points).Therisk
freerateisunchanged.Bywhatpercentage(not
percentagepoints)
wouldtherequiredreturnonyourstockincreaseasa
resultofthis
event?
a.36.10%
b.38.00%
c.40.00%
d.42.00%
e.44.10%
(24.5)Requiredrateofreturn
CN
Answer:eMEDIUM
30.Considerthefollowinginformationandthencalculate
therequiredrate
ofreturnfortheScientificInvestmentFund,whichholds
4stocks.
Themarketsrequiredrateofreturnis15.0%,therisk
freerateis
7.0%,andtheFund'sassetsareasfollows:
Stock
Investment
A
$200,000
1.50
Beta
B
300,000
0.50
C
500,000
1.25
D
1,000,000
0.75
a.10.67%

b.11.23%
c.11.82%
d.12.45%
e.13.10%
(24.5)Requiredrateofreturn
CN
Answer:aMEDIUM
31.DataforOakdaleFurniture,Inc.isshownbelow.Now
theexpected
inflationrateandthustheinflationpremiumincreaseby
2.0
percentagepoints,andOakdaleacquiresriskyassetsthat
increaseits
betabytheindicatedpercentage.Whatisthefirm'snew
requiredrate
ofreturn?
Beta:
1.50
Requiredreturn(rs)
10.20%
RPM:
6.00%
Percentageincreaseinbeta:
20%
a.14.00%
b.14.70%
c.15.44%
d.16.21%
e.17.02%

Page 11
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
Problems
Page11
(24.5)Marketreturn
CN
Answer:dMEDIUM
32.Thereturnsonthemarket,thereturnsonUnitedFund
(UF),therisk
freerate,andtherequiredreturnontheUnitedFundare
shownbelow.

Assumingthemarketisinequilibriumandthatbetacan
beestimated
withhistoricaldata,whatistherequiredreturnonthe
market,rM?
Year
Market
2006
9%
14%
UF
2007
11%
16%
2008
15%
22%
2009
5%
7%
2010
1%
2%
rRF:7.00%;rUnited:
15.00%
a.10.57%
b.11.13%
c.11.72%
d.12.33%
e.12.95%
(24.5)BetassensitivitytothebaseyearCN
Answer:dMEDIUM
33.Youaregiventhefollowingreturnson"themarket"
andStockQduring
thelastthreeyears.Wecouldcalculatebetausingdata
forYears1
and2andthen,afterYear3,calculateanewbetafor
Years2and3.
Howdifferentarethosetwobetas,i.e.,what'sthevalue
ofbeta2
beta1?(Hint:YoucanfindbetasusingtheRiseOverRun
method,or
usingyourcalculator'sregressionfunction.)
Year
Market

1
6.10%
6.50%
StockQ
2
12.90%
3.70%
3
16.20%
21.71%
a.7.89
b.8.30
c.8.74
d.9.20
e.9.66

Page 12
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page12
ShortAnswer
Chapter24:PortfolioTheory

ShortAnswerProblems
Hard:
(24.2)Portfoliosandrisknonalgorithmic
CN
HARD
34.SecurityAhasanexpectedreturnof12.4%witha
standarddeviationof
15%,andacorrelationwiththemarketof0.85.Security
Bhasanexpected
returnof0.73%withastandarddeviationof20%,anda
correlationwith
themarketof0.67.ThestandarddeviationofrMis12%.
a.TosomeonewhoactsinaccordancewiththeCAPM,which
securityis
morerisky,AorB?Why?(Hint:Nocalculationsare
necessaryto
answerthisquestion;itiseasy
b.WhatarethebetacoefficientsofAandB?
Calculations
.)
are

c.Iftheriskfreerateis6%,whatisthevalueofrM?
necessary.
(Comp:24.124.5)PortfoliosandrisknonalgorithmicCN
HARD
35.YouplantoinvestinStockX,StockY,orsome
combinationofthetwo.
TheexpectedreturnforXis10%andX=5%.Theexpected
returnforY
is12%andY=6%.Thecorrelationcoefficient,rXY,is
0.75.
a.Calculaterpandpfor100%,75%,50%,25%,and0%in
StockX.
b.Usethevaluesyoucalculatedforrpandptographthe
attainable
setofportfolios.Whichpartoftheattainablesetis
efficient?
Also,drawinasetofhypotheticalindifferencecurves
toshowhowan
investormightselectaportfoliocomprisedofStocksX
andY.Letan
indifferencecurvebetangenttotheefficientsetatthe
pointwhere
rp=11%.
c.Nowsupposeweaddarisklessassettotheinvestment
possibilities.
Whateffectswillthishaveontheconstructionof
portfolios?
d.SupposerM=12%,M=4%,andrRF=6%.Whatwouldbethe
required
andexpectedreturnonaportfoliowithP=10%?
e.SupposethecorrelationofStockXwiththemarket,
rXM,is0.8,while
rYM=0.9.Usethisinformation,alongwithdatagiven
previously,to
determineStockXsandStockYsbetacoefficients.
f.WhatistherequiredrateofreturnonStocksXandY?
Dothese
stocksappeartobeinequilibrium?Ifnot,whatwould
happento
bringaboutanequilibrium?

Page 13
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
ShortAnswer
Page13
(Comp:24.124.4)EfficientportfoliosnonalgorithmicCN
HARD
36.StockAhasanexpectedreturnrA=10%andA=10%.
StockBhasrB=14%
andB=15%.rAB=0.Therateofreturnonrisklessassets
is6%.
a.Constructagraphthatshowsthefeasibleand
efficientsets,giving
considerationtotheexistenceoftherisklessasset.
b.ExplainwhatwouldhappentotheCMLifthetwostocks
had(a)a
positivecorrelationcoefficientor(b)anegative
correlation
coefficient.
c.Supposetheseweretheonlythreesecurities(A,B,
andriskless)in
theeconomy,andeveryonesindifferencecurvesweresuch
thatthey
weretangenttotheCMLtotherightofthepointwhere
theCMLwas
tangenttotheefficientsetofriskyassets.Wouldthis
representa
stableequilibrium?Ifnot,howwouldanequilibriumbe
produced?

Page 14
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page14
Answers
Chapter24:PortfolioTheory

CHAPTER24
ANSWERSANDSOLUTIONS
1.
(24.4)SML
FN
Answer:bEASY
2.
(24.4)SML

FN
Answer:aEASY
3.
(24.5)Betacoefficient
FN
Answer:aEASY
4.
(24.5)Betacoefficient
FN
Answer:bEASY
5.
(24.5)Betacoefficient
FN
Answer:aEASY
6.
(24.5)Portfoliorisk
FN
Answer:aEASY
7.
(24.2)Riskaversion
FN
Answer:aMEDIUM
8.
(24.3)CAPM
FN
Answer:bMEDIUM
9.
(24.4)SML
FN
Answer:bMEDIUM
Managerscaninfluencethefirmsbetacoefficientbychangingsuchthingsasthe
capitalstructure(moredebt
willincreasebeta)andchangingthetypeofassetsheldbythefirm(riskierassetswill
tendtoincreasebeta).
However,managerscannotcontroltheriskfreerateorthereturnonthemarket.
10.(24.4)SML
FN
Answer:bMEDIUM
11.(24.5)Portfoliobeta
FN
Answer:bMEDIUM
12.(24.7)Arbitragepricingtheory
FN
Answer:bMEDIUM

13.(24.5)Riskaversion
CN
Answer:bEASY
14.(24.5)Riskmeasures
CN
Answer:dEASY
15.(24.5)Betacoefficient
CN
Answer:cEASY
16.(24.5)Betacoefficient
CN
Answer:dEASY
17.(24.2)Marketequilibrium
CN
Answer:aMEDIUM
18.(24.4)CML
CN
Answer:eMEDIUM
19.(24.5)Portfolioriskandreturn
CN
Answer:cMEDIUM
20.(24.5)Betacoefficient
CN
Answer:dMEDIUM
Bsreturnsareindependentofthemarket,henceitsbetaiszero.IfyouplotAs
returnsagainstthoseofthe
market,youseeanegativeslope,henceBsbetaisnegative.Therefore,disthe
correctanswer.
21.(24.5)Betacalculation
CN
Answer:cMEDIUM

Page 15
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
Answers
Page15
22.(24.5)Characteristicline
CN
Answer:eMEDIUM
23.(24.6)TestsoftheCAPM
CN

Answer:aMEDIUM
24.(24.8)FamaFrenchmodel
CN
Answer:aMEDIUM
25.(24.2)Portfoliosandrisk
CN
Answer:cHARD
PercentA
PercentB
rp
p
100
0
10.00%
10.00%
75
25
11.25
9.01
50
50
12.50
11.18
25
75
13.75
15.20
0
100
15.00
20.00
rp=xrA+(1x)rB.

(
)
(
)

B
A
AB
2
B
2
2
A
2
p

x1x2
x1
x

.
ButAB=0,so,

(
)
B
2
2
A
2
p

x1
x

.
Forourinvestor,rp=14.75%andp=14.25%.
26.(24.5)Portfoliobeta
CN
Answer:bEASY
%leadstock:
5%
Leadbeta:
1.00
Steelbeta:
2.00
Oldbeta:
1.12=0.95X+0.05(1.00)whereXistheportfolio'saveragebetaw/osteel.
X=1.12/0.950.05=1.1263
Newbeta=0.95X+0.05(2.00)=0.951.1263+0.052.00=1.1700

CML

kp
(%)
15
14
13
12
11
10
9
8
7
2
4
6
8
10
12
14
16
18
20

p(%)

rp
(%)

CML

kp
(%)
15
14
13
12
11
10
9
8
7
2
4
6
8
10
12
14
16
18
20

p(%)

rp
(%)

Page 16
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page16
Answers
Chapter24:PortfolioTheory
27.(24.5)Portfoliobeta
CN
Answer:bEASY
Oldportfolioreturn
12.0%
Oldportfoliobeta
1.20
Newstockreturn
15.0%
Newstockbeta
2.00
Percentofportfolioinnewstock:

10%
Newexpectedportfolioreturn=rp=0.115%+0.912%=12.30%
Newexpectedportfoliobeta=bp=0.12.00+0.91.20=1.28
28.(24.5)Requiredrateofreturn
CN
Answer:dEASY
IP:
4.00%
Realrate:
3.00%
RPM:
5.00%
Beta:
1.00
Requiredreturn=3%+4%+1.0(5%)=12.00%
29.(24.5)Requiredrateofreturn
CN
Answer:cMEDIUM
Beta:
2.00
Requiredreturnonstock:
15.0%
Requiredreturnonmarket:
10.0%
Increaseinrequiredmarketreturn:30.0%
Findriskfreerate:
rs=rRF+b(rMrRF)=rRF+b(rM)b(rRF);rRF=b(rM)rs
rRF=b(rM)rs=2.0(10%)15%=
5.00%
Findnewreturnonaveragestock=10.0%(1.3)
13.00%
Findnewmarketriskpremium=13%5%=
8.00%
Newreq.returnonourstock=rs=rRF+b(rMrRF)=5%+2(8%)=
21.00%
%increaseinstock'sreq.return=(21%15%)/15%=
40.00%

Page 17
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
Answers

Page17
30.(24.5)Requiredrateofreturn
CN
Answer:eMEDIUM
rM:
15.0%
rRF:
7.0%
Findportfoliobeta:
Weight
Beta
Product
$200,000
0.100
1.50
0.1500
$300,000
0.150
0.50
0.0750
$500,000
0.250
1.25
0.3125
$1,000,000
0.500
0.75
0.3750
$2,000,000
1.000
0.7625
FindRPM=rMrRF=8.00%
rs=rRF+b(RPM)=13.10%
31.(24.5)Requiredrateofreturn
CN
Answer:aMEDIUM
Oldbeta:
1.50
Oldrs=rRF+b(RPM)
10.20%
RPM
6.00%
Percentageincreaseinbeta:20%
Findnewbetaafterincrease=1.80

FindoldrRF:Oldrs=rRF+b(RPM):10.2%=rRF+1.5(6.0%):rRF=10.2%9.0%=
1.20%
FindnewrRF:OldrRF+2.0%increaseininflation=3.20%
Findnewrs=newrRF+newbeta(RPM)=14.00%

Page 18
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page18
Answers
Chapter24:PortfolioTheory
32.(24.5)Marketreturn
CN
Answer:dMEDIUM
ThefollowinggraphshowsthatUnited'sreturnsareperfectlycorrelatedwiththe
market.
rRF:
7.00%
rUnited:15.00%
1.Findbeta:WefoundbetausingExcel,butitcouldbefoundwithacalculatoror
usingtheriseover
runmethodasshownbelow:
Rise2216
6
=b=1.5
Run
1511
4
2.NowfindRPM:
rs=15%=7%+1.5(RPM)
RPM=(157)/1.5=5.33%
3.FindrM:rM=rRF+RPM=12.33%

Page 19
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
Answers
Page19
33.(24.5)BetassensitivitytothebaseyearCN
Answer:dMEDIUM
Year

Market
StockQ
1
6.10%
6.50%
2
12.90%
3.70%
3
16.20%
21.71%
Years1and2,beta1=Rise/Run=(3.76.5)/(12.96.1)=1.50
Years2and3,beta2=Rise/Run=(21.713.7)/(16.212.9)=7.70
Difference:Beta2Beta1=9.20
Youwouldgetthesameresultusingacalculatortofindthetwobetas.
34.(24.2)PortfoliosandrisknonalgorithmicCN
HARD
a.TheveryfactthatrA>rBindicatesthatSecurityAisregardedbyinvestorsasthe
moreriskyone.This
occursbecauseSecurityBhasanegativecovariancewiththemarketholdingBina
diversified
portfoliolowerstheriskinessoftheportfolio.Althoughitisnotnecessaryfor
answeringthequestion,
onecouldusethedatatocalculatecovariancesforAandB:
Cov(rA,rM)=A,MAM,where
A,M=CorrelationofAsreturnwiththemarketreturn=0.85.
A,M=StandarddeviationsofreturnsofAandthemarket,respectively.
Cov(rA,rM)=0.85(0.15)(0.12)=0.0153.
Cov(rB,rM)=B,MBM=0.67(0.20)(0.12)=0.01608.
SecurityAscontributiontotheportfolioriskis,therefore,higherthanthatofB.
Inasingleassetportfolio,thesecuritysriskismeasuredbythevarianceofits
returns.
VarianceA=
2

=(0.15)2=0.0225,andVarianceB=
B

=(0.20)2=0.04.
Thus,inasingleassetportfolio,BisriskierthanA,butinadiversified(CAPM)
portfolio,Aisriskier.
b.BetacoefficientsofAandBarecalculatedasfollows:

(
)()()()
()
.

0625.1
12.0
0153.0

r,r
Cov
b
2
2
M
M
A
M,A
2
M
M
A
A

=
=

(
)
()
.
1167.1
12.0
01608
.0
r,r
Cov
b
2
2
M
M
B
B

=
c.ThevalueofrMiscalculatedfromtheCAPMequation:
rsA=rRF+(rMrRF)bA.12.4%=6%+(rM6%)1.0625.

Therefore,
1.0625rM=12.4%6%+6.375%=12.775%.rM=12.775%/1.0625=12.02%.
AsimilarsolutioncouldbeobtainedbyapplyingtheCAPMequationtoSecurityB.

Page 20
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page20
Answers
Chapter24:PortfolioTheory
35.(Comp:24.124.5)Portfoliosandrisknonalgorithmic
CN
HARD
a.rp=X(rX)+(1X)(rY)
X

rX
+
(1X)

rY
=
rp
1.00
10%
0.00
12%
10.0%
0.75
10
0.25
12
10.5
0.50
10
0.50
12
11.0
0.25
10
0.75
12
11.5

0.00
10
1.00
12
12.0

(
)
(
)

XY

2
Y
2
2
X
2
2
p

cov
X1X2
X1
X

covXY=rXYXY=(0.75)(0.05)(0.06)=0.00225.
At100%StockX:

()()
.05.0
0025.0
05.0
00.1
2
2
p

=
=
=

At75%StockX:

()()()()()()(
)

(
)(
)(
)

.
04979
.0
002479
.0
000844
.0
000225
.0
00141
.0
00225
.025.075.02
06.0
25.0
05.0
75.0
2
2
2
2
p

=
=
+
+
=
+
+
=

At50%StockX:

()()()()()()(
)
(
)(
)(
)

.
05148
.0
00265
.0
001125
.0
0009.0
000625
.0
00225
.050.050.02
06.0
50.0
05.0
50.0
2
2
2
2
p

=
=
+
+
=
+
+
=

At25%StockX:

()()()()()()(
)
(
)(
)(
)
.055.0
003025
.0
000844
.0
002025
.0

000156
.0
00225
.075.025.02
06.0
75.0
05.0
25.0
2
2
2
2
p

=
=
+
+
=
+
+
=

At0%StockX:

()()
.06.0
0036.0
06.00.12
2
p

=
=
=

13.0
12.0
11.0
10.0
1
2
3
4
5
6
7
AttainableSet
EfficientSet(BCDE)
ExpectedPortfolio
Return,kp
(%)
Portfolio
Risk,p(%)
E
D
C
B
A
rp
13.0
12.0

11.0
10.0
1
2
3
4
5
6
7
AttainableSet
EfficientSet(BCDE)
ExpectedPortfolio
Return,kp
(%)
Portfolio
Risk,p(%)
E
D
C
B
A
rp

Page 21
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
Answers
Page21
b.Portfolio
PercentinX
PercentinY
rp
p
A
100%
0%
10.0%
5.00%
B
75
25
10.5
4.98
C
50
50
11.0
5.15
D
25
75
11.5

5.50
E
0
100
12.0
6.00
ThesegmentBCDEisefficient.ThesegmentBAEisnotefficient.
c.Withtheadditionofarisklessasset,anewportfoliocanbecreatedwhichcombines
riskfreeandrisky
assets.Nowinvestorswillchoosecombinationsofthemarketportfolioandthe
risklessasset.If
borrowingispermitted,thenlessriskaverseinvestorswillmoveouttheCMLbeyond
P.
d.
%.21
%10
%4
%6%12
%6
rr
rr
p
M
RF
M
RF
p

+
=

+
=
e.

(
)
()

.0.1
%4
%4
%4
80.0%5

r,rcov
b
M
XM
X
2
M
XM
M
X
2
M
M
X
X

=
=
=

()
.35.1
%4
%4.5
%4
9.0%6

bY
=
=
=
f.rX=rRF+(rMrRF)bX=6%+(11%6%)1.0=11%.
rY=6%+(11%6%)1.35=12.75%.
SincetheexpectedreturnonX,
%10
rX=
<11%,and
%12
rY=
<12.75%,bothstocksareoutof
equilibrium.Theyarebothovervalued.Theirpriceswoulddecline,andtheirexpected
returnswould
rise,untilanequilibriumwasrestored.

Page 22
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Page22
Answers
Chapter24:PortfolioTheory
36.(Comp:24.124.4)Efficientportfoliosnonalgorithmic
CN
HARD
ABCDE=feasibleset.
BCDE=efficientsetofriskyassets.
rRFD=efficientsetincludingrisklessasset.
a.Thetablebelowshowsthereturnsandstandarddeviationsforvariousportfoliosof
SecuritiesAandB.
PercentofPortfolioin
SecurityA
PercentofPortfolioin
SecurityB
ExpectedPortfolio
Return
StandardDeviationof
PortfolioReturn
(x)
(1x)
rr(%)
p(%)

100
0
10.0
10.00
75
25
11.0
8.39
50
50
12.0
9.01
25
75
13.0
11.52
0
100
14.0
15.00
Calculations:
rp=xrA+(1x)rB.

()
()
B
A
AB
2
B
2
2
A
2
p

x1x2
x1
x

.
rA=10%;A=10%;rB=14%;B=15%;rAB=0%.
Forx=0.5:
rp=0.5(10%)+0.5(14%)=0.05+0.07=0.12=12%.

()()()()
()()()()()
%.01.9
25.81
25.56
25
15
1005.05.02
15
5.1
10
5.0
2
2
2
2
p

=
=
+
=
+
+
=

rpandpforothercombinationsofSecuritiesAandBintheportfolioweresimilarly
calculated.
14
13
12
11
10
9
8
7
6
2
4
6
8
10
12
14
16
E
A
B
C
D
0

(%)
kp
p(%)

rp
(%)
14
13
12
11
10
9
8
7
6
2
4
6
8
10
12
14
16
E
A
B
C
D
0

(%)
kp
p(%)

rp
(%)

Page 23
2011CengageLearning.AllRightsReserved.Maynotbescanned,copiedor
duplicated,orposted
toapubliclyaccessiblewebsite,inwholeorinpart.

Chapter24:PortfolioTheory
Answers
Page23
b.Ifthecorrelationcoefficientwerepositive,thentheCMLwouldhavealesssteep
slope.Theriskinessof
theportfoliowouldincrease.Ifthecorrelationcoefficientwerenegative,thenthe
CMLwouldbesteeper.
c.Thiswouldnotrepresentastableequilibrium,becausenoonewouldwanttohold
therisklessasset.Ina
stableequilibrium,allsecuritiesmustbepricedsothattheywillbeheldinportfolios.
Therefore,theprice
oftherisklessassetwillfall,anditsrateofreturn,rRF,willrise.Thiswillproducea
newtangencypoint
andcauseanewCMLtobecreated.However,atthenewtangencypointwehavea
newmarket
portfolio.Thiswillprobablyleadtoarepricingofstocks,hencetoachangeinthe
efficientset.
Thefinalresultswillinclude(1)ahigherrRF,(2)aCMLthatislesssteepthanthe
presentone,(3)some
changeintheefficientset,(4)arebalancingofportfolios,withsomeinvestors(those
whoaremostrisk
averse)holdingportfoliosthatcontainsomeoftherisklessassetandsomeofthe

marketportfolio,and(5)
anequilibriumsituationinwhichallsecuritieswereheldinportfoliosandtherewas
nogeneraldesireto
changeportfoliocompositions.