1. Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%.

What is the expected return on a stock with a beta of 1.3? A. 6% B. 15.6% C. 18% D. 21.6% E[rs] = 6% + [18% - 6%](1.3) = 21.6% 2. Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A. 2% B. 6% C. 8% D. 12% 3. According to the capital asset pricing model, fairly priced securities have _________. A. negative betas B. positive alphas C. positive betas D. zero alphas 4. The graph of the relationship between expected return and beta in the CAPM context is called the _________. A. CML B. CAL C. SML D. SCL 5. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A. fairly priced B. overpriced C. underpriced D. None of the above

6. 6 An impo ortant chara acteristic of market equi ilibrium is _ __________ ______. A. the p presence of m many oppor rtunities for creating zer ro-investme portfolio ent os B. all in nvestors exh hibit the sam degree of risk aversio me f on C. the ab bsence of ar rbitrage opp portunities D. the a lack of liqu uidity in the market e 7. 7 The risk k-free rate is 4%. The ex s xpected mar rate of return is 11%. If you ex rket xpect stock X with a beta of .8 to off a rate of return of 12 percent, th you shou a fer 2 hen uld _______ ___. A. buy s stock X because it is ov verpriced B. buy s stock X beca ause it is un nderpriced C. sell s short stock X because it is overpric t ced D. sell s short stock X because it is underpri t iced 8. 8 Building a zero-inv g vestment por rtfolio will a always invo ______ olve ________. A. an un nknown mix xture of shor and long p rt positions B. only short positio ons ons C. only long positio l nts t D. equal investmen in a short and a long position 9. 9 Assume that both X and Y are well-divers e sified portfolios and the risk-free ra is e ate 8%. Por rtfolio X has an expecte return of 14% and a beta of 1.00 Portfolio Y has s ed 0. an expec return o 9.5% and a beta of 0 cted of d 0.25. In this situation, you would conclud that portfo de olios X and Y _______ ___. A. are in equilibrium n m B. offer an arbitrage opportunity C. are both underpr riced D. are b both fairly pr riced

Thus, th are no a here arbitrage opportunities, and X and Y are in equ uilibrium. 10. Conside the follow er wing data for a one-facto economy All portfo r y. olios are wel ll or diversifi fied. ortfolio E(r) Beta Po A 9% 1.0 F 5 0 Suppose another po e ortfolio E well diversified with a be of 0.5 an expected eta nd d return of 6 %. Ther is an arbit re trage opport tunity exist. What woul the arbitra ld age strategy be? y A. Buy 1F, buy 1A short sell 2E y A, B. Buy 1F, short se 2A, buy 1E y ell C. Shor Sell 2F, b 1A, buy 1E rt buy D. Shor sell 1F, sh sell 1A, buy 2E rt hort

11. When co omputing th bank disc he count yield y would u ____ da in the ye you use ays ear. A. 260 B. 360 C. 365 D. 366 r ted at n lled 12. A dollar denominat deposit a a London bank is cal _____. A. eurod dollars B. LIBO OR C. foreig bonds gn D. Com mmercial pap per 13. An inve estor in a T-b earns in bill nterest by __ ________. A. receiving interes payments every 90 da st ays B. receiv ving dividen payment every 30 d nd ts days C. converting the T T-bill at matu urity into a higher valued T-note ng at t ace eceived at m maturity D. buyin the bill a a discount from the fa value re 14. A T-bill quote shee has 90 day T-bill quo with a 4 l et y otes 4.92 bid and a 4.86 ask. If the bill has a $10,000 f face value an investor could buy this bill for n A. $10,0 000.00 B. $9,87 78.50 C. $9,87 77.00 D. $9,88 80.16

s. 15. Conside the liquidi preferen theory of the term st er ity nce f tructure of i interest rates On average, one would expect inve d estors to req quire _____ _____. gher yield on short term bonds than long term b n m n bonds A. a hig B. a high yield on long term bonds than short term b her n bonds C. the sa yield on both short term bond and long t ame t ds term bonds D. the li iquidity pref ference theo cannot b used to m ory be make any of the other statemen nts. 16. Conside the expect er tations theo of the ter structure of interest rates. If the yield ory rm e e curve is upward slo oping, this in ndicates that investors e expect short t-term intere est rates to __________ in the futu _ ure. A. incre ease B. decre ease hange C. not ch D. chang in an unp ge predictable m manner 17. One and two year m d maturity, def fault-free, z zero-coupon bonds have yields-ton e maturity of 7% and 8% respect y d tively. What is the impl one-yea forward r lied ar rate, one year from today r y? A. 2.0% % B. 8.0% % C. 9.0% % D. 11.1% %

18. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $80 discount from par value. The current yield on this bond is _________. A. 6.00% B. 6.49% C. 7.73% D.8.00% 19. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 7%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar). A. $1,000 B. $1,063 C. $1,081 D. $1,100 20. A coupon bond which pays interest quarterly, has a par value of $1,000, matures in 5 years and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be approximately _________. A. $888 B. $892 C. $962 D. $1,000 21. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97 B. $104 C. $364 D. $732 22. If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.30% B. 4.50% C. 5.20% D. 5.50% A bond sells at premium when coupon rate > YTM.