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100% Correct Solution of 1,2,3,4 question

**1. You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B?**

Years Market Stock A Stock B

1 0.03 0.16 0.05

2 -0.05 0.20 0.05

3 0.01 0.18 0.05

4 -0.10 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.

**2. Which of the following statements is CORRECT?**

a. “Characteristic line” is another name for the Security Market Line.

b. The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.

c. The slope of the characteristic line is the stock’s standard deviation.

d. The distance of the plot points from the characteristic line is a measure of the stock’s market risk.

e. The distance of the plot points from the characteristic line is a measure of the stock’s diversifiable risk.

**3. Assume an economy in which there are three securities: Stock A with rA = 10% and A = 10%; Stock B with rB = 15% and B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0).** Which of the following statements is most CORRECT?

a. The expected return on the investor’s portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (SD) of approximately 20%.

b. The expected return on the investor’s portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (SD) of approximately 10%.

c. The expected return on the investor’s portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (SD) that is between 10% and 20%.

d. The investor’s risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%.

e. Since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.

**4. Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, 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

a. 10.67%

b. 11.23%

c. 11.82%

d. 12.45%

e. 13.10%

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