Portfolio Management MCQ - Portfolio Management Section 1

66 The table below shows information for securities held by three investors, Daniel, David, and Diana.

Investor	Expected Standard Deviation	Beta
Daniel	30	1.60
David	25	1.80
Diana	20	1.40

Given that the expected return for David’s security is 14% and the riskfree rate is 2.5%, what is the expected return for the market?

The expected return for the market can be calculated using the following equation: E (Ri)= Rf+ β (E (Rm) −Rf) 14% = 2.5% + 1.80 (E (Rm) −2.5%) E(Rm)= 8.88%

67 The table below shows information for securities held by three investors, Daniel, David, and Diana.

Investor	Expected Standard Deviation	Beta
Daniel	30	1.60
David	25	1.80
Diana	20	1.40

Given that the expected market risk premium is 7.5%, which of the following investors has the lowest expected return?

Diana will have the lowest expected return because her investment has the lowest beta value. The value of the risk-free rate will not matter here.

68 The table below shows information for securities held by three investors, Daniel, David, and Diana.

Investor	Expected Standard Deviation	Beta
Daniel	30	1.60
David	25	1.80
Diana	20	1.40

Given that the expected market return declines, which of the following investor’s security will have the greatest impact on the expected return?

The security with the highest beta will be most sensitive to change in the expected market return.

69 Miranda, an analyst, makes use of the capital asset pricing model to come up with the expected return of Stock X. She then estimates the return for Stock X using cash flow projections. The estimated return is higher than the return predicted by CAPM. She should conclude that Stock X is:

A security is undervalued if the estimated return is higher than the return calculated using CAPM.

70 If the expected return on the market portfolio is 8% and the risk free rate is 4%, the expected return of a security with a beta of 1.25 is closest to:

CAPM : re=Rf+β[E (Rmkt) −Rf] = 4 + 1.25(8 - 4) = 9%.