University:
CFA Institute
Course:
CFA Level 1 - Portfolio Management
Academic year:

2023
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23

Pages:

5
Author:

anon

CFA Level 1 - Portfolio Management Session 12 - Reading 53 - LOS g Portfolio Risk and Return (Notes, Practice Questions, Sample Questions) 1. The beta of stock D is -0.5. If the expected return of Stock D is 8%, and the risk-free rate of return is 5%, what is the expected return of the market? A) +3.0%. B) -1.0%. C) +3.5% [Explanation]: RRStock = Rf + (RMarket ? Rf) × BetaStock, where RR = required return, R = return, and Rf = risk-free rate A bit of algebraic manipulation results in: RMarket = [RRStock ? Rf ? (BetaStock × Rf)] / BetaStock = [8 ? 5 ? (-0.5 × 5)] / -0.5 = 0.5 / -0.5 = -1% 2. Given a beta of 1.25 and a risk-free rate of 6%, what is the expected rate of return assuming a 12% market return? A) 10%. B) 13.5%. C) 31%. [Explanation]: k = 6 + 1.25 (12 ? 6) = 6 + 1.25(6) = 6 + 7.5 = 13.5 3. The expected market premium is 8%, with the risk-free rate at 7%. What is the expected rate of return on a stock with a beta of 1.3? A) 16.3%. B) 10.4%. C) 17.4% [Explanation]: RRStock = Rf + (RMarket ? Rf) × BetaStock, where RR = required return, R = return, and Rf = risk-free rate, and (RMarket ? Rf) = market premium Here, RRStock = 7 + (8 × 1.3) = 7 + 10.4 = 17.4% 4. If the risk-free rate of return is 3.5%, the expected market return is 9.5%, and the beta of a stock is 1.3, what is the required return on the stock? A) 7.8%. B) 11.3%. C) 12.4% [Explanation]: The formula for the required return is: ERstock = Rf + (ERM – Rf) × Betastock, or 0.035 + (0.095 – 0.035) × 1.3 = 0.113, or 11.3% 5. Given a beta of 1.10 and a risk-free rate of 5%, what is the expected rate of return assuming a 10% market return? A) 15.5%. B) 5.5%. C) 10.5% [Explanation]: k = 5 + 1.10 (10 - 5) = 10.5 6. What is the required rate of return for a stock with a beta of 1.2, when the risk-free rate is 6% and the market is offering 12%? A) 7.2%. B) 6.0%. C) 13.2% [Explanation]: RRStock = Rf + (RMarket - Rf) × BetaStock, where RR= required return, R = return, and Rf = risk-free rate. Here, RRStock = 6 + (12 - 6) × 1.2 = 6 + 7.2 = 13.2% 7. The beta of Stock A is 1.3. If the expected return of the market is 12%, and the risk-free rate of return is 6%, what is the expected return of Stock A? A) 13.8%. B) 14.2%. C) 15.6% [Explanation]: RRStock = Rf + (RMarket - Rf) × BetaStock, where RR= required return, R = return, and Rf = risk-free rate Here, RRStock = 6 + (12 - 6) × 1.3 = 6 + 7.8 = 13.8% 8. What is the expected rate of return on a stock that has a beta of 1.4 if the market risk premium is 9% and the risk-free rate is 4%? A) 16.6%. B) 13.0%. C) 11.0% [Explanation]: Using the security market line (SML) equation: 4% + 1.4(9%) = 16.6% 9. Given the following information, what is the required rate of return on Bin Co? inflation premium = 3% real risk-free rate = 2% Bin Co. beta = 1.3 market risk premium = 4% A) 7.6%. B) 16.7%. C) 10.2% [Explanation]: Use the capital asset pricing model (CAPM) to find the required rate of return. The approximate risk-free rate of interest is 5% (2% real risk-free rate + 3% inflation premium). k = 5% + 1.3(4%) = 10.2% 10. Given a beta of 1.55 and a risk-ree rate of 8%, what is the expected rate of return, assuming a 14% market return? A) 12.4%. B) 17.3%. C) 20.4% [Explanation]: k = 8 + 1.55(14-8) = 8 + 1.55(6) = 8 + 9.3 = 17.3

CFA Level 1: Portfolio Risk and Return (Session 12 - Reading 53 - LOS g)

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