1. Portfolio theory as described by Markowitz is most concerned with: A) the elimination of systematic risk. B) the effect of diversification on portfolio risk. C) the identification of unsystematic risk. D) active portfolio management to enhance returns.
2. The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to A) 0.142. B) 0.144. C) 0.153. D) 0.134. E) 0.117.
3. The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should A) buy the stock because it is overpriced. B) sell short the stock because it is overpriced. C) sell the stock short because it is underpriced. D) buy the stock because it is underpriced. E) None of the options, as the stock is fairly priced.