Q1) Suppose that both X and Y are well-diversified portfolios and risk-free rate is 8%. Portfolio X has expected return of 14% and beta of 1.00. Portfolio Y has expected return of 9.5% and beta of 0.25. In this situation, you would conclude that portfolios X and Y __________.
A) Are in equilibrium
B) Offer arbitrage opportunity
C) Are both underpriced
D) Are both fairly priced
Q2) Expected return on market portfolio is 15%. Risk-free rate is 8%. Expected return on SDA Corp. common stock is 16%. Beta of SDA Corp. common stock is 1.25. In the context of capital asset pricing model, __________.
A) SDA Corp. stock is underpriced
B) SDA Corp. stock is fairly priced
C) SDA Corp. stock's alpha is -0.75%
D) SDA Corp. stock alpha is 0.75%
Q3) Asset A has expected return of 15% and Sharpe ratio of .4. Asset B has expected return of 20% and Sharpe ratio of .3. Risk-averse investor would favour portfolio using risk-free asset and _______.
A) Asset A
B) Asset B
C) No risky asset
D) Cannot tell from data given