Topic 9.

Capital Asset Pricing Model

Questions and Answers

Question 9.1. Assume that the security market line is given as

ri 0.04 0.08i

Analysts have estimated that the Beta on two stocks is x 0.5 and y 2 . What must the
expected returns on the two securities be in order for them to be a good purchase?

Question 9.2. Assume that the following assets are correctly priced according to the security
market line. Derive the security market line. What is the expected return of a security with a
Beta of 2?
r1 6% 1 0.5
r2 12% 2 1.5

Assume that there exists an asset with r3 15% and 3 1.2 . Design the arbitrage opportunity.

Question 9.3. Assume that over some period a CAPM was estimated. The results are as follows.
ri 0.06 0.19i

Assume that over the same period two mutual funds had the following results.

Fund A:

Actual Return = 10%

Beta = 0.8

Fund B:

Actual Return = 15%

Beta = 1.2

What can be said about the fund performance?