ECON F412/FIN F313: SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT
SEM – I 2021-2022
Practice Problems Set – SIM and CAPM
1. Given characteristics of securities:

Stock Alpha Beta Firm specific

risk (SD)
X 0.5% 1.5 9%
Y 1% 0.8 10%

If the market excess return is 8% and market’s standard deviation is 11%

find the risk and return of portfolio with weights 70% of stock X and 30%
of stock Y.

2. Given the beta for a particular stock is 0.9, the risk-free rate is 6.5% and
the expected market return is 12.5%, what is the expected return on the
stock?

3. What is the market risk premium given an expected return on a security

of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4.0%,
according to the CAPM model?

4. Given is the following information regarding two securities 1 and 2 that

satisfy the security market line: E(r1) = 10%; E(r2) = 12%; β1 = 1; β2 =
1.4. What can we say about the pricing of another security 3 in the market
that has an expected return of 14% with a beta of 1.2?

5. Given risk-free rate of 10% and the expected market returns of 14%.
Compute the expected return for the following stocks. Where would they
fall on an SML graph?

Stock Beta Expected

returns
A 0.85 14%
B 1.25 12%
C -0.20 11%
6. Which assumptions of CAPM model will affect its equilibrium result?
Explain.