I.
Multiple Choice (RC1.1.1; RC2.1; RC3.1; RC4.1): True/False and Explain (4 points)
1. Even if the semi-strong version of the efficient market hypothesis is true, it might be
possible to earn extraordinary returns from private information not available to other
investors.
2. If stock prices move randomly, charting and technical analysis are useful investment
tools.
3. The process of buying an underpriced security and selling an equivalent overpriced
security until the prices converge is known as arbitrage.
4. In the short term, stock prices tend to rise as inflation rises.
5. When investors expect higher inflation, they will generally require higher rates of return.
6. Portfolio objectives should be established before beginning to invest.
7. An efficient portfolio maximizes the rate of return without consideration of risk.
8. A beta of 0.5 means that a stock is half as risky the overall market.
II.
Short essay (RC 2.2) (2 points)
Discuss the similarities and differences between real and financial assets.
III. Exercises (RC 3.1, RC 4.1) (4 points)
1. Mai is considering a stock purchase. The stock pays a constant annual dividend of $2.00 per
share and is currently trading at $19. Mai’s required rate of return for this stock is 10%. Should she
buy this stock?
2. You have the following information:
Year
X Returns
Y Returns
2010
2011
2012
2013
2014
15%
18%
-17%
4%
20%
12%
7%
-5%
2%
12%
Market
Returns
15%
10%
-12%
3%
15%
The risk-free rate is 8% and the market risk premium is 4%.
a. Calculate: Coefficients βX and βY
b. Using the results of question 1, calculate the required rate of return for stock X and
stock Y. The expected rate of return of X:13%, Y:14%. Discuss about the value of these
stock.
c. Using the results of questions 1 and 2, calculate the required rate of return for a
portfolio with a composition of 30% X shares and 70% Y shares.
1
2
3
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