Question

The cum iieret on te le T-B AR The maket cgects that the Fed wi e the ate nl vear the the esped Ta TAPRI Aonding to the expectt potheis the c 1e d 20. offer an iere te of AR 2 5% 4) 7% You are bulli ona phamail stok The stock i cmly ding S00 per hare and you have S6.000 of vr se imet Yu bomow an adional 54000 fm your beoker and invetio.0 in the stock, rai eargin is atwhat price range you wil nieamein llik the mot comect anwer a Tound to the closet cent) I) Below 33 13 2) Below 67 3) Above 71.43 4) one of the above 21 22 You are bullish on M and heve decided to h 10 otracts (000 shares) of at the mane IBM call options which will expire in dee monts. Cumently the M stock is trading at S0 per shae and the call penium is $ pe share At what stock price you will be able to bek even on the expintion de 2 80 3) 85 4) one of the above Continuing with the previous question, what's the retum on this investment if the 23. price of M is 120 or 40. respectively 1) 100-100 2) 700-100% 3) S0 50% 4) none of the above The expected return of a portfolio is 15% and its beta is 12 The T-bill rate is 5% 24. and the SAP S00 index expectod retum is 15% Acconding to CAPM, the alpha of this portfolio is 1) positive, overvalued 2) negative, overvalued 3) positive, undervalued 4) negative undervalued 5) 0, fairly valued and this portfolio is

Answer 1

Solution :- (24)

Alpha = Expected Return - [ Rf + Beta*(Rm - Rf) ]

Alpha = 15% - [ 5% + 1.2*(15% - 5%) ]

Alpha = 15% - 17%

Alpha = - 2%

So the Alpha is negative and Negative Alpha means Over Valued

Therefore the Correct answer is (2) that is Negative , Overvalued

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