Stock Market Index and Security Returns Quiz
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Questions and Answers

What is the value of the beta of security i, βi?

  • $0.01104$
  • $0.16$
  • $0.4$
  • $0.3$ (correct)

    • What is the estimate of the covariance between RTF and KIU?

  • $0.0225$
  • $0.05625$
  • $0.0405$ (correct)
  • $0.0675$

    • Based on the capital asset pricing model (CAPM), is JKU overvalued, under or fairly valued?

  • Overvalued
  • Undervalued (correct)
  • Fairly valued
  • Cannot be determined from the given information

    • Which of the following is the correct formula for calculating the beta of a security, $\beta_i$?

    <p>$\beta_i = \frac{\text{Cov}(R_i,R_m)}{\text{Var}(R_m)}$</p> Signup and view all the answers

    What is the formula for the covariance between two stocks, $\text{Cov}(R_{RTF}, R_{KIU})$?

    <p>$\text{Cov}(R_{RTF}, R_{KIU}) = \rho_{RTF,KIU} \sqrt{\text{Var}(R_{RTF})\text{Var}(R_{KIU})}$</p> Signup and view all the answers

    What is the relationship between the correlation coefficient $\rho_{i,m}$ and the beta $\beta_i$ of a security?

    <p>$\beta_i = \rho_{i,m} \times \frac{\sigma_i}{\sigma_m}$</p> Signup and view all the answers

    If the expected return of the market is 12% and the risk-free rate is 5%, what must the expected return of JKU be for it to be fairly valued according to the CAPM?

    <p>12%</p> Signup and view all the answers

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