Guys, those of you who are preparing for CFA, these questions might be helpful.. try those out...


1) Identify and justify which stock would be more appropriate for an investor who wants to a) Add this stock to a well-diversified equity portfolio
b) Hold this stock as a single-stock portfolio.

Forecasted return Standard deviation Beta
Stock X 14% 36% 0.8
Stock Y 17% 25% 1.5
Market Index 14% 15% 1.0
Risk-free rate 5%


2) Net after-tax cash flows (in million of dollars) of the project is

Years from Now After-Tax CF
0 -20
1-9 10
10 20

The project’s beta is 1.7. Assuming r(f) = 9% & E(Rm)=19%, what is the net present value of the project? What is the highest possible beta estimate for the project before its NPV becomes negative?

3) Consider the following table, which gives a security analyst’s expected return on two stocks for two particular market returns:

Market Return Aggressive stock Defensive stock
5% 2% 3.5%
20 32 14

a)what are the betas of the two stocks?
b)What is the expected rate of return on each stock if the market return is equally likely to be 5% or 20%?
c)If the T-bill rate is 8%, and the market return is equally likely to be 5% or 20%, draw SML for this economy.
d)Plot the two securities on the SML graph. What are the alphas of each?
e)What hurdle rate should be used by the management of the aggressive firm for a project with the risk characteristics of the defensive firm’s stock?