8006 Exam Dumps : Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

The stock has a beta of 1.2, therefore intuitively it can be expected to earn more than the broad market index. It will earn the risk free rate, ie 3%, and 1.2 times the equity risk premium of 5% (8% - 3%). The expected returns from the stock therefore are 3% + (8% - 3%)*1.2 = 9%

Explanation:

The return on an asset is a function of the covariance of the asset's return to the returns of the market portfolio. They do not depend upon the standard deviation of the asset itself. Therefore Choice 'b' is correct and Choice 'c' is incorrect.

The expected returns on an asset are equal to the risk free rate plus the beta times the market risk premium, therefore Choice 'a' is correct.

Portfolios on the efficient frontier will all have a different Sharpe ratio, which is the ratio of excess returns to portfolio volatility.

Choice 'c' is the correct answer (note that the question is asking for an identification of the INCORRECT statement).

Choice 'b' is the correct answer. The other relationships are not correct.