Exam 8: The Capital Asset Pricing Model and Multi-Factor Models

Using the Capital Asset Pricing Model (CAPM), the cost of ordinary equity is the return required by investors as compensation for the firm's nondiversifiable risk.

In the formula E(ri) = rf + fi E(rm - rf), what does the term E(rm - rf) represent?

The difference between the return on the market portfolio of assets and the risk- free rate of return represents the premium the investor must receive for taking the average amount of risk associated with holding the market portfolio of assets.

The cost of ordinary equity for a firm would be 18% if the risk- free return is 5%, the market risk premium is 10%, and the firm's beta is 1.3.

The security market line (SML) reflects the required return in the marketplace for each level of nondiversifiable risk (beta).

Asset P has a beta of 0.9. The risk- free rate of return is 8%, while the return on the market portfolio of assets is 14%. The asset's required rate of return is

If the beta of a specific share is 1, what is the likely result of a 2 per cent increase in the market index return?

For a particular share, a 1 per cent change in the market index generally leads to a return of less than 1 per cent on the company's share. What can be concluded about the value of beta (fi)?

Which of the following gives the best definition of the CAPM approach?

Which three of the following are common applications of the CAPM?

The value of zero for beta coefficient of the risk- free asset reflects not only its absence of risk but also the fact that the asset's return is unaffected by movements in the market return.

Shares in a company are perfectly correlated with the market return. The risk free rate of return is 5 per cent and the risk premium is 6 per cent. What is the expected return?

Using the capital asset pricing model, the cost of ordinary stock equity is the return required by investors as compensation for

Which two of the following highlight technical problems with the CAPM?

What is the basic predication of the CAPM?

Which one of the following statements does Arnold consider to be controversial?

An increase in the beta of a firm indicates , and, all else being the same, results in .

Which two of the statements accurately relate to unsystematic risk?

Asset Y has a beta of 1.2. The risk- free rate of return is 6%, while the return on the market portfolio of assets is 12%. The asset's market risk premium is

The capital asset pricing model describes the relationship between the required return, or the cost of common stock equity capital, and the nonsystematic risk of the firm as measured by the beta coefficient.