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

What return would you expect if the risk- free rate of return was 5 per cent, the beta risk is 1.5, and the historical risk premium has been 6 per cent? (Base you calculation on the capital asset pricing model.)

Use of the Capital Asset Pricing Model (CAPM) in measuring the cost of ordinary equity differs from the constant dividend growth valuation model in that it directly considers the firm's risk as reflected by beta.

The cost of ordinary equity may be estimated by using the

A firm has a beta of 1.2. The market return equals 14% and the risk- free rate of return equals 6 %. The estimated cost of ordinary equity is

What are the two variables whose relationship is represented by the Security Market Line?

Which model would you be adopting if you used the formula E(ri) = rf + fi[E (rm)- rf) ?

In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by

What is represented by the symbol rf in the formula ri = rf + fi (rm - rf) ?

What does beta measure?

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