Question 1

Robert Engle won the Nobel Prize for his

Accepted Answer

A) work on econometric techniques to deal with time-varying volatility. 
B) work on developing the efficient frontier. 
C) work on developing the CAPM. 
D) work on interest rates. 
A) work on econometric techniques to deal with time-varying volatility. 
B) work on developing the efficient frontier. 
C) work on developing the CAPM. 
D) work on interest rates. A

Question 2

As a financial analyst, you are tasked with evaluating a capital-budgeting project.You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate.The risk-free rate is 4%, and the expected market rate of return is 11%.Your company has a beta of 1.0, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be

Accepted Answer

A) 4%. 
B) 7%. 
C) 15%. 
D) 11%. 
A) 4%. 
B) 7%. 
C) 15%. 
D) 11%. D

Question 3

As a financial analyst, you are tasked with evaluating a capital-budgeting project.You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate.The risk-free rate is 4%, and the expected market rate of return is 11%.Your company has a beta of 0.75, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be

Accepted Answer

A) 4%. 
B) 9.25%. 
C) 15%. 
D) 11%. 
A) 4%. 
B) 9.25%. 
C) 15%. 
D) 11%. B

Question 4

Standard deviation and beta both measure risk, but they are different in that beta measures

Accepted Answer

A) both systematic and unsystematic risk. 
B) only systematic risk, while standard deviation is a measure of total risk. 
C) only unsystematic risk, while standard deviation is a measure of total risk. 
D) both systematic and unsystematic risk, while standard deviation measures only systematic risk. 
A) both systematic and unsystematic risk. 
B) only systematic risk, while standard deviation is a measure of total risk. 
C) only unsystematic risk, while standard deviation is a measure of total risk. 
D) both systematic and unsystematic risk, while standard deviation measures only systematic risk.

Question 5

You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3.The beta of the resulting portfolio is

Accepted Answer

A) 1.40. 
B) 1.00. 
C) 0.52. 
D) 1.08. 
A) 1.40. 
B) 1.00. 
C) 0.52. 
D) 1.08.

Question 6

The capital asset pricing model assumes

Accepted Answer

A) all investors are rational. 
B) all investors have the same holding period. 
C) investors have heterogeneous expectations. 
D) all investors are rational and have the same holding period. 
A) all investors are rational. 
B) all investors have the same holding period. 
C) investors have heterogeneous expectations. 
D) all investors are rational and have the same holding period.

Question 7

Assume that a security is fairly priced and has an expected rate of return of 0.13.The market expected rate of return is 0.13, and the risk-free rate is 0.04.The beta of the stock is

Accepted Answer

A) 1.25. 
B) 1.7. 
C) 1. 
D) 0.95. 
A) 1.25. 
B) 1.7. 
C) 1. 
D) 0.95.

Question 8

According to the Capital Asset Pricing Model (CAPM), a security with a

Accepted Answer

A) positive alpha is considered overpriced. 
B) zero alpha is considered to be a good buy. 
C) negative alpha is considered to be a good buy. 
D) positive alpha is considered to be underpriced. 
A) positive alpha is considered overpriced. 
B) zero alpha is considered to be a good buy. 
C) negative alpha is considered to be a good buy. 
D) positive alpha is considered to be underpriced.

Question 9

The capital asset pricing model assumes

Accepted Answer

A) all investors are price takers. 
B) all investors have the same holding period. 
C) investors pay taxes on capital gains. 
D) all investors are price takers and have the same holding period. 
A) all investors are price takers. 
B) all investors have the same holding period. 
C) investors pay taxes on capital gains. 
D) all investors are price takers and have the same holding period.

Question 10

Burton Malkiel results show that

Accepted Answer

A) Beta tends to 1 over time. 
B) CAPM is not testable in practice. 
C) the distribution of alphas is roughly bell shaped. 
D) CAPM can be tested in empirical studies. 
A) Beta tends to 1 over time. 
B) CAPM is not testable in practice. 
C) the distribution of alphas is roughly bell shaped. 
D) CAPM can be tested in empirical studies.

Question 11

A security has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08, and the risk-free rate is 0.05.The alpha of the stock is

Accepted Answer

A) 1.7%. 
B) -1.7%. 
C) 8.3%. 
D) 5.5%. 
A) 1.7%. 
B) -1.7%. 
C) 8.3%. 
D) 5.5%.

Question 12

In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is

Accepted Answer

A) unique risk. 
B) systematic risk. 
C) standard deviation of returns. 
D) variance of returns. 
A) unique risk. 
B) systematic risk. 
C) standard deviation of returns. 
D) variance of returns.

Question 13

According to the Capital Asset Pricing Model (CAPM), overpriced securities have

Accepted Answer

A) positive betas. 
B) zero alphas. 
C) negative alphas. 
D) positive alphas. 
A) positive betas. 
B) zero alphas. 
C) negative alphas. 
D) positive alphas.

Question 14

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect CAT with a beta of 1.0 to offer a rate of return of 10%, you should

Accepted Answer

A) buy CAT because it is overpriced. 
B) sell short CAT because it is overpriced. 
C) sell short CAT because it is underpriced. 
D) buy CAT because it is underpriced. 
A) buy CAT because it is overpriced. 
B) sell short CAT because it is overpriced. 
C) sell short CAT because it is underpriced. 
D) buy CAT because it is underpriced.

Question 15

According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have

Accepted Answer

A) positive betas. 
B) zero alphas. 
C) negative betas. 
D) positive alphas. 
A) positive betas. 
B) zero alphas. 
C) negative betas. 
D) positive alphas.

Question 16

The amount that an investor allocates to the market portfolio is negatively related to I) the expected return on the market portfolio.
II) the investor's risk aversion coefficient.
III) the risk-free rate of return.
IV) the variance of the market portfolio.

Accepted Answer

A) I and II. 
B) II and III. 
C) II and IV. 
D) II, III, and IV. 
A) I and II. 
B) II and III. 
C) II and IV. 
D) II, III, and IV.

Question 17

An underpriced security will plot

Accepted Answer

A) on the security market line. 
B) below the security market line. 
C) above the security market line. 
D) either above or below the security market line depending on its covariance with the market. 
A) on the security market line. 
B) below the security market line. 
C) above the security market line. 
D) either above or below the security market line depending on its covariance with the market.

Question 18

Your opinion is that security A has an expected rate of return of 0.145.It has a beta of 1.5.The risk-free rate is 0.04, and the market expected rate of return is 0.11.According to the Capital Asset Pricing Model, this security is

Accepted Answer

A) underpriced. 
B) overpriced. 
C) fairly priced. 
D) Cannot be determined from data provided. 
A) underpriced. 
B) overpriced. 
C) fairly priced. 
D) Cannot be determined from data provided.

Question 19

The risk-free rate is 5%.The expected market rate of return is 11%.If you expect stock X with a beta of 2.1 to offer a rate of return of 15%, you should

Accepted Answer

A) buy stock X because it is overpriced. 
B) sell short stock X because it is overpriced. 
C) sell short stock X because it is underpriced. 
D) buy stock X because it is underpriced. 
A) buy stock X because it is overpriced. 
B) sell short stock X because it is overpriced. 
C) sell short stock X because it is underpriced. 
D) buy stock X because it is underpriced.

Question 20

A security has an expected rate of return of 0.13 and a beta of 2.1.The market expected rate of return is 0.09, and the risk-free rate is 0.045.The alpha of the stock is

Accepted Answer

A) -0.95%. 
B) -1.7%. 
C) 8.3%. 
D) 5.5%. 
A) -0.95%. 
B) -1.7%. 
C) 8.3%. 
D) 5.5%.

Exam 9: The Capital Asset Pricing Model

Robert Engle won the Nobel Prize for his

Standard deviation and beta both measure risk, but they are different in that beta measures

You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3.The beta of the resulting portfolio is

The capital asset pricing model assumes

Assume that a security is fairly priced and has an expected rate of return of 0.13.The market expected rate of return is 0.13, and the risk-free rate is 0.04.The beta of the stock is

According to the Capital Asset Pricing Model (CAPM), a security with a

The capital asset pricing model assumes

Burton Malkiel results show that

A security has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08, and the risk-free rate is 0.05.The alpha of the stock is

In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is

According to the Capital Asset Pricing Model (CAPM), overpriced securities have

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect CAT with a beta of 1.0 to offer a rate of return of 10%, you should

According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have

The amount that an investor allocates to the market portfolio is negatively related to I) the expected return on the market portfolio. II) the investor's risk aversion coefficient. III) the risk-free rate of return. IV) the variance of the market portfolio.

An underpriced security will plot

Your opinion is that security A has an expected rate of return of 0.145.It has a beta of 1.5.The risk-free rate is 0.04, and the market expected rate of return is 0.11.According to the Capital Asset Pricing Model, this security is

The risk-free rate is 5%.The expected market rate of return is 11%.If you expect stock X with a beta of 2.1 to offer a rate of return of 15%, you should

A security has an expected rate of return of 0.13 and a beta of 2.1.The market expected rate of return is 0.09, and the risk-free rate is 0.045.The alpha of the stock is

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Risk, Return, and the Historical Record

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The Efficient Market Hypothesis

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Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

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Financial Statement Analysis

Options Markets: Introduction

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