Question 1

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of

Accepted Answer

A) systematic risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk. 
A) systematic risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk.

Question 2

The security market line (SML)

Accepted Answer

A) can be portrayed graphically as the expected return-beta relationship. 
B) can be portrayed graphically as the expected return-standard deviation of market-returns relationship. 
C) provides a benchmark for evaluation of investment performance. 
D) can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance. 
A) can be portrayed graphically as the expected return-beta relationship. 
B) can be portrayed graphically as the expected return-standard deviation of market-returns relationship. 
C) provides a benchmark for evaluation of investment performance. 
D) can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance.

Question 3

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

Accepted Answer

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

Question 4

The expected return-beta relationship of the CAPM is graphically represented by

Accepted Answer

A) the security-market line. 
B) the capital-market line. 
C) the capital-allocation line. 
D) the efficient frontier with a risk-free asset. 
A) the security-market line. 
B) the capital-market line. 
C) the capital-allocation line. 
D) the efficient frontier with a risk-free asset.

Question 5

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 13%, 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 6

A security has an expected rate of return of 0.15 and a beta of 1.25.The market expected rate of return is 0.10, and the risk-free rate is 0.04.The alpha of the stock is

Accepted Answer

A) 1.7%. 
B) -1.7%. 
C) 8.3%. 
D) 3.5%. 
A) 1.7%. 
B) -1.7%. 
C) 8.3%. 
D) 3.5%.

Question 7

Which statement is not true regarding the market portfolio?

Accepted Answer

A) It includes all publicly-traded financial assets. 
B) It lies on the efficient frontier. 
C) All securities in the market portfolio are held in proportion to their market values. 
D) It is the tangency point between the capital market line and the indifference curve. 
A) It includes all publicly-traded financial assets. 
B) It lies on the efficient frontier. 
C) All securities in the market portfolio are held in proportion to their market values. 
D) It is the tangency point between the capital market line and the indifference curve.

Question 8

The expected return-beta relationship

Accepted Answer

A) is the most familiar expression of the CAPM to practitioners. 
B) refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. 
C) assumes that investors hold well-diversified portfolios. 
D) All of the options are true. 
A) is the most familiar expression of the CAPM to practitioners. 
B) refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. 
C) assumes that investors hold well-diversified portfolios. 
D) All of the options are true.

Question 9

The risk-free rate is 7%.The expected market rate of return is 15%.If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should

Accepted Answer

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

Question 10

Fama and French documented the predictive power of

Accepted Answer

A) Beta only for asset returns. 
B) Alpha on asset returns. 
C) Yield spread for asset returns. 
D) Liquidity premium for asset returns. 
A) Beta only for asset returns. 
B) Alpha on asset returns. 
C) Yield spread for asset returns. 
D) Liquidity premium for asset returns.

Question 11

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

Accepted Answer

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

Question 12

Your opinion is that security C has an expected rate of return of 0.106.It has a beta of 1.1.The risk-free rate is 0.04, and the market expected rate of return is 0.10.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 13

Security A has an expected rate of return of 0.10 and a beta of 1.3.The market expected rate of return is 0.10, and the risk-free rate is 0.04.The alpha of the stock is

Accepted Answer

A) 1.7%. 
B) -1.8%. 
C) 8.3%. 
D) 5.5%. 
A) 1.7%. 
B) -1.8%. 
C) 8.3%. 
D) 5.5%.

Question 14

The security market line (SML) is

Accepted Answer

A) the line that describes the expected return-beta relationship for well-diversified portfolios only. 
B) also called the capital allocation line. 
C) the line that is tangent to the efficient frontier of all risky assets. 
D) the line that represents the expected return-beta relationship. 
A) the line that describes the expected return-beta relationship for well-diversified portfolios only. 
B) also called the capital allocation line. 
C) the line that is tangent to the efficient frontier of all risky assets. 
D) the line that represents the expected return-beta relationship.

Question 15

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 0.67, 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) 8.69%. 
C) 15%. 
D) 11%. 
A) 4%. 
B) 8.69%. 
C) 15%. 
D) 11%.

Question 16

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

Accepted Answer

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

Question 17

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 5%, and the expected market rate of return is 10%.Your company has a beta of 0.67, 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) 10%. 
B) 5%. 
C) 8.35%. 
D) 28.35%. 
A) 10%. 
B) 5%. 
C) 8.35%. 
D) 28.35%.

Question 18

According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false?

Accepted Answer

A) The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate. 
B) The expected rate of return on a security increases as its beta increases. 
C) A fairly priced security has an alpha of zero. 
D) In equilibrium, all securities lie on the security market line. 
A) The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate. 
B) The expected rate of return on a security increases as its beta increases. 
C) A fairly priced security has an alpha of zero. 
D) In equilibrium, all securities lie on the security market line.

Question 19

Fama and French documented

Accepted Answer

A) that CAPM is confirmed in empirical studies. 
B) number of other extra-market risk factors. 
C) Beta tends to 1 over time. 
D) CAPM is not testable in practice. 
A) that CAPM is confirmed in empirical studies. 
B) number of other extra-market risk factors. 
C) Beta tends to 1 over time. 
D) CAPM is not testable in practice.

Question 20

The risk-free rate is 4%.The expected market rate of return is 12%.If you expect stock X with a beta of 1.0 to offer a rate of return of 10%, 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.

Exam 9: The Capital Asset Pricing Model

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of

The security market line (SML)

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

The expected return-beta relationship of the CAPM is graphically represented by

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 13%, you should

A security has an expected rate of return of 0.15 and a beta of 1.25.The market expected rate of return is 0.10, and the risk-free rate is 0.04.The alpha of the stock is

Which statement is not true regarding the market portfolio?

The expected return-beta relationship

The risk-free rate is 7%.The expected market rate of return is 15%.If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should

Fama and French documented the predictive power of

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

Your opinion is that security C has an expected rate of return of 0.106.It has a beta of 1.1.The risk-free rate is 0.04, and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model, this security is

Security A has an expected rate of return of 0.10 and a beta of 1.3.The market expected rate of return is 0.10, and the risk-free rate is 0.04.The alpha of the stock is

The security market line (SML) is

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

According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false?

Fama and French documented

The risk-free rate is 4%.The expected market rate of return is 12%.If you expect stock X with a beta of 1.0 to offer a rate of return of 10%, you should

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