Question 1

The capital asset pricing model (CAPM)states which of the following?

Accepted Answer

A) The expected risk premium on an investment is proportional to its beta. 
B) The expected rate of return on an investment is proportional to its beta. 
C) The expected rate of return on an investment is determined entirely by the risk-free rate and the market rate of return. 
D) The expected rate of return on an investment is determined entirely by the risk-free rate. 
A) The expected risk premium on an investment is proportional to its beta. 
B) The expected rate of return on an investment is proportional to its beta. 
C) The expected rate of return on an investment is determined entirely by the risk-free rate and the market rate of return. 
D) The expected rate of return on an investment is determined entirely by the risk-free rate.

Question 2

Overpriced stocks will plot below the security market line.

Accepted Answer

A) True 
 B)False

Question 3

The correlation coefficient between the efficient portfolio and the risk-free asset is

Accepted Answer

A) +1.0. 
B) −1.0. 
C) 0.0. 
D) Further information is needed. 
A) +1.0. 
B) −1.0. 
C) 0.0. 
D) Further information is needed.

Question 4

Suppose the beta of Microsoft is 1.13, the risk-free rate is 3 percent, and the market risk premium is 8 percent. Calculate the expected return for Microsoft.

Accepted Answer

A) 12.04 percent 
B) 15.66 percent 
C) 13.94 percent 
D) 8.65 percent 
A) 12.04 percent 
B) 15.66 percent 
C) 13.94 percent 
D) 8.65 percent

Question 5

The security market line (SML)is the graph of

Accepted Answer

A) expected rate of return on investment vs. variance of returns. 
B) expected rate of return on investment vs. standard deviation of returns. 
C) expected rate of return on investment vs. beta. 
D) expected rate of return on investment vs. average returns. 
A) expected rate of return on investment vs. variance of returns. 
B) expected rate of return on investment vs. standard deviation of returns. 
C) expected rate of return on investment vs. beta. 
D) expected rate of return on investment vs. average returns.

Question 6

Assume the following data for a stock: Beta = 1.5; risk-free rate = 4 percent; market rate of return = 12 percent; and expected rate of return on the stock = 15 percent. Then the stock is

Accepted Answer

A) overpriced. 
B) underpriced. 
C) correctly priced. 
D) cannot be determined. 
A) overpriced. 
B) underpriced. 
C) correctly priced. 
D) cannot be determined.

Question 7

One would expect a stock with a beta of 1.25 to increase in returns

Accepted Answer

A) 25 percent more than the market in up markets. 
B) 25 percent more than the market in down markets. 
C) 125 percent more than the market in up markets. 
D) 125 percent more than the market in down markets. 
A) 25 percent more than the market in up markets. 
B) 25 percent more than the market in down markets. 
C) 125 percent more than the market in up markets. 
D) 125 percent more than the market in down markets.

Question 8

The distribution of annual returns over long periods for stocks is more closely related to the normal distribution than the lognormal distribution.

Accepted Answer

A) True 
 B)False

Question 9

A factor in APT is a variable that

Accepted Answer

A) is pure "noise." 
B) correlates with risky asset returns in an unsystematic manner. 
C) correlates with the returns of risky assets in a systematic manner. 
D) affects the returns of risky assets in a random manner. 
A) is pure "noise." 
B) correlates with risky asset returns in an unsystematic manner. 
C) correlates with the returns of risky assets in a systematic manner. 
D) affects the returns of risky assets in a random manner.

Exam 8: Portfolio Theory and the Capital Asset Pricing Model

The capital asset pricing model (CAPM)states which of the following?

Overpriced stocks will plot below the security market line.

The correlation coefficient between the efficient portfolio and the risk-free asset is

Suppose the beta of Microsoft is 1.13, the risk-free rate is 3 percent, and the market risk premium is 8 percent. Calculate the expected return for Microsoft.

The security market line (SML)is the graph of

Assume the following data for a stock: Beta = 1.5; risk-free rate = 4 percent; market rate of return = 12 percent; and expected rate of return on the stock = 15 percent. Then the stock is

One would expect a stock with a beta of 1.25 to increase in returns

The distribution of annual returns over long periods for stocks is more closely related to the normal distribution than the lognormal distribution.

A factor in APT is a variable that

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters