Question 1

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases

Accepted Answer

A)  directly with alpha. 
B)  inversely with alpha. 
C)  directly with beta. 
D)  inversely with beta. 
E)  in proportion to its standard deviation. 
A)  directly with alpha. 
B)  inversely with alpha. 
C)  directly with beta. 
D)  inversely with beta. 
E)  in proportion to its standard deviation. C

Question 2

A stock generates a perpetual cash flow of $7 per share, per year. The market index has an expected return of 12% and the risk free rate is 5%. If the stock's listed beta is 1.0 and I believe the true beta is 0.75, how much of a premium will I pay for the stock?

Accepted Answer

A)  $9.96 
B)  $12.26 
C)  $33.29 
D)  $41.43 
A)  $9.96 
B)  $12.26 
C)  $33.29 
D)  $41.43 A

Question 3

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. 
E)  None of the options, as the stock is fairly priced. 
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. 
E)  None of the options, as the stock is fairly priced. B

Question 4

Studies of liquidity spreads in security markets have shown that

Accepted Answer

A)  liquid stocks earn higher returns than illiquid stocks. 
B)  illiquid stocks earn higher returns than liquid stocks. 
C)  both liquid and illiquid stocks earn the same returns. 
D)  illiquid stocks are good investments for frequent, short-term traders. 
A)  liquid stocks earn higher returns than illiquid stocks. 
B)  illiquid stocks earn higher returns than liquid stocks. 
C)  both liquid and illiquid stocks earn the same returns. 
D)  illiquid stocks are good investments for frequent, short-term traders.

Question 5

The amount that an investor allocates to the market portfolio is negatively related toI) 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. 
E)  I, III, and IV. 
A)  I and II. 
B)  II and III. 
C)  II and IV. 
D)  II, III, and IV. 
E)  I, III, and IV.

Question 6

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 7

The capital asset pricing model assumes

Accepted Answer

A)  all investors are price takers. 
B)  all investors have the same holding period. 
C)  investors have homogeneous expectations. 
D)  all investors are price takers and have the same holding period. 
E)  all investors are price takers, have the same holding period, and have homogeneous expectations. 
A)  all investors are price takers. 
B)  all investors have the same holding period. 
C)  investors have homogeneous expectations. 
D)  all investors are price takers and have the same holding period. 
E)  all investors are price takers, have the same holding period, and have homogeneous expectations.

Question 8

Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. 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 9

Capital asset pricing theory asserts that portfolio returns are best explained by

Accepted Answer

A)  reinvestment risk. 
B)  specific risk. 
C)  systematic risk. 
D)  diversification. 
A)  reinvestment risk. 
B)  specific risk. 
C)  systematic risk. 
D)  diversification.

Question 10

The capital asset pricing model assumes

Accepted Answer

A)  all investors are fully informed. 
B)  all investors are rational. 
C)  all investors are mean-variance optimizers. 
D)  taxes are an important consideration. 
E)  all investors are fully informed, are rational, and are mean-variance optimizers. 
A)  all investors are fully informed. 
B)  all investors are rational. 
C)  all investors are mean-variance optimizers. 
D)  taxes are an important consideration. 
E)  all investors are fully informed, are rational, and are mean-variance optimizers.

Question 11

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%. 
E)  0.75%. 
A)  4%. 
B)  9.25%. 
C)  15%. 
D)  11%. 
E)  0.75%.

Question 12

Assume that a security is fairly priced and has an expected rate of return of 0.17. The market expected rate of return is 0.11, and the risk-free rate is 0.04. The beta of the stock is

Accepted Answer

A)  1.25. 
B)  1.86. 
C)  1. 
D)  0.95. 
A)  1.25. 
B)  1.86. 
C)  1. 
D)  0.95.

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

A security has an expected rate of return of 0.12 and a beta of 1.1. The market expected rate of return is 0.09, and the risk-free rate is 0.04. The alpha of the stock is

Accepted Answer

A)  9.7%. 
B)  7.7%. 
C)  5.3%. 
D)  2.5%. 
A)  9.7%. 
B)  7.7%. 
C)  5.3%. 
D)  2.5%.

Question 15

In a well-diversified portfolio,

Accepted Answer

A)  market risk is negligible. 
B)  systematic risk is negligible. 
C)  unsystematic risk is negligible. 
D)  nondiversifiable risk is negligible. 
A)  market risk is negligible. 
B)  systematic risk is negligible. 
C)  unsystematic risk is negligible. 
D)  nondiversifiable risk is negligible.

Question 16

A stock generates a perpetual cash flow of $8 per share, per year. The market index has an expected return of 14% and the risk free rate is 3%. If the stock's listed beta is 1.0 and I believe the true beta is 1.3, how much is the stock overpriced?

Accepted Answer

A)  $33.42 
B)  $25.78 
C)  $18.20 
D)  $10.90 
A)  $33.42 
B)  $25.78 
C)  $18.20 
D)  $10.90

Question 17

One of the assumptions of the CAPM is that investors exhibit myopic behavior. What does this mean?

Accepted Answer

A)  They plan for one identical holding period. 
B)  They are price takers who can't affect market prices through their trades. 
C)  They are mean-variance optimizers. 
D)  They have the same economic view of the world. 
E)  They pay no taxes or transactions costs. 
A)  They plan for one identical holding period. 
B)  They are price takers who can't affect market prices through their trades. 
C)  They are mean-variance optimizers. 
D)  They have the same economic view of the world. 
E)  They pay no taxes or transactions costs.

Question 18

Your opinion is that Boeing has an expected rate of return of 0.112. It has a beta of 0.92. 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 19

Which statement is true regarding the capital market line (CML)?I) The CML is the line from the risk-free rate through the market portfolio.II) The CML is the best attainable capital allocation line.III) The CML is also called the security market line.IV) The CML always has a positive slope.

Accepted Answer

A)  I only 
B)  II only 
C)  III only 
D)  IV only 
E)  I, II, and IV 
A)  I only 
B)  II only 
C)  III only 
D)  IV only 
E)  I, II, and IV

Question 20

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%.

Exam 9: The Capital Asset Pricing Model

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases

A stock generates a perpetual cash flow of $7 per share, per year. The market index has an expected return of 12% and the risk free rate is 5%. If the stock's listed beta is 1.0 and I believe the true beta is 0.75, how much of a premium will I pay for the stock?

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

Studies of liquidity spreads in security markets have shown that

The amount that an investor allocates to the market portfolio is negatively related toI) 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.

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

The capital asset pricing model assumes

Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing Model, this security is

Capital asset pricing theory asserts that portfolio returns are best explained by

The capital asset pricing model assumes

Assume that a security is fairly priced and has an expected rate of return of 0.17. The market expected rate of return is 0.11, and the risk-free rate is 0.04. The beta of the stock 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

A security has an expected rate of return of 0.12 and a beta of 1.1. The market expected rate of return is 0.09, and the risk-free rate is 0.04. The alpha of the stock is

In a well-diversified portfolio,

A stock generates a perpetual cash flow of $8 per share, per year. The market index has an expected return of 14% and the risk free rate is 3%. If the stock's listed beta is 1.0 and I believe the true beta is 1.3, how much is the stock overpriced?

One of the assumptions of the CAPM is that investors exhibit myopic behavior. What does this mean?

Your opinion is that Boeing has an expected rate of return of 0.112. It has a beta of 0.92. 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

Which statement is true regarding the capital market line (CML)?I) The CML is the line from the risk-free rate through the market portfolio.II) The CML is the best attainable capital allocation line.III) The CML is also called the security market line.IV) The CML always has a positive slope.

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

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters