Question 1

Most professional investors use the S&P 500 as a general gauge of total market performance.

Accepted Answer

A) True 
 B)False

Question 2

Based on the CAPM, would you expect an investment in precious metals to have an above average return?

Accepted Answer

No. Precious metals tend to be

Question 3

None of the asset-pricing models assume that the market is perfect.

Accepted Answer

A) True 
 B)False

Question 4

An investment in a limited partnership that searches for sunken treasure would have a high beta.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is an assumption of the CMT?

Accepted Answer

A)  Single investors can affect the market by their buying and selling decisions. 
B)  There is no inflation. 
C)  Investors prefer capital gains over dividends. 
D)  Different investors have different probability distributions for assets. 
A)  Single investors can affect the market by their buying and selling decisions. 
B)  There is no inflation. 
C)  Investors prefer capital gains over dividends. 
D)  Different investors have different probability distributions for assets.

Question 6

Under the separation theorem, investors should:

Accepted Answer

A)  hold the same portfolio of risky assets. 
B)  have different optimal portfolios of risky assets. 
C)  hold the same percentage of their portfolio in risk-free securities. 
D)  borrow at the risk-free rate to achieve a lower risk portfolio. 
A)  hold the same portfolio of risky assets. 
B)  have different optimal portfolios of risky assets. 
C)  hold the same percentage of their portfolio in risk-free securities. 
D)  borrow at the risk-free rate to achieve a lower risk portfolio.

Question 7

The four-factor model adds a momentum factor to the three-factor model.

Accepted Answer

A) True 
 B)False

Question 8

If markets are efficient and in equilibrium:

Accepted Answer

A)  all securities would lie on the SML. 
B)  any security that plots below the SML would be considered undervalued. 
C)  any security that plots above the SML would be considered overvalued. 
D)  no security would lie on the SML. 
A)  all securities would lie on the SML. 
B)  any security that plots below the SML would be considered undervalued. 
C)  any security that plots above the SML would be considered overvalued. 
D)  no security would lie on the SML.

Question 9

The expected return on the market for next period is 11 percent. The risk-free rate is 4 percent, and Alpha Company has a beta of 1.1. The market risk premium is:
A) 7.7 percent.
B) 7 percent.
C) 11 percent.
D) 12.1 percent.

Accepted Answer

The answer of The expected return on the market for...

Question 10

The expected return for the market is 12 percent, with a standard deviation of 20 percent. The expected risk-free rate is 8 percent. Information is available for three mutual funds, all assumed to be efficient, as follows:
 $\begin{array}{ll}
\underline { Mutual~~~Funds   }&\underline {  \sigma(\%)  }\
\text { Affiliated } & 15 \
\text { Omega } & 17 \
\text { Ivy } & 19
\end{array}$ (a) Based on the CML, calculate the market price of risk.
(b) Calculate the expected return on each of these portfolios.

Accepted Answer

(a) Market price of risk = slo

Question 11

Which of the following is generally used as a proxy for the risk-free return?

Accepted Answer

A)  Savings account 
B)  Certificate of deposit 
C)  Treasury security 
D)  AAA-rated bond 
A)  Savings account 
B)  Certificate of deposit 
C)  Treasury security 
D)  AAA-rated bond

Question 12

For which of the following models is beta the slope term?

Accepted Answer

A)  Risk-free model 
B)  CAPM 
C)  CML 
D)  Market model 
A)  Risk-free model 
B)  CAPM 
C)  CML 
D)  Market model

Question 13

Based on the CAPM, which stock should have the highest expected return over the next year?

Accepted Answer

A)  McDonald's 
B)  Barrick Gold 
C)  Campbell Soup 
D)  Bank of America 
A)  McDonald's 
B)  Barrick Gold 
C)  Campbell Soup 
D)  Bank of America

Question 14

Under the CMT, the relevant risk to consider with any security is:

Accepted Answer

A)  its correlation with other securities in the portfolio. 
B)  its covariance with the market portfolio. 
C)  its deviation from the portfolio required rate of return. 
D)  its variance from the risk-free rate of return. 
A)  its correlation with other securities in the portfolio. 
B)  its covariance with the market portfolio. 
C)  its deviation from the portfolio required rate of return. 
D)  its variance from the risk-free rate of return.

Question 15

At a given point in time, the SML dictates that a security with a beta of 1.10 should require a return of 18 percent. Analysts determine that a stock with an observed beta of 1.10 has an expected return of 20 percent. Outline the scenario that will bring the security's return into equilibrium.

Accepted Answer

Investors will recognize the s

Question 16

Beta is a measure of return volatility.

Accepted Answer

A) True 
 B)False

Question 17

Under the Market model, the regression line that results when the return of a security is plotted against the market index return is the:

Accepted Answer

A)  SML. 
B)  CML. 
C)  characteristic line. 
D)  slope. 
A)  SML. 
B)  CML. 
C)  characteristic line. 
D)  slope.

Question 18

The separation theorem states that:

Accepted Answer

A)  systematic risk is separate from unsystematic risk. 
B)  individual security risk is separate from portfolio risk. 
C)  the investment decision is separate from the financing decision. 
D)  the borrowing portfolio is separate from the lending portfolio. 
A)  systematic risk is separate from unsystematic risk. 
B)  individual security risk is separate from portfolio risk. 
C)  the investment decision is separate from the financing decision. 
D)  the borrowing portfolio is separate from the lending portfolio.

Question 19

The Capital Asset Pricing Model (CAPM):

Accepted Answer

A)  has serious flaws because of its complexity. 
B)  shows the relationship between risk and expected return. 
C)  was developed by Markowitz in the 1930s. 
D)  is a discounted-cash-flow valuation model. 
A)  has serious flaws because of its complexity. 
B)  shows the relationship between risk and expected return. 
C)  was developed by Markowitz in the 1930s. 
D)  is a discounted-cash-flow valuation model.

Question 20

The market has an expected return of 13 percent and the risk-free rate is 5.5 percent. If Morgan Stanley has a beta of 1.85, what is the required return for Morgan Stanley?

Accepted Answer

0.055 + 1.85 (.13 -

Exam 9: Capital Market Theory and Asset Pricing Models

Most professional investors use the S&P 500 as a general gauge of total market performance.

Based on the CAPM, would you expect an investment in precious metals to have an above average return?

None of the asset-pricing models assume that the market is perfect.

An investment in a limited partnership that searches for sunken treasure would have a high beta.

Which of the following is an assumption of the CMT?

Under the separation theorem, investors should:

The four-factor model adds a momentum factor to the three-factor model.

If markets are efficient and in equilibrium:

The expected return on the market for next period is 11 percent. The risk-free rate is 4 percent, and Alpha Company has a beta of 1.1. The market risk premium is: A) 7.7 percent. B) 7 percent. C) 11 percent. D) 12.1 percent.

Which of the following is generally used as a proxy for the risk-free return?

For which of the following models is beta the slope term?

Based on the CAPM, which stock should have the highest expected return over the next year?

Under the CMT, the relevant risk to consider with any security is:

At a given point in time, the SML dictates that a security with a beta of 1.10 should require a return of 18 percent. Analysts determine that a stock with an observed beta of 1.10 has an expected return of 20 percent. Outline the scenario that will bring the security's return into equilibrium.

Beta is a measure of return volatility.

Under the Market model, the regression line that results when the return of a security is plotted against the market index return is the:

The separation theorem states that:

The Capital Asset Pricing Model (CAPM):

The market has an expected return of 13 percent and the risk-free rate is 5.5 percent. If Morgan Stanley has a beta of 1.85, what is the required return for Morgan Stanley?

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How Securities Are Traded

The Risk and Return From Investing

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Common Stocks: Analysis and Strategy

Market Efficiency

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Bond Yields and Prices

Bonds: Analysis and Strategy

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