Question 1

If a stock has a beta greater than 1.0, it means:

Accepted Answer

A)  the stock's return has greater than average sensitivity to the market return. 
B)  the stock would be an attractive holding during a bear market. 
C)  an investor will earn a higher return on the stock than the market returns. 
D)  the stock is less risky than the market portfolio. 
A)  the stock's return has greater than average sensitivity to the market return. 
B)  the stock would be an attractive holding during a bear market. 
C)  an investor will earn a higher return on the stock than the market returns. 
D)  the stock is less risky than the market portfolio.

Question 2

Select the incorrect statement regarding the CML. The CML:

Accepted Answer

A)  is an equilibrium relationship for efficient portfolios and individual securities. 
B)  represents the risk-return tradeoff for efficient portfolios. 
C)  has an intercept that is the reward to investors for deferring consumption. 
D)  relies on standard deviation as the measure of risk. 
A)  is an equilibrium relationship for efficient portfolios and individual securities. 
B)  represents the risk-return tradeoff for efficient portfolios. 
C)  has an intercept that is the reward to investors for deferring consumption. 
D)  relies on standard deviation as the measure of risk.

Question 3

With the APT, risk is defined in terms of a stock's sensitivity to basic economic factors.

Accepted Answer

A) True 
 B)False

Question 4

If the risk-free lending rate is lower than the borrowing rate, what would the shape of the CML and efficient frontier look like?

Accepted Answer

The CML would go from the risk-free rate

Question 5

The arbitrage pricing theory (APT):

Accepted Answer

A)  considers only one factor and is a narrower model than the CAPM. 
B)  considers more factors than the CAPM and is a broader model. 
C)  is useful only for well-diversified portfolios of common stock. 
D)  is easy to implement because the factors are readily observable. 
A)  considers only one factor and is a narrower model than the CAPM. 
B)  considers more factors than the CAPM and is a broader model. 
C)  is useful only for well-diversified portfolios of common stock. 
D)  is easy to implement because the factors are readily observable.

Question 6

Compare the capital market line and the security market line.

Accepted Answer

CML and SML both ind

Question 7

Tests of the CAPM suggest the trade-off between expected return and risk is an upward-sloping straight line.

Accepted Answer

A) True 
 B)False

Question 8

Some securities are considered to be "defensive" in that they tend to hold their value or increase in value when the majority of securities are losing value, such as during a recession. What could one conclude about the betas of defensive securities?

Accepted Answer

One would expect the

Question 9

McDonald's has a below average beta.

Accepted Answer

A) True 
 B)False

Question 10

The SML can be used to analyze the relationship between risk and required return for:

Accepted Answer

A)  all assets. 
B)  only inefficient portfolios. 
C)  only efficient portfolios. 
D)  only individual securities. 
A)  all assets. 
B)  only inefficient portfolios. 
C)  only efficient portfolios. 
D)  only individual securities.

Question 11

The slope of the CML is the:

Accepted Answer

A)  standard deviation of the market portfolio.::::: 
B)  market price of risk for efficient portfolios. 
C)  risk-free rate. 
D)  risk premium for the market portfolio. 
A)  standard deviation of the market portfolio.::::: 
B)  market price of risk for efficient portfolios. 
C)  risk-free rate. 
D)  risk premium for the market portfolio.

Question 12

The characteristic line is the regression fitting total returns for a stock against total returns for the market and is sometimes calculated using excess returns.

Accepted Answer

A) True 
 B)False

Question 13

A security that plots above the SML would be a good security to sell short.

Accepted Answer

A) True 
 B)False

Question 14

The APT is based on the:

Accepted Answer

A)  law of averages. 
B)  law of attraction. 
C)  law of accelerating return. 
D)  law of one price. 
A)  law of averages. 
B)  law of attraction. 
C)  law of accelerating return. 
D)  law of one price.

Question 15

The CML states that all investors should invest in the same portfolio of risky assets.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements regarding investors and the CMT is true?

Accepted Answer

A)  Investors recognize that all the assumptions of the CMT are unrealistic. 
B)  Investors recognize that all of the CMT assumptions are not unrealistic. 
C)  Investors are not aware of the assumptions of the CMT model. 
D)  Investors recognize the CMT is useless for individual investors. 
A)  Investors recognize that all the assumptions of the CMT are unrealistic. 
B)  Investors recognize that all of the CMT assumptions are not unrealistic. 
C)  Investors are not aware of the assumptions of the CMT model. 
D)  Investors recognize the CMT is useless for individual investors.

Question 17

How are securities chosen and in what proportions are they represented in the market portfolio M?

Accepted Answer

All assets are included in por

Question 18

The most volatile stocks have betas near zero.

Accepted Answer

A) True 
 B)False

Question 19

Like CAPM, APT does not assume a single-period investment horizon.

Accepted Answer

A) True 
 B)False

Question 20

Assume a risk-free rate of 5 percent and an expected market return of 15 percent. Now suppose that the SML shifts, changing slope, so that kRF is still 5 percent but kM is now 16 percent. What does this shift suggest about investors' risk aversion? If the slope were to change downward, what would that suggest?

Accepted Answer

It suggests that investors are more aver

Exam 9: Capital Market Theory and Asset Pricing Models

If a stock has a beta greater than 1.0, it means:

Select the incorrect statement regarding the CML. The CML:

With the APT, risk is defined in terms of a stock's sensitivity to basic economic factors.

If the risk-free lending rate is lower than the borrowing rate, what would the shape of the CML and efficient frontier look like?

The arbitrage pricing theory (APT):

Compare the capital market line and the security market line.

Tests of the CAPM suggest the trade-off between expected return and risk is an upward-sloping straight line.

Some securities are considered to be "defensive" in that they tend to hold their value or increase in value when the majority of securities are losing value, such as during a recession. What could one conclude about the betas of defensive securities?

McDonald's has a below average beta.

The SML can be used to analyze the relationship between risk and required return for:

The slope of the CML is the:

The characteristic line is the regression fitting total returns for a stock against total returns for the market and is sometimes calculated using excess returns.

A security that plots above the SML would be a good security to sell short.

The APT is based on the:

The CML states that all investors should invest in the same portfolio of risky assets.

Which of the following statements regarding investors and the CMT is true?

How are securities chosen and in what proportions are they represented in the market portfolio M?

The most volatile stocks have betas near zero.

Like CAPM, APT does not assume a single-period investment horizon.

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

Portfolio Selection and Asset Allocation

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

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