Question 1

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. A

Question 2

Betas of individual securities are unstable over time.What are some characteristics that could cause a company's beta to change over time?

Accepted Answer

A few examples include earnings,cash flow,management,financial leverage,sales growth,and product mix.

Question 3

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. A

Question 4

Why is market risk sometimes said to be the "relevant" risk for a portfolio manager?What is the measure of market risk?

Accepted Answer

Market risk,measured by beta,is non-dive

Question 5

Which of the following might be used as a factor in an APT factor model?

Accepted Answer

A) The risk-free rate 
B) Expected inflation 
C) Unanticipated deviations from expected inflation 
D) Loss by fire at a company's manufacturing plant 
A) The risk-free rate 
B) Expected inflation 
C) Unanticipated deviations from expected inflation 
D) Loss by fire at a company's manufacturing plant

Question 6

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 particular 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 7

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 8

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 9

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 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

Compare the security market line model and the arbitrage pricing theory.

Accepted Answer

SML is a one-factor model,the factor bei

Question 12

What does it mean when the CAPM is called "robust?"

Accepted Answer

A) The CAPM requires no assumptions. 
B) Even if the CAPM's major assumptions are relaxed,most of its conclusions still hold. 
C) The CAPM is based on realistic assumptions. 
D) No other model can represent stock returns better than the CAPM. 
A) The CAPM requires no assumptions. 
B) Even if the CAPM's major assumptions are relaxed,most of its conclusions still hold. 
C) The CAPM is based on realistic assumptions. 
D) No other model can represent stock returns better than the CAPM.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Select the correct statement regarding the market portfolio.

Accepted Answer

A) It is readily and precisely observable. 
B) It has no unsystematic risk. 
C) It has no systematic risk. 
D) It should be composed of stocks or bonds. 
A) It is readily and precisely observable. 
B) It has no unsystematic risk. 
C) It has no systematic risk. 
D) It should be composed of stocks or bonds.

Question 15

Beta is a measure of systematic risk and relates one security's return to another security's return.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is generally used as a proxy for the risk-free rate of 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 17

Which of the following is an implication of the CAPM?

Accepted Answer

A) A security with a beta of 0 has an expected return of 0. 
B) Investors are not compensated for bearing diversifiable risk. 
C) The risk-return relationship is nonlinear. 
D) There are two risk factors that drive asset returns. 
A) A security with a beta of 0 has an expected return of 0. 
B) Investors are not compensated for bearing diversifiable risk. 
C) The risk-return relationship is nonlinear. 
D) There are two risk factors that drive asset returns.

Question 18

Positive theory refers to a theory that:

Accepted Answer

A) explains how economic participants should act. 
B) describes how economic participants act. 
C) is optimistic. 
D) has been shown to have high explanatory power as a result of empirical testing. 
A) explains how economic participants should act. 
B) describes how economic participants act. 
C) is optimistic. 
D) has been shown to have high explanatory power as a result of empirical testing.

Question 19

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 20

Which of the following is the correct calculation for the required rate of return under the CAPM?

Accepted Answer

A) Beta × (market risk premium) 
B) Beta + market risk premium 
C) Risk-free rate + risk premium 
D) Risk-free rate × (market risk premium) 
A) Beta × (market risk premium) 
B) Beta + market risk premium 
C) Risk-free rate + risk premium 
D) Risk-free rate × (market risk premium)

Exam 9: Asset Pricing Models

Under the separation theorem,investors should:

Betas of individual securities are unstable over time.What are some characteristics that could cause a company's beta to change over time?

If markets are efficient and in equilibrium:

Why is market risk sometimes said to be the "relevant" risk for a portfolio manager?What is the measure of market risk?

Which of the following might be used as a factor in an APT factor model?

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

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

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

Compare the security market line model and the arbitrage pricing theory.

What does it mean when the CAPM is called "robust?"

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

Select the correct statement regarding the market portfolio.

Beta is a measure of systematic risk and relates one security's return to another security's return.

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

Which of the following is an implication of the CAPM?

Positive theory refers to a theory that:

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

Which of the following is the correct calculation for the required rate of return under the CAPM?

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risks and Returns From Investing

Portfolio Theory

Portfolio Selection

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economy Market Analysis

Industry Analysis

Company Analysis

Technical Analysis

Bond Yields

Bonds: Analysis and Strategy

Options

Futures

Portfolio Management

Evaluation of Investment Performance

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