Question 1

An analyst determined that for the past two quarters the risk-free rate has exceeded the return on the market portfolio.Does this information disprove the CML?

Accepted Answer

No,it merely shows that actual

Question 2

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

Question 3

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:

Accepted Answer

A) 7.7 percent. 
B) 7 percent. 
C) 11 percent. 
D) 12.1 percent. 
A) 7.7 percent. 
B) 7 percent. 
C) 11 percent. 
D) 12.1 percent.

Question 4

Compare the capital market line and the security market line.

Accepted Answer

CMLSML
efficient portfolios,co

Question 5

Which of the following statements is most accurate?The:

Accepted Answer

A) CML plots individual stocks and efficient portfolios. 
B) CML plots both efficient and inefficient portfolios. 
C) SML plots individual securities and efficient portfolios,only. 
D) SML plots individual securities,inefficient portfolios,and efficient portfolios. 
A) CML plots individual stocks and efficient portfolios. 
B) CML plots both efficient and inefficient portfolios. 
C) SML plots individual securities and efficient portfolios,only. 
D) SML plots individual securities,inefficient portfolios,and efficient portfolios.

Question 6

Unlike the CAPM,the APT does not assume borrowing and lending at the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 7

The Capital Asset Pricing Model:

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 8

The APT is based on the law of one price,which states two identical assets cannot sell at different prices.

Accepted Answer

A) True 
 B)False

Question 9

The most volatile stocks have betas near zero.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Securities with betas greater than l should have:

Accepted Answer

A) greater than average diversifiable risk 
B) lower than average diversifiable risk. 
C) required returns higher than the market return. 
D) no systematic risk. 
A) greater than average diversifiable risk 
B) lower than average diversifiable risk. 
C) required returns higher than the market return. 
D) no systematic risk.

Question 12

Which of the following is not an assumption of both the arbitrage pricing theory (APT)and the CAPM?

Accepted Answer

A) Investors have homogeneous beliefs. 
B) Investors are risk-averse utility maximizers. 
C) Borrowing and lending can be done at the rate RF. 
D) Markets are perfect. 
A) Investors have homogeneous beliefs. 
B) Investors are risk-averse utility maximizers. 
C) Borrowing and lending can be done at the rate RF. 
D) Markets are perfect.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

Using the separation theorem,it is necessary to match each investor's indifference curves with a particular efficient portfolio.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements about the difference between the SML and the CML is true?

Accepted Answer

A) The intercept of the CML is the origin,whereas the intercept of the SML is RF. 
B) The CML applies to efficient portfolios,whereas the SML applies to all
Portfolios or securities. 
C) The CML can be downward sloping,whereas that is impossible for the SML. 
D) The CML and the SML are essentially the same except for the price of risk. 
A) The intercept of the CML is the origin,whereas the intercept of the SML is RF. 
B) The CML applies to efficient portfolios,whereas the SML applies to all
Portfolios or securities. 
C) The CML can be downward sloping,whereas that is impossible for the SML. 
D) The CML and the SML are essentially the same except for the price of risk.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

The CML indicates the required return for each portfolio risk level.

Accepted Answer

A) True 
 B)False

Exam 9: Asset Pricing Models

An analyst determined that for the past two quarters the risk-free rate has exceeded the return on the market portfolio.Does this information disprove the CML?

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:

Compare the capital market line and the security market line.

Which of the following statements is most accurate?The:

Unlike the CAPM,the APT does not assume borrowing and lending at the risk-free rate.

The Capital Asset Pricing Model:

The APT is based on the law of one price,which states two identical assets cannot sell at different prices.

The most volatile stocks have betas near zero.

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

Securities with betas greater than l should have:

Which of the following is not an assumption of both the arbitrage pricing theory (APT)and the CAPM?

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

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

Which of the following is an assumption of the CMT?

Using the separation theorem,it is necessary to match each investor's indifference curves with a particular efficient portfolio.

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

Which of the following statements about the difference between the SML and the CML is true?

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

The CML indicates the required return for each portfolio risk level.

Understanding Investments

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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

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Bond Yields

Bonds: Analysis and Strategy

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