Question 1

The market risk,beta,of a security is equal to

Accepted Answer

A)  the covariance between the security's return and the market return divided by the variance of the market's returns. 
B)  the covariance between the security and market returns divided by the standard deviation of the market's returns. 
C)  the variance of the security's returns divided by the covariance between the security and market returns. 
D)  the variance of the security's returns divided by the variance of the market's returns. 
E)  none of these. 
A)  the covariance between the security's return and the market return divided by the variance of the market's returns. 
B)  the covariance between the security and market returns divided by the standard deviation of the market's returns. 
C)  the variance of the security's returns divided by the covariance between the security and market returns. 
D)  the variance of the security's returns divided by the variance of the market's returns. 
E)  none of these.

Question 2

Assume that a security is fairly priced and has an expected rate of return of 0.13.The market expected rate of return is 0.13 and the risk-free rate is 0.04.The beta of the stock is

Accepted Answer

A)  1.25. 
B)  1.7. 
C)  1. 
D)  0.95. 
E)  none of these 
A)  1.25. 
B)  1.7. 
C)  1. 
D)  0.95. 
E)  none of these

Question 3

For the CAPM that examines illiquidity premiums,if there is correlation among assets due to common systematic risk factors,the illiquidity premium on asset i is a function of

Accepted Answer

A)  the market's volatility. 
B)  asset i's volatility. 
C)  the trading costs of security i. 
D)  the risk-free rate. 
E)  the money supply. 
A)  the market's volatility. 
B)  asset i's volatility. 
C)  the trading costs of security i. 
D)  the risk-free rate. 
E)  the money supply.

Question 4

Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.

Accepted Answer

The CAPM can be used to establish a hurd

Question 5

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)  The 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)  The 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 6

Discuss the mutual fund theorem.

Accepted Answer

The mutual fund theorem is based on the

Question 7

The risk-free rate and the expected market rate of return are 0.06 and 0.12,respectively.According to the capital asset pricing model (CAPM),the expected rate of return on security X with a beta of 1.2 is equal to

Accepted Answer

A)  0.06. 
B)  0.144. 
C)  0.12. 
D)  0.132 
E)  0.18 
A)  0.06. 
B)  0.144. 
C)  0.12. 
D)  0.132 
E)  0.18

Question 8

The risk-free rate is 7 percent.The expected market rate of return is 15 percent.If you expect stock X with a beta of 1.3 to offer a rate of return of 12 percent,you should

Accepted Answer

A)  buy stock X because it is overpriced. 
B)  sell short stock X because it is overpriced. 
C)  sell stock short X because it is underpriced. 
D)  buy stock X because it is underpriced. 
E)  none of these,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 stock short X because it is underpriced. 
D)  buy stock X because it is underpriced. 
E)  none of these,as the stock is fairly priced.

Question 9

Which of the following statements about the mutual fund theorem is true?
I.It is similar to the separation property.
II.It implies that a passive investment strategy can be efficient.
III.It implies that efficient portfolios can be formed only through active strategies.
IV.It means that professional managers have superior security selection strategies.

Accepted Answer

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

Question 10

You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7.The beta of the resulting portfolio is

Accepted Answer

A)  1.40. 
B)  1.15. 
C)  0.36. 
D)  1.08. 
E)  0.80. 
A)  1.40. 
B)  1.15. 
C)  0.36. 
D)  1.08. 
E)  0.80.

Question 11

According to the Capital Asset Pricing Model (CAPM),

Accepted Answer

A)  a security with a positive alpha is considered overpriced. 
B)  a security with a zero alpha is considered to be a good buy. 
C)  a security with a negative alpha is considered to be a good buy. 
D)  a security with a positive alpha is considered to be underpriced. 
E)  none of these. 
A)  a security with a positive alpha is considered overpriced. 
B)  a security with a zero alpha is considered to be a good buy. 
C)  a security with a negative alpha is considered to be a good buy. 
D)  a security with a positive alpha is considered to be underpriced. 
E)  none of these.

Question 12

The expected return-beta relationship

Accepted Answer

A)  is the most familiar expression of the CAPM to practitioners. 
B)  refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio,which is beta. 
C)  assumes that investors hold well-diversified portfolios 
D)  all of these are true. 
E)  none of these are true. 
A)  is the most familiar expression of the CAPM to practitioners. 
B)  refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio,which is beta. 
C)  assumes that investors hold well-diversified portfolios 
D)  all of these are true. 
E)  none of these are true.

Question 13

The CAPM applies to

Accepted Answer

A)  portfolios of securities only. 
B)  individual securities only. 
C)  efficient portfolios of securities only. 
D)  efficient portfolios and efficient individual securities only. 
E)  all portfolios and individual securities. 
A)  portfolios of securities only. 
B)  individual securities only. 
C)  efficient portfolios of securities only. 
D)  efficient portfolios and efficient individual securities only. 
E)  all portfolios and individual securities.

Question 14

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 by 10%. 
B)  overpriced. 
C)  fairly priced. 
D)  cannot be determined from data provided. 
E)  underpriced by 5%. 
A)  underpriced by 10%. 
B)  overpriced. 
C)  fairly priced. 
D)  cannot be determined from data provided. 
E)  underpriced by 5%.

Question 15

Empirical results regarding betas estimated from historical data indicate that

Accepted Answer

A)  betas are constant over time. 
B)  betas of all securities are always greater than one. 
C)  betas are always near zero. 
D)  betas appear to regress toward one over time. 
E)  betas are always positive. 
A)  betas are constant over time. 
B)  betas of all securities are always greater than one. 
C)  betas are always near zero. 
D)  betas appear to regress toward one over time. 
E)  betas are always positive.

Question 16

List and discuss two of the assumptions of the CAPM.

Accepted Answer

Assumptions are 1)there are many investo

Question 17

What is the expected return of a zero-beta security?

Accepted Answer

A)  The market rate of return. 
B)  Zero rate of return. 
C)  A negative rate of return. 
D)  The risk-free rate. 
E)  None of these. 
A)  The market rate of return. 
B)  Zero rate of return. 
C)  A negative rate of return. 
D)  The risk-free rate. 
E)  None of these.

Question 18

The capital asset pricing model assumes

Accepted Answer

A)  all investors are price takers. 
B)  all investors have the same holding period. 
C)  investors pay taxes on capital gains. 
D)  both a and b are true. 
E)  a,b and c are all true. 
A)  all investors are price takers. 
B)  all investors have the same holding period. 
C)  investors pay taxes on capital gains. 
D)  both a and b are true. 
E)  a,b and c are all true.

Question 19

In equilibrium,the marginal price of risk for a risky security must be

Accepted Answer

A)  equal to the marginal price of risk for the market portfolio. 
B)  greater than the marginal price of risk for the market portfolio. 
C)  less than the marginal price of risk for the market portfolio. 
D)  adjusted by its degree of nonsystematic risk. 
E)  none of these are true. 
A)  equal to the marginal price of risk for the market portfolio. 
B)  greater than the marginal price of risk for the market portfolio. 
C)  less than the marginal price of risk for the market portfolio. 
D)  adjusted by its degree of nonsystematic risk. 
E)  none of these are true.

Question 20

Security A has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08 and the risk-free rate is 0.05.The alpha of the stock is

Accepted Answer

A)  1.7%. 
B)  -1.7%. 
C)  8.3%. 
D)  5.5%. 
E)  none of these. 
A)  1.7%. 
B)  -1.7%. 
C)  8.3%. 
D)  5.5%. 
E)  none of these.

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

The market risk,beta,of a security is equal to

Assume that a security is fairly priced and has an expected rate of return of 0.13.The market expected rate of return is 0.13 and the risk-free rate is 0.04.The beta of the stock is

For the CAPM that examines illiquidity premiums,if there is correlation among assets due to common systematic risk factors,the illiquidity premium on asset i is a function of

Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.

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

Discuss the mutual fund theorem.

The risk-free rate and the expected market rate of return are 0.06 and 0.12,respectively.According to the capital asset pricing model (CAPM),the expected rate of return on security X with a beta of 1.2 is equal to

The risk-free rate is 7 percent.The expected market rate of return is 15 percent.If you expect stock X with a beta of 1.3 to offer a rate of return of 12 percent,you should

You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7.The beta of the resulting portfolio is

According to the Capital Asset Pricing Model (CAPM),

The expected return-beta relationship

The CAPM applies to

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

Empirical results regarding betas estimated from historical data indicate that

List and discuss two of the assumptions of the CAPM.

What is the expected return of a zero-beta security?

The capital asset pricing model assumes

In equilibrium,the marginal price of risk for a risky security must be

Security A has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08 and the risk-free rate is 0.05.The alpha of the stock is

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