Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

Your personal opinion is that security X has an expected rate of return of 0.11.It has a beta of 1.5.The risk-free rate is 0.05 and the market expected rate of return is 0.09.According to the Capital Asset Pricing Model,this security is

Discuss the differences between the capital market line and the security market line.

Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.

The security market line (SML)

According to the Capital Asset Pricing Model (CAPM)a well diversified portfolio's rate of return is a function of

Given the following two stocks A and B Security Expected rate of return Beta A 0.12 1.2 B 0.14 1.8 If the expected market rate of return is 0.09 and the risk-free rate is 0.05,which security would be considered the better buy and why?

Capital Asset Pricing Theory asserts that portfolio returns are best explained by:

Which statement is

In the context of the Capital Asset Pricing Model (CAPM)the relevant measure of risk is

Studies of liquidity spreads in security markets have shown that

According to the CAPM,the risk premium an investor expects to receive on any stock or portfolio increases:

As a financial analyst,you are tasked with evaluating a capital budgeting project.You were instructed to use the IRR method and you need to determine an appropriate hurdle rate.The risk-free rate is 4 percent and the expected market rate of return is 11 percent.Your company has a beta of 1.0 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM,the appropriate hurdle rate would be ______%.

Standard deviation and beta both measure risk,but they are different in that