Question 1

An overpriced security will plot

Accepted Answer

A) on the Security Market Line. 
B) below the Security Market Line. 
C) above the Security Market Line. 
D) either above or below the Security Market Line depending on its covariance with the market. 
E) either above or below the Security Market Line depending on its standard deviation. 
A) on the Security Market Line. 
B) below the Security Market Line. 
C) above the Security Market Line. 
D) either above or below the Security Market Line depending on its covariance with the market. 
E) either above or below the Security Market Line depending on its standard deviation. B

Question 2

A "fairly priced" asset lies

Accepted Answer

A) above the security market line. 
B) on the security market line. 
C) on the capital market line. 
D) above the capital market line. 
E) below the security market line. 
A) above the security market line. 
B) on the security market line. 
C) on the capital market line. 
D) above the capital market line. 
E) below the security market line. B

Question 3

The risk-free rate is 5 percent.The expected market rate of return is 11 percent.If you expect stock X with a beta of 2.1 to offer a rate of return of 15 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 the above,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 the above,as the stock is fairly priced. B

Question 4

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 1.4 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 ______%.

Accepted Answer

A) 13.8 
B) 7 
C) 15 
D) 4 
E) 1.4 
A) 13.8 
B) 7 
C) 15 
D) 4 
E) 1.4

Question 5

If investors do not know their investment horizons for certain

Accepted Answer

A) the CAPM is no longer valid. 
B) the CAPM underlying assumptions are not violated. 
C) the implications of the CAPM are not violated as long as investors' liquidity needs are not priced. 
D) the implications of the CAPM are no longer useful. 
E) none of the above are true. 
A) the CAPM is no longer valid. 
B) the CAPM underlying assumptions are not violated. 
C) the implications of the CAPM are not violated as long as investors' liquidity needs are not priced. 
D) the implications of the CAPM are no longer useful. 
E) none of the above are true.

Question 6

The expected return - beta relationship of the CAPM is graphically represented by

Accepted Answer

A) the security market line. 
B) the capital market line. 
C) the capital allocation line. 
D) the efficient frontier with a risk-free asset. 
E) the efficient frontier without a risk-free asset. 
A) the security market line. 
B) the capital market line. 
C) the capital allocation line. 
D) the efficient frontier with a risk-free asset. 
E) the efficient frontier without a risk-free asset.

Question 7

The security market line (SML)

Accepted Answer

A) can be portrayed graphically as the expected return-beta relationship. 
B) can be portrayed graphically as the expected return-standard deviation of market returns relationship. 
C) provides a benchmark for evaluation of investment performance. 
D) A and C. 
E) B and C. 
A) can be portrayed graphically as the expected return-beta relationship. 
B) can be portrayed graphically as the expected return-standard deviation of market returns relationship. 
C) provides a benchmark for evaluation of investment performance. 
D) A and C. 
E) B and C.

Question 8

Studies of liquidity spreads in security markets have shown that

Accepted Answer

A) liquid stocks earn higher returns than illiquid stocks. 
B) illiquid stocks earn higher returns than liquid stocks. 
C) both liquid and illiquid stocks earn the same returns. 
D) illiquid stocks are good investments for frequent, short-term traders. 
E) None of the above are true. 
A) liquid stocks earn higher returns than illiquid stocks. 
B) illiquid stocks earn higher returns than liquid stocks. 
C) both liquid and illiquid stocks earn the same returns. 
D) illiquid stocks are good investments for frequent, short-term traders. 
E) None of the above are true.

Question 9

A security 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 the above. 
A) 1.7%. 
B) -1.7%. 
C) 8.3%. 
D) 5.5%. 
E) none of the above.

Question 10

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 11

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.s. 
E) none of the above. 
A) 1.25. 
B) 1.7. 
C) 1. 
D) 0.95.s. 
E) none of the above.

Question 12

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 0.75 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 ______%.

Accepted Answer

A) 4 
B) 9.25 
C) 15 
D) 11 
E) 0.75 
A) 4 
B) 9.25 
C) 15 
D) 11 
E) 0.75

Question 13

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

Accepted Answer

A) beta measures both systematic and unsystematic risk. 
B) beta measures only systematic risk while standard deviation is a measure of total risk. 
C) beta measures only unsystematic risk while standard deviation is a measure of total risk. 
D) beta measures both systematic and unsystematic risk while standard deviation measures only systematic risk. 
E) beta measures total risk while standard deviation measures only nonsystematic risk. 
A) beta measures both systematic and unsystematic risk. 
B) beta measures only systematic risk while standard deviation is a measure of total risk. 
C) beta measures only unsystematic risk while standard deviation is a measure of total risk. 
D) beta measures both systematic and unsystematic risk while standard deviation measures only systematic risk. 
E) beta measures total risk while standard deviation measures only nonsystematic risk.

Question 14

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 15

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

Accepted Answer

A) market risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk. 
E) none of the above. 
A) market risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk. 
E) none of the above.

Question 16

According to the Capital Asset Pricing Model (CAPM),fairly priced securities

Accepted Answer

A) have positive betas. 
B) have zero alphas. 
C) have negative betas. 
D) have positive alphas. 
E) none of the above. 
A) have positive betas. 
B) have zero alphas. 
C) have negative betas. 
D) have positive alphas. 
E) none of the above.

Question 17

Research by Jeremy Stein of MIT resolves the dispute over whether beta is a sufficient pricing factor by suggesting that managers should use beta to estimate

Accepted Answer

A) long-term returns but not short-term returns. 
B) short-term returns but not long-term returns. 
C) both long- and short-term returns. 
D) book-to-market ratios. 
E) None of the above was suggested by Stein. 
A) long-term returns but not short-term returns. 
B) short-term returns but not long-term returns. 
C) both long- and short-term returns. 
D) book-to-market ratios. 
E) None of the above was suggested by Stein.

Question 18

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 the above. 
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 the above.

Question 19

The risk-free rate is 4 percent.The expected market rate of return is 11 percent.If you expect CAT with a beta of 1.0 to offer a rate of return of 11 percent,you should

Accepted Answer

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

Question 20

Your opinion is that security A has an expected rate of return of 0.145.It has a beta of 1.5.The risk-free rate is 0.04 and the market expected rate of return is 0.11.According to the Capital Asset Pricing Model,this security is

Accepted Answer

A) underpriced. 
B) overpriced. 
C) fairly priced. 
D) cannot be determined from data provided. 
E) none of the above. 
A) underpriced. 
B) overpriced. 
C) fairly priced. 
D) cannot be determined from data provided. 
E) none of the above.

Exam 12: Behavioral Finance and Technical Analysis

An overpriced security will plot

A "fairly priced" asset lies

The risk-free rate is 5 percent.The expected market rate of return is 11 percent.If you expect stock X with a beta of 2.1 to offer a rate of return of 15 percent,you should

If investors do not know their investment horizons for certain

The expected return - beta relationship of the CAPM is graphically represented by

The security market line (SML)

Studies of liquidity spreads in security markets have shown that

A security 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

The CAPM applies 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 ___.

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

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.

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

According to the Capital Asset Pricing Model (CAPM),fairly priced securities

Research by Jeremy Stein of MIT resolves the dispute over whether beta is a sufficient pricing factor by suggesting that managers should use beta to estimate

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

The risk-free rate is 4 percent.The expected market rate of return is 11 percent.If you expect CAT with a beta of 1.0 to offer a rate of return of 11 percent,you should

Your opinion is that security A has an expected rate of return of 0.145.It has a beta of 1.5.The risk-free rate is 0.04 and the market expected rate of return is 0.11.According to the Capital Asset Pricing Model,this security is

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

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