Question 1

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

Accepted Answer

The assumptions are:
(a) The market is c

Question 2

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 0.67 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) 8.69 
C) 15 
D) 11 
E) 0.75 
A) 4 
B) 8.69 
C) 15 
D) 11 
E) 0.75

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.

Question 4

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

Accepted Answer

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

Question 5

The market portfolio has a beta of

Accepted Answer

A) 0. 
B) 1. 
C) -1. 
D) 0.5. 
E) none of the above 
A) 0. 
B) 1. 
C) -1. 
D) 0.5. 
E) none of the above

Question 6

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) They 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) They 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 7

Which statement is true regarding the Capital Market Line (CML)?

Accepted Answer

A) The CML is the line from the risk-free rate through the market portfolio. 
B) The CML is the best attainable capital allocation line. 
C) The CML is also called the security market line. 
D) The CML always has a positive slope. 
E) A,B,and D are true. 
A) The CML is the line from the risk-free rate through the market portfolio. 
B) The CML is the best attainable capital allocation line. 
C) The CML is also called the security market line. 
D) The CML always has a positive slope. 
E) A,B,and D are true.

Question 8

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 9

The capital asset pricing model assumes

Accepted Answer

A) all investors are fully informed. 
B) all investors are rational. 
C) all investors are mean-variance optimizers. 
D) taxes are an important consideration. 
E) A,B and C are all true. 
A) all investors are fully informed. 
B) all investors are rational. 
C) all investors are mean-variance optimizers. 
D) taxes are an important consideration. 
E) A,B and C are all true.

Question 10

Which statement is not true regarding the market portfolio?

Accepted Answer

A) It includes all publicly traded financial assets. 
B) It lies on the efficient frontier. 
C) All securities in the market portfolio are held in proportion to their market values. 
D) It is the tangency point between the capital market line and the indifference curve. 
E) All of the above are true. 
A) It includes all publicly traded financial assets. 
B) It lies on the efficient frontier. 
C) All securities in the market portfolio are held in proportion to their market values. 
D) It is the tangency point between the capital market line and the indifference curve. 
E) All of the above are true.

Question 11

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

Accepted Answer

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

Question 12

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

Accepted Answer

A) unique risk. 
B) systematic risk. 
C) standard deviation of returns. 
D) variance of returns. 
E) none of the above. 
A) unique risk. 
B) systematic risk. 
C) standard deviation of returns. 
D) variance of returns. 
E) none of the above.

Question 13

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.

Question 14

Given the following two stocks A and B $$\begin{array} { | l | l | l | } 
\hline \text { Security } & \text { Expected rate of return } & \underline { \text { Beta } } \
\hline \text { A } & 0.12 & 1.2 \
\hline \text { B } & 0.14 & 1.8 \
\hline
\end{array}$$ 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?

Accepted Answer

A) A because it offers an expected excess return of 1.2%. 
B) B because it offers an expected excess return of 1.8%. 
C) A because it offers an expected excess return of 2.2%. 
D) B because it offers an expected return of 14%. 
E) B because it has a higher beta. 
A) A because it offers an expected excess return of 1.2%. 
B) B because it offers an expected excess return of 1.8%. 
C) A because it offers an expected excess return of 2.2%. 
D) B because it offers an expected return of 14%. 
E) B because it has a higher beta.

Question 15

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 5 percent and the expected market rate of return is 10 percent.Your company has a beta of 0.67 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) 10 
B) 5 
C) 8.35 
D) 28.35 
E) 0.67 
A) 10 
B) 5 
C) 8.35 
D) 28.35 
E) 0.67

Question 16

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

Accepted Answer

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

Question 17

Your opinion is that Boeing has an expected rate of return of 0.08.It has a beta of 0.92.The risk-free rate is 0.04 and the market expected rate of return is 0.10.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.

Question 18

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

Accepted Answer

A) unique risk. 
B) systematic risk. 
C) standard deviation of returns. 
D) variance of returns. 
E) none of the above. 
A) unique risk. 
B) systematic risk. 
C) standard deviation of returns. 
D) variance of returns. 
E) none of the above.

Question 19

Security A has an expected rate of return of 0.10 and a beta of 1.3.The market expected rate of return is 0.10 and the risk-free rate is 0.04.The alpha of the stock is

Accepted Answer

A) 1.7%. 
B) -1.8%. 
C) 8.3%. 
D) 5.5%. 
E) none of the above. 
A) 1.7%. 
B) -1.8%. 
C) 8.3%. 
D) 5.5%. 
E) none of the above.

Question 20

Your personal opinion is that a security 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

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

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

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

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

The market portfolio has a beta of

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

Which statement is true regarding the Capital Market Line (CML)?

Empirical results regarding betas estimated from historical data indicate that

The capital asset pricing model assumes

Which statement is not true regarding the market portfolio?

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

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

A "fairly priced" asset lies

Given the following two stocks A and B Security Expected rate of return 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?

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

Your opinion is that Boeing has an expected rate of return of 0.08.It has a beta of 0.92.The risk-free rate is 0.04 and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model,this security is

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

Security A has an expected rate of return of 0.10 and a beta of 1.3.The market expected rate of return is 0.10 and the risk-free rate is 0.04.The alpha of the stock is

Your personal opinion is that a security 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

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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