Question 1

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

Accepted Answer

A) economic factors. 
B) specific risk. 
C) systematic risk. 
D) diversification. 
E) none of the above. 
A) economic factors. 
B) specific risk. 
C) systematic risk. 
D) diversification. 
E) none of the above.

Question 2

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 3

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 4

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 5

Your opinion is that Boeing has an expected rate of return of 0.112.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 6

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. 
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 7

In a well diversified portfolio

Accepted Answer

A) market risk is negligible. 
B) systematic risk is negligible. 
C) unsystematic risk is negligible. 
D) nondiversifiable risk is negligible. 
E) none of the above. 
A) market risk is negligible. 
B) systematic risk is negligible. 
C) unsystematic risk is negligible. 
D) nondiversifiable risk is negligible. 
E) none of the above.

Question 8

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 ______%.

Accepted Answer

A) 4 
B) 7 
C) 15 
D) 11 
E) 1 
A) 4 
B) 7 
C) 15 
D) 11 
E) 1

Question 9

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 the above 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 the above are true.

Question 10

Your opinion is that Boeing has an expected rate of return of 0.0952.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 11

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 12

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

Accepted Answer

The capital market line measures the exc

Question 13

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 the above are true. 
E) none of the above 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 the above are true. 
E) none of the above are true.

Question 14

Your opinion is that CSCO has an expected rate of return of 0.15.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. 
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 15

According to the Capital Asset Pricing Model (CAPM),underpriced 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 16

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. 
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 17

An underpriced 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.

Question 18

Your opinion is that security C has an expected rate of return of 0.106.It has a beta of 1.1.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 19

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

Accepted Answer

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

Question 20

Your opinion is that Boeing has an expected rate of return of 0.0952.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.

Exam 12: Behavioral Finance and Technical Analysis

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

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

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

Your opinion is that Boeing has an expected rate of return of 0.112.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

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

In a well diversified portfolio

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

Your opinion is that Boeing has an expected rate of return of 0.0952.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

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?

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

The expected return-beta relationship

Your opinion is that CSCO has an expected rate of return of 0.15.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

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

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

An underpriced security will plot

Your opinion is that security C has an expected rate of return of 0.106.It has a beta of 1.1.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

Your opinion is that Boeing has an expected rate of return of 0.0952.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

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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