Question 1

Which of the following is a FALSE statement of the market price of risk?

Accepted Answer

A)  It is the incremental risk divided by the incremental expected return. 
B)  It is the slope of the capital market line. 
C)  It is the equilibrium price of risk in the capital market. 
D)  It indicates the additional expected return that the market demands for an increase in a portfolio's risk. 
A)  It is the incremental risk divided by the incremental expected return. 
B)  It is the slope of the capital market line. 
C)  It is the equilibrium price of risk in the capital market. 
D)  It indicates the additional expected return that the market demands for an increase in a portfolio's risk.

Question 2

The risk-free rate is 4.5 percent.The expected return on the market is 13 percent with a standard deviation of 15 percent.What is the required rate of return for Stock X if it has a beta of 1.4?

Accepted Answer

A)  16.40% 
B)  18.20% 
C)  20.50% 
D)  22.70% 
A)  16.40% 
B)  18.20% 
C)  20.50% 
D)  22.70%

Question 3

Which of the following is a TRUE statement?

Accepted Answer

A)  The tangent portfolio is the risky portfolio on the efficient frontier whose tangent line cuts the horizontal axis at the risk-free rate. 
B)  The new (or super) efficient frontier represents the portfolios composed of the risk-free rate and the tangent portfolio that offers the highest expected rate of return for any given level or risk. 
C)  The separation theorem states that the investment decision, (how to construct the portfolio of risky assets), is not separate from the financing decision, (how much should be invested or borrowed in the risk-free asset). 
D)  The market portfolio is a portfolio that contains some risky securities in the market. 
A)  The tangent portfolio is the risky portfolio on the efficient frontier whose tangent line cuts the horizontal axis at the risk-free rate. 
B)  The new (or super) efficient frontier represents the portfolios composed of the risk-free rate and the tangent portfolio that offers the highest expected rate of return for any given level or risk. 
C)  The separation theorem states that the investment decision, (how to construct the portfolio of risky assets), is not separate from the financing decision, (how much should be invested or borrowed in the risk-free asset). 
D)  The market portfolio is a portfolio that contains some risky securities in the market.

Question 4

The expected return on the market is 14 percent with a standard deviation of 18 percent and the risk-free rate is 5 percent.Which of the following portfolios are underpriced?

Accepted Answer

A)  1 and 2 only 
B)  1 and 3 only 
C)  2 and 3 only 
D)  3 and 4 only 
A)  1 and 2 only 
B)  1 and 3 only 
C)  2 and 3 only 
D)  3 and 4 only

Question 5

Use the following three statements to answer this question:

Accepted Answer

A)  I, II and III are correct. 
B)  I, II and III are incorrect. 
C)  I and III are correct, II is incorrect. 
D)  I is incorrect, II and III are correct.
I.The capital market line (CML)depicts the highest attainable expected return for any given risk level that includes only efficient portfolios.
II.The security market line (SML)depicts the required rate of return for any given risk level that includes only individual securities.
III.The Security Market Line (SML)measures the price of systematic risk. 
A)  I, II and III are correct. 
B)  I, II and III are incorrect. 
C)  I and III are correct, II is incorrect. 
D)  I is incorrect, II and III are correct.
I.The capital market line (CML)depicts the highest attainable expected return for any given risk level that includes only efficient portfolios.
II.The security market line (SML)depicts the required rate of return for any given risk level that includes only individual securities.
III.The Security Market Line (SML)measures the price of systematic risk.

Question 6

What is beta?

Accepted Answer

Beta is a measure of a security's market

Question 7

A portfolio consists of two securities: a risk-free asset and an equity security.The expected return on the risk-free asset is 4.25 percent.The expected return of the equity security is 16 percent with a standard deviation of 22 percent.What is the portfolio standard deviation if the expected return for the portfolio is 12 percent?

Accepted Answer

A)  6.99% 
B)  7.49% 
C)  10.55% 
D)  14.51% 
A)  6.99% 
B)  7.49% 
C)  10.55% 
D)  14.51%

Question 8

A portfolio is composed of $2,000 invested in Stock A,$3,000 in Stock B,$4,000 in Stock C,and $5,000 in Stock D.What is the beta of the portfolio if the betas of Stock A,B,C,and D are 0.9,1.6,1.8 and 1.2,respectively?

Accepted Answer

A)  1.03 
B)  1.26 
C)  1.41 
D)  1.65 
A)  1.03 
B)  1.26 
C)  1.41 
D)  1.65

Question 9

Which one of the following is NOT true?

Accepted Answer

A)  The separation theorem states that the borrowing decision and investment decision are separate. 
B)  Investors should look at investments in terms of their prospective return, not their cost 
C)  The separation theorem states that you cannot separate your risk-free and stock investments. 
D)  The market portfolio is the tangent line that goes through the risk-free rate. 
A)  The separation theorem states that the borrowing decision and investment decision are separate. 
B)  Investors should look at investments in terms of their prospective return, not their cost 
C)  The separation theorem states that you cannot separate your risk-free and stock investments. 
D)  The market portfolio is the tangent line that goes through the risk-free rate.

Question 10

Use the following statements to answer this question:

Accepted Answer

A)  I, II, and III are correct. 
B)  I, II, and III are incorrect. 
C)  I, II are correct, and III is incorrect. 
D)  I, II are incorrect, and III is correct.
I.The risk premium is the expected payoff needed to get out of a risky situation.
II.The insurance premium is the payment needed to get into a risky situation.
III.Risk-averse investors willingly take fair gambles. 
A)  I, II, and III are correct. 
B)  I, II, and III are incorrect. 
C)  I, II are correct, and III is incorrect. 
D)  I, II are incorrect, and III is correct.
I.The risk premium is the expected payoff needed to get out of a risky situation.
II.The insurance premium is the payment needed to get into a risky situation.
III.Risk-averse investors willingly take fair gambles.

Question 11

The expected return of the market portfolio is 14 percent with a standard deviation of 25 percent.The risk-free rate is 6 percent.What would be the weight of the market portfolio in an efficient portfolio with a standard deviation of 30 percent,if borrowing is not allowed?

Accepted Answer

A)  16.78% 
B)  83.33% 
C)  20% 
D)  Cannot be constructed 
A)  16.78% 
B)  83.33% 
C)  20% 
D)  Cannot be constructed

Question 12

Stock ABC is currently selling for $16.72.It has just paid an annual dividend of $0.80 per share,which is expected to grow at 4.5 percent indefinitely.The risk-free rate is 6 percent.The expected return on the market portfolio is 14 percent with a standard deviation of 17 percent.
a) What is the expected return on Stock ABC?
b) Is Stock ABC overpriced, underpriced, or correctly priced if it has a beta of 0.6?
c) Is Stock ABC above, below, or on the SML?
d) What is the equilibrium price of Stock ABC? Assume the dividend grow rate remains at 4.5 percent.

Accepted Answer

A.Expected return on Stock ABC @#IMG-DLM& B.Requir

Question 13

Suppose you have $3,600 to invest in Securities A and B.Security A has an expected return of 6 percent and a beta of 0.5.Stock B has an expected return of 20 percent and a beta of 1.8.What is the expected return on the portfolio if the portfolio beta is 2.0?

Accepted Answer

A)  24.00% 
B)  23.65% 
C)  22.15% 
D)  22.22% 
A)  24.00% 
B)  23.65% 
C)  22.15% 
D)  22.22%

Question 14

The expected return on the market is 12 percent with a standard deviation of 20 percent and the risk-free rate is 4 percent.Which of the following portfolios are correctly priced?

Accepted Answer

A)  1 and 2 only 
B)  1 and 4 only 
C)  2 and 3 only 
D)  3 and 4 only 
A)  1 and 2 only 
B)  1 and 4 only 
C)  2 and 3 only 
D)  3 and 4 only

Question 15

What is the expected payoff from an investment that is equally likely to move from $100 to $180 or $100 to $70?

Accepted Answer

A)  40 
B)  15 
C)  -15 
D)  25 
A)  40 
B)  15 
C)  -15 
D)  25

Question 16

Which of the following is NOT a correct statement?

Accepted Answer

A)  Risk-averse investors will not willingly undertake fair gambles. 
B)  Risk-averse investors prefer to gamble on a risky situation where there is an equal probability of winning or losing the same amount of money. 
C)  Risk-averse investors require a risk premium to bear risk; the more risk averse they are, the higher the risk premium they require. 
D)  Risk-averse investors are willing to pay an insurance premium to get out of a risky situation. 
A)  Risk-averse investors will not willingly undertake fair gambles. 
B)  Risk-averse investors prefer to gamble on a risky situation where there is an equal probability of winning or losing the same amount of money. 
C)  Risk-averse investors require a risk premium to bear risk; the more risk averse they are, the higher the risk premium they require. 
D)  Risk-averse investors are willing to pay an insurance premium to get out of a risky situation.

Question 17

Which one of the following stocks does NOT have a beta close to 1?

Accepted Answer

A)  A stock that is part of the most dominant industry. 
B)  A stock that has a very high capitalization. 
C)  A newly listed stock. 
D)  The stock of a well-established firm. 
A)  A stock that is part of the most dominant industry. 
B)  A stock that has a very high capitalization. 
C)  A newly listed stock. 
D)  The stock of a well-established firm.

Question 18

The expected return on the market is 12.5 percent with a standard deviation of 25 percent.The risk-free rate is 5.5 percent.What is the expected return on an efficient portfolio with a standard deviation of 30 percent?

Accepted Answer

A)  4.10% 
B)  11.33% 
C)  13.90% 
D)  28.90% 
A)  4.10% 
B)  11.33% 
C)  13.90% 
D)  28.90%

Question 19

The expected return on the market is 11.5 percent with a standard deviation of 13 percent and the risk-free rate is 4 percent.Which of the following portfolios are undervalued?

Accepted Answer

A)  1 and 2 only 
B)  1 and 4 only 
C)  2 and 3 only 
D)  3 and 4 only 
A)  1 and 2 only 
B)  1 and 4 only 
C)  2 and 3 only 
D)  3 and 4 only

Question 20

The CAPM Model makes all the assumptions below EXCEPT:

Accepted Answer

A)  Assuming no transactional costs. 
B)  Assuming no personal income taxes. 
C)  Assuming all investors have different expectations about expected returns, and standard deviations for all traded securities. 
D)  Assuming all investors can borrow/lend at the risk-free rate. 
A)  Assuming no transactional costs. 
B)  Assuming no personal income taxes. 
C)  Assuming all investors have different expectations about expected returns, and standard deviations for all traded securities. 
D)  Assuming all investors can borrow/lend at the risk-free rate.

Exam 9: The Capital Asset Pricing Model Capm

Which of the following is a FALSE statement of the market price of risk?

The risk-free rate is 4.5 percent.The expected return on the market is 13 percent with a standard deviation of 15 percent.What is the required rate of return for Stock X if it has a beta of 1.4?

Which of the following is a TRUE statement?

The expected return on the market is 14 percent with a standard deviation of 18 percent and the risk-free rate is 5 percent.Which of the following portfolios are underpriced?

Use the following three statements to answer this question:

What is beta?

A portfolio is composed of $2,000 invested in Stock A,$3,000 in Stock B,$4,000 in Stock C,and $5,000 in Stock D.What is the beta of the portfolio if the betas of Stock A,B,C,and D are 0.9,1.6,1.8 and 1.2,respectively?

Which one of the following is NOT true?

Use the following statements to answer this question:

The expected return of the market portfolio is 14 percent with a standard deviation of 25 percent.The risk-free rate is 6 percent.What would be the weight of the market portfolio in an efficient portfolio with a standard deviation of 30 percent,if borrowing is not allowed?

Suppose you have $3,600 to invest in Securities A and B.Security A has an expected return of 6 percent and a beta of 0.5.Stock B has an expected return of 20 percent and a beta of 1.8.What is the expected return on the portfolio if the portfolio beta is 2.0?

The expected return on the market is 12 percent with a standard deviation of 20 percent and the risk-free rate is 4 percent.Which of the following portfolios are correctly priced?

What is the expected payoff from an investment that is equally likely to move from $100 to $180 or $100 to $70?

Which of the following is NOT a correct statement?

Which one of the following stocks does NOT have a beta close to 1?

The expected return on the market is 12.5 percent with a standard deviation of 25 percent.The risk-free rate is 5.5 percent.What is the expected return on an efficient portfolio with a standard deviation of 30 percent?

The expected return on the market is 11.5 percent with a standard deviation of 13 percent and the risk-free rate is 4 percent.Which of the following portfolios are undervalued?

The CAPM Model makes all the assumptions below EXCEPT:

An Introduction to Finance

Business Corporatefinance

Financial Statements

Financial Statement Analysis and Forecasting

Time Value of Money

Bond Valuation and Interest Rates

Equity Valuation

Risk, return, and Portfolio Theory

Market Efficiency

Forwards,futures,and Swaps

Options

Capital Budgeting, risk Considerations, and Other Special Issues

Cash Flow Estimation and Capital Budgeting Decisions

Mergers and Acquisitions

Leasing

Investment Banking and Securities Law

Debt Instruments

Equity and Hybrid Instruments

Cost of Capital

Capital Structure Decisions

Dividend Policy

Working Capital Management: General Issues

Working Capital Management: Current Assets and Current Liabilities

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