Question 1

When identifying undervalued and overvalued assets, which of the following statements is false?

Accepted Answer

A)  An asset is properly valued if its estimated rate of return is equal to its required rate of return. 
B)  An asset is considered overvalued if its estimated rate of return is below its required rate of return. 
C)  An asset is considered undervalued if its estimated rate of return is above its required rate of return. 
D)  An asset is considered overvalued if its required rate of return is below its estimated rate of return. 
E)  None of the above (that is, all are true statements). 
A)  An asset is properly valued if its estimated rate of return is equal to its required rate of return. 
B)  An asset is considered overvalued if its estimated rate of return is below its required rate of return. 
C)  An asset is considered undervalued if its estimated rate of return is above its required rate of return. 
D)  An asset is considered overvalued if its required rate of return is below its estimated rate of return. 
E)  None of the above (that is, all are true statements). D

Question 2

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

Accepted Answer

A)  zero beta model. 
B)  unstable beta or a higher borrowing rate. 
C)  zero beta model or a higher borrowing rate. 
D)  higher borrowing rate. 
E)  unstable beta. 
A)  zero beta model. 
B)  unstable beta or a higher borrowing rate. 
C)  zero beta model or a higher borrowing rate. 
D)  higher borrowing rate. 
E)  unstable beta. C

Question 3

Which of the following is not an assumption of the Capital Market Theory?

Accepted Answer

A)  All investors are Markowitz efficient investors. 
B)  All investors have homogeneous expectations. 
C)  There are no taxes or transaction costs in buying or selling assets. 
D)  All investments are indivisible so it is impossible to buy or sell fractional shares. 
E)  All investors have the same one period time horizon. 
A)  All investors are Markowitz efficient investors. 
B)  All investors have homogeneous expectations. 
C)  There are no taxes or transaction costs in buying or selling assets. 
D)  All investments are indivisible so it is impossible to buy or sell fractional shares. 
E)  All investors have the same one period time horizon. D

Question 4

Beta is a measure of

Accepted Answer

A)  company specific risk 
B)  industry risk 
C)  diversifiable risk 
D)  systematic risk 
E)  unique risk 
A)  company specific risk 
B)  industry risk 
C)  diversifiable risk 
D)  systematic risk 
E)  unique risk

Question 5

The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing model (CAPM) uses ____.

Accepted Answer

A)  beta; total risk 
B)  standard deviation; total risk 
C)  standard deviation; systematic risk 
D)  unsystematic risk; total risk 
E)  systematic risk; beta 
A)  beta; total risk 
B)  standard deviation; total risk 
C)  standard deviation; systematic risk 
D)  unsystematic risk; total risk 
E)  systematic risk; beta

Question 6

As the number of securities in a portfolio increases, the amount of systematic risk

Accepted Answer

A)  remains constant. 
B)  decreases. 
C)  increases. 
D)  changes. 
E)  none of the above. 
A)  remains constant. 
B)  decreases. 
C)  increases. 
D)  changes. 
E)  none of the above.

Question 7

Theoretically, the correlation coefficient between a completely diversified portfolio and the market portfolio should be

Accepted Answer

A)  −1.0. 
B)  +1.0. 
C)  0.0. 
D)  −0.5. 
E)  +0.5. 
A)  −1.0. 
B)  +1.0. 
C)  0.0. 
D)  −0.5. 
E)  +0.5.

Question 8

Which of the following would most closely resemble the true market portfolio?

Accepted Answer

A)  Stocks 
B)  Stocks and bonds 
C)  Stocks, bonds and foreign securities 
D)  Stocks, bonds, foreign securities and options 
E)  Stocks, bonds, foreign securities, options and coins 
A)  Stocks 
B)  Stocks and bonds 
C)  Stocks, bonds and foreign securities 
D)  Stocks, bonds, foreign securities and options 
E)  Stocks, bonds, foreign securities, options and coins

Question 9

Which of the following statements about the risk-free asset is correct?

Accepted Answer

A)  The risk-free asset is defined as an asset for which there is uncertainty regarding the expected rate of return. 
B) The standard deviation of return for the risk-free asset is equal to zero. 
C)  The standard deviation of return for the risk-free asset cannot be zero, since division by zero is undefined. 
D)  Choices a and b. 
E)  Choices a and c. 
A)  The risk-free asset is defined as an asset for which there is uncertainty regarding the expected rate of return. 
B) The standard deviation of return for the risk-free asset is equal to zero. 
C)  The standard deviation of return for the risk-free asset cannot be zero, since division by zero is undefined. 
D)  Choices a and b. 
E)  Choices a and c.

Question 10

Utilising the security market line an investor owning a stock with a beta of −2 would expect the stock's return to ____ in a market that was expected to decline 15 per cent.

Accepted Answer

A)  rise or fall an indeterminate amount 
B)  fall by 3 per cent 
C)  fall by 30 per cent 
D)  rise by 13 per cent 
E)  rise by 30 per cent 
A)  rise or fall an indeterminate amount 
B)  fall by 3 per cent 
C)  fall by 30 per cent 
D)  rise by 13 per cent 
E)  rise by 30 per cent

Question 11

In the presence of transactions costs, the SML will be

Accepted Answer

A)  a single straight line. 
B)  a kinked line. 
C)  a set of lines rather than a single straight line. 
D)  a curve rather than a single straight line. 
E)  impossible to determine. 
A)  a single straight line. 
B)  a kinked line. 
C)  a set of lines rather than a single straight line. 
D)  a curve rather than a single straight line. 
E)  impossible to determine.

Question 12

A completely diversified portfolio would have a correlation with the market portfolio that is

Accepted Answer

A)  equal to zero because it has only unsystematic risk. 
B)  equal to one because it has only systematic risk. 
C)  less than zero because it has only systematic risk. 
D)  less than one because it has only unsystematic risk. 
E)  less than one because it has only systematic risk. 
A)  equal to zero because it has only unsystematic risk. 
B)  equal to one because it has only systematic risk. 
C)  less than zero because it has only systematic risk. 
D)  less than one because it has only unsystematic risk. 
E)  less than one because it has only systematic risk.

Question 13

What does WRF = −0.50 mean?

Accepted Answer

A)  The investor can borrow money at the risk-free rate. 
B)  The investor can lend money at the current market rate. 
C)  The investor can borrow money at the current market rate. 
D)  The investor can borrow money at the prime rate of interest. 
E)  The investor can lend money at the prime rate of interest. 
A)  The investor can borrow money at the risk-free rate. 
B)  The investor can lend money at the current market rate. 
C)  The investor can borrow money at the current market rate. 
D)  The investor can borrow money at the prime rate of interest. 
E)  The investor can lend money at the prime rate of interest.

Question 14

All portfolios on the capital market line are

Accepted Answer

A)  perfectly positively correlated. 
B)  perfectly negatively correlated. 
C)  unique from each other. 
D)  weakly correlated. 
E)  unrelated except that they contain the risk free asset. 
A)  perfectly positively correlated. 
B)  perfectly negatively correlated. 
C)  unique from each other. 
D)  weakly correlated. 
E)  unrelated except that they contain the risk free asset.

Question 15

Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.

Accepted Answer

A)  11.13% 
B)  14.97% 
C)  16.25% 
D)  22.25% 
E)  17.0% 
A)  11.13% 
B)  14.97% 
C)  16.25% 
D)  22.25% 
E)  17.0%

When identifying undervalued and overvalued assets, which of the following statements is false?

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

Which of the following is not an assumption of the Capital Market Theory?

Beta is a measure of

The capital market line (CML) uses as a risk measurement, whereas the capital asset pricing model (CAPM) uses .

As the number of securities in a portfolio increases, the amount of systematic risk

Theoretically, the correlation coefficient between a completely diversified portfolio and the market portfolio should be

Which of the following would most closely resemble the true market portfolio?

Which of the following statements about the risk-free asset is correct?

Utilising the security market line an investor owning a stock with a beta of −2 would expect the stock's return to ____ in a market that was expected to decline 15 per cent.

In the presence of transactions costs, the SML will be

A completely diversified portfolio would have a correlation with the market portfolio that is

What does WRF = −0.50 mean?

All portfolios on the capital market line are

Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.

The Investment Process

The Global Market Investment Decision

Securities Markets: Organization and Operation

Efficient Capital Markets

Portfolio Management

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Professional Money Management, Alternative Assets and Industry Ethics

Evaluation of Portfolio Performance

Swap Contracts, Convertible Securities and Other Embedded Derivatives

Filters

Exam 6: Asset Pricing Models

When identifying undervalued and overvalued assets, which of the following statements is false?

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

Which of the following is not an assumption of the Capital Market Theory?

Beta is a measure of

The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing model (CAPM) uses ____.

As the number of securities in a portfolio increases, the amount of systematic risk

Theoretically, the correlation coefficient between a completely diversified portfolio and the market portfolio should be

Which of the following would most closely resemble the true market portfolio?

Which of the following statements about the risk-free asset is correct?

Utilising the security market line an investor owning a stock with a beta of −2 would expect the stock's return to ____ in a market that was expected to decline 15 per cent.

In the presence of transactions costs, the SML will be

A completely diversified portfolio would have a correlation with the market portfolio that is

What does WRF = −0.50 mean?

All portfolios on the capital market line are

Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.

The Investment Process

The Global Market Investment Decision

Securities Markets: Organization and Operation

Efficient Capital Markets

Portfolio Management

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Professional Money Management, Alternative Assets and Industry Ethics

Evaluation of Portfolio Performance

Swap Contracts, Convertible Securities and Other Embedded Derivatives

Filters

The capital market line (CML) uses as a risk measurement, whereas the capital asset pricing model (CAPM) uses .