Question 1

Which of the following statements about the difference between the SML and the CML is TRUE?

Accepted Answer

A)  The intercept of the CML is the origin while the intercept of the SML is RF. 
B)  CML consists of efficient portfolios, while the SML is concerned with all portfolios or securities. 
C)  CML could be downward sloping while that is impossible for the SML. 
D)  CML and the SML are essentially the same except in terms of the securities represented. 
A)  The intercept of the CML is the origin while the intercept of the SML is RF. 
B)  CML consists of efficient portfolios, while the SML is concerned with all portfolios or securities. 
C)  CML could be downward sloping while that is impossible for the SML. 
D)  CML and the SML are essentially the same except in terms of the securities represented. B

Question 2

The CML states that all investors should invest in the same portfolio of risky assets.

Accepted Answer

A) True 
 B)False  True

Question 3

Under the separation theorem, all investors should:

Accepted Answer

A)  hold the same portfolio of risky assets and therefore have the same risk/return combination. 
B)  have different optimal portfolios. 
C)  have the same portfolio of risky assets and achieve their own risk-return combination through borrowing and lending. 
D)  hold the same portfolio of risky assets and the same expected return but at different levels of risk 
A)  hold the same portfolio of risky assets and therefore have the same risk/return combination. 
B)  have different optimal portfolios. 
C)  have the same portfolio of risky assets and achieve their own risk-return combination through borrowing and lending. 
D)  hold the same portfolio of risky assets and the same expected return but at different levels of risk D

Question 4

Some securities are considered to be "defensive" in that they tend to hold their value or increase in value when the majority of securities are losing value, such as during a recession. What could one conclude about the betas of defensive securities?

Accepted Answer

One would expect the

Question 5

The APT is based on the:

Accepted Answer

A)  law of averages. 
B)  law of attraction. 
C)  law of accelerating return. 
D)  law of one price. 
A)  law of averages. 
B)  law of attraction. 
C)  law of accelerating return. 
D)  law of one price.

Question 6

Why is market risk sometimes said to be the "relevant" risk for a portfolio manager? What is the measure of market risk?

Accepted Answer

Market risk, measured by beta, is nondiv

Question 7

The separation theorem states that:

Accepted Answer

A)  systematic risk is separate from unsystematic risk. 
B)  individual security risk is separate from portfolio risk. 
C)  the investment decision is separate from the financing decision. 
D)  borrowing portfolio is separate from the lending portfolio. 
A)  systematic risk is separate from unsystematic risk. 
B)  individual security risk is separate from portfolio risk. 
C)  the investment decision is separate from the financing decision. 
D)  borrowing portfolio is separate from the lending portfolio.

Question 8

The expected market return is 9 percent. The risk-free rate of return is 1 percent, and XYZ Co. has a beta of 1.4. The risk premium is

Accepted Answer

A)  8 percent. 
B)  11.2 percent. 
C)  12.2 percent. 
D)  10.3 percent 
A)  8 percent. 
B)  11.2 percent. 
C)  12.2 percent. 
D)  10.3 percent

Question 9

Testing of the CAPM suggests the trade-off between expected return and risk is an upward-sloping straight line.

Accepted Answer

A) True 
 B)False

Question 10

The arbitrage pricing theory (APT) and the CAPM both assume all except the following?

Accepted Answer

A)  Investors have homogeneous beliefs. 
B)  Investors are risk-averse utility maximizers. 
C)  Borrowing and lending can be done at the rate RF. 
D)  Markets are perfect. 
A)  Investors have homogeneous beliefs. 
B)  Investors are risk-averse utility maximizers. 
C)  Borrowing and lending can be done at the rate RF. 
D)  Markets are perfect.

Question 11

Which of the following is not one of the reasonable conclusions of the CAPM reached by a consensus of the empirical results?

Accepted Answer

A)  The intercept term is generally higher than the RF. 
B)  The SML appears to be non-linear. 
C)  The slope of the CAPM is generally less steep than suggested by the theory. 
D)  CAPM is an imperfect model for the explanation of the cross section of security returns. 
A)  The intercept term is generally higher than the RF. 
B)  The SML appears to be non-linear. 
C)  The slope of the CAPM is generally less steep than suggested by the theory. 
D)  CAPM is an imperfect model for the explanation of the cross section of security returns.

Question 12

Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is not one of the assumptions of the CMT?

Accepted Answer

A)  All investors have the same one-period time horizon. 
B)  There are no personal income taxes. 
C)  There is no interest rate charged on borrowing. 
D)  There are no transaction costs. 
A)  All investors have the same one-period time horizon. 
B)  There are no personal income taxes. 
C)  There is no interest rate charged on borrowing. 
D)  There are no transaction costs.

Question 14

When markets are in equilibrium, the CML will be upward sloping

Accepted Answer

A)  because it shows the optimum combination of risky securities. 
B)  because the price of risk must always be positive. 
C)  because it contains all securities weighted by their market values. 
D)  because the CML indicates the required return for each portfolio risk level. 
A)  because it shows the optimum combination of risky securities. 
B)  because the price of risk must always be positive. 
C)  because it contains all securities weighted by their market values. 
D)  because the CML indicates the required return for each portfolio risk level.

Question 15

The Capital Asset Pricing Model:

Accepted Answer

A)  has serious flaws because of its complexity. 
B)  measures relevant risk of a security and shows the relationship between risk and expected return. 
C)  was developed by Markowitz in the 1930s. 
D)  discounts almost all of the Markowitz portfolio theory. 
A)  has serious flaws because of its complexity. 
B)  measures relevant risk of a security and shows the relationship between risk and expected return. 
C)  was developed by Markowitz in the 1930s. 
D)  discounts almost all of the Markowitz portfolio theory.

Question 16

The slope of the CML is the:

Accepted Answer

A)  standard deviation for efficient portfolios.::::: 
B)  market price of risk for efficient portfolios. 
C)  risk-free rate. 
D)  risk premium for the market portfolio. 
A)  standard deviation for efficient portfolios.::::: 
B)  market price of risk for efficient portfolios. 
C)  risk-free rate. 
D)  risk premium for the market portfolio.

Question 17

None of the asset-pricing models assume that the market is perfect.

Accepted Answer

A) True 
 B)False

Question 18

Like the CAPM, the APT assumes a single-period investment horizon.

Accepted Answer

A) True 
 B)False

Question 19

How are securities chosen and in what proportions are they represented in the market portfolio M?

Accepted Answer

All assets are included in por

Question 20

Under the CMT, the relevant risk to consider with any security is:

Accepted Answer

A)  its correlation with other securities in the portfolio. 
B)  its covariance with the market portfolio. 
C)  its deviation from the portfolio required rate of return. 
D)  its variance from the risk-free rate of return. 
A)  its correlation with other securities in the portfolio. 
B)  its covariance with the market portfolio. 
C)  its deviation from the portfolio required rate of return. 
D)  its variance from the risk-free rate of return.

Exam 9: Asset Pricing Principles

Which of the following statements about the difference between the SML and the CML is TRUE?

The CML states that all investors should invest in the same portfolio of risky assets.

Under the separation theorem, all investors should:

Some securities are considered to be "defensive" in that they tend to hold their value or increase in value when the majority of securities are losing value, such as during a recession. What could one conclude about the betas of defensive securities?

The APT is based on the:

Why is market risk sometimes said to be the "relevant" risk for a portfolio manager? What is the measure of market risk?

The separation theorem states that:

The expected market return is 9 percent. The risk-free rate of return is 1 percent, and XYZ Co. has a beta of 1.4. The risk premium is

Testing of the CAPM suggests the trade-off between expected return and risk is an upward-sloping straight line.

The arbitrage pricing theory (APT) and the CAPM both assume all except the following?

Which of the following is not one of the reasonable conclusions of the CAPM reached by a consensus of the empirical results?

Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate.

Which of the following is not one of the assumptions of the CMT?

When markets are in equilibrium, the CML will be upward sloping

The Capital Asset Pricing Model:

The slope of the CML is the:

None of the asset-pricing models assume that the market is perfect.

Like the CAPM, the APT assumes a single-period investment horizon.

How are securities chosen and in what proportions are they represented in the market portfolio M?

Under the CMT, the relevant risk to consider with any security is:

Investing Is an Important Activity Worldwide

Investment Alternatives: Generic Principles All Investors Must Know

Indirect Investing: a Global Activity

Securities Markets Matter to All Investors

All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

Portfolio Theory Is Universal

Portfolio Selection for All Investors

Common Stock Valuation Lessons for All Investors

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

Fixed Income Securities Are Available Worldwide

Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Options

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

Filters