Deck 7: Risk,return,and the Capital Asset Pricing Model

Question 1

A particular stock has an expected return of 18%.If the expected return on the market portfolio is 13%,and the risk-free rate is 5%,what's the stock's CAPM beta?

A) 1.000
B) 1.625
C) 2.250
D) 1.385

Answer 1

1.625

Question 2

A particular stock has an expected return of 11%.If the expected risk premium on the market portfolio is 8%,and the risk-free rate is 5%,what's the stock's CAPM beta?

A) 1.375
B) 0.750
C) 0.846
D) 0.462

Answer 2

0.750

Question 3

If the market portfolio has an expected return of 0.12 and a standard deviation of 0.40,and the risk-free rate is 0.04,what is the slope of the security market line?

A) 0.08
B) 0.20
C) 0.04
D) 0.12

Answer 3

0.08

Question 4

According to the CAPM (capital asset pricing model),the security market line is a straight line.The slope of this line should be equal to

A) zero
B) the expected risk premium on the market portfolio
C) the risk-free rate
D) the expected return on the market portfolio

Question 5

A particular stock has a beta of 1.4 and an expected return of 13%.If the expected risk premium on the market portfolio is 6%,what's the expected return on the market portfolio?

A) 10.6%
B) 4.6%
C) 8.4%
D) 9.3%

Question 6

According to the CAPM (capital asset pricing model),what is the single factor that explains differences in returns across securities?

A) the risk-free rate
B) the expected risk premium on the market portfolio
C) the beta of a security
D) the expected return on the market portfolio
E) the volatility of a security

Question 7

Suppose Sarah can borrow and lend at the risk free-rate of 3%.Which of the following four risky portfolios should she hold in combination with a position in the risk-free asset?

A) portfolio with a standard deviation of 15% and an expected return of 12%
B) portfolio with a standard deviation of 19% and an expected return of 15%
C) portfolio with a standard deviation of 25% and an expected return of 18%
D) portfolio with a standard deviation of 12% and an expected return of 9%

Question 8

According to the CAPM (capital asset pricing model),the security market line is a straight line.The intercept of this line should be equal to

A) zero
B) the expected risk premium on the market portfolio
C) the risk-free rate
D) the expected return on the market portfolio

Question 9

A particular asset has a beta of 1.2 and an expected return of 10%.The expected return on the market portfolio is 13% and the risk-free is 5%.Which of the following statement is correct?

A) This asset lies on the security market line.
B) This asset lies above the security market line.
C) This asset lies below the security market line.
D) Cannot tell from the given information.

Question 10

The risk-free rate is 5% and the expected return on the market portfolio is 13%.A stock has a beta of 1.0,what is its expected return?

A) 8%
B) 13%
C) 5%
D) none of the above

Question 11

The CAPM (capital asset pricing model)assumes that:

A) all assets can be traded
B) investors are risk-averse
C) investors have homogeneous expectations
D) all of the above

Question 12

A portfolio has 40% invested in Asset 1 and 60% invested in Asset 2.If Asset 1 has a beta of 1.2 and Asset 2 has a beta of 1.8,what's the beta of the portfolio?

A) 1.50
B) 1.56
C) 1.20
D) 1.80
E) cannot tell from the given information

Question 13

The risk-free rate is 5% and the expected return on the market portfolio is 13%.A stock has a beta of 1.5,what is its expected return?

A) 17%
B) 12%
C) 19.5%
D) 24.5%

Question 14

Suppose David can borrow and lend at the risk-free rate of 5%.Which of the following three risky portfolios should he hold in combination with a position in the risk-free asset?

A) portfolio with a standard deviation of 16% and an expected return of 12%
B) portfolio with a standard deviation of 20% and an expected return of 16%
C) portfolio with a standard deviation of 30% and an expected return of 20%
D) he should be indifferent in holding any of the three portfolios

Question 15

The risk-free rate is 5% and the expected return on the market portfolio is 13%.A stock has a beta of 0,what is its expected return?

A) 0%
B) 5%
C) 13%
D) none of the above

Question 16

The stock of Alpha Company has an expected return of 15.5% and a beta of 1.5,and Gamma Company stock has an expected return of 13.4% and a beta of 1.2.Assume the CAPM holds.What's the expected return on the market?

A) 12%
B) 7%
C) 10.3%
D) 11.2%

Question 17

An asset has a beta of 2.0 and an expected return of 20%.The expected risk premium on the market portfolio is 5% and the risk-free is 7%.The stock is

A) overpriced
B) underpriced
C) appropriately priced
D) Cannot tell from the given information

Question 18

A particular asset has a beta of 1.2 and an expected return of 10%.The expected return on the market portfolio is 13% and the risk-free is 5%.The stock is

A) overpriced
B) underpriced
C) appropriately priced
D) Cannot tell from the given information

Question 19

A stock that pays no dividends is currently priced at $40 and is expected to increase in price to $45 by year end.The expected risk premium on the market portfolio is 6% and the risk-free is 5%.If the stock has a beta of 0.6,the stock is

A) overpriced
B) underpriced
C) appropriately priced
D) Cannot tell from the given information

Question 20

The stock of Alpha Company has an expected return of 18% and a beta of 1.5,and Gamma Company stock has an expected return of 15.6% and a beta of 1.2.Assume the CAPM holds.What's the risk-free rate?

A) 8.0%
B) 6.0%
C) 0%
D) 4.7%

Question 21

NARRBEGIN: Exhibit 7-1
Exhibit 7-1

Given Exhibit 7-1,what is the expected return?

A) 13.00%
B) 15.96%
C) 16.00%
D) 17.75%

Question 22

An investor put 40% of her money in Stock A and 60% in Stock B.Stock A has a beta of 1.2 and Stock B has a beta of 1.6.If the risk-free rate is 5% and the expected return on the market is 12%,what's the investor's expected return?

A) 22.28%
B) 14.80%
C) 15.08%
D) 21.80%

Question 23

Expected returns are:

A) always positive.
B) always greater than the risk-free rate.
C) inherently unobservable.
D) usually equal to actual returns.

Question 24

A portfolio consists 20% of a risk-free asset and 80% of a stock.The risk-free return is 4%.The stock has an expected return of 15% and a standard deviation of 30%.What's the expected return

A) 12.8%
B) 9.5%
C) 15.0%
D) 4.0%

Question 25

A disadvantage of the probabilistic approach to estimating an asset's returns is:

A) history always repeats itself.
B) it does not require one to assume that the future will look like the past.
C) recent history is more important than future risk.
D) that the range of possible outcomes is often broader than the scenarios used.

Question 26

NARRBEGIN: Exhibit 7-2
Exhibit 7-2

Given Exhibit 7-2,what is the expected standard deviation?

A) 957.38%
B) 1058.69%
C) 30.71%
D) 32.54%

Question 27

NARRBEGIN: Exhibit 7-2
Exhibit 7-2

Given Exhibit 7-2,what is the expected variance?

A) 943.19%
B) 1058.69%
C) 49.27%
D) 32.54%

Question 28

You have the following data on the securities of three firms: If the risk-free rate last year was 3%,and the return on the market was 11%,which firm had the best performance on a risk-adjusted basis?

A) Firm A
B) Firm B
C) Firm C
D) There is no difference in performance on a risk-adjusted basis

Question 29

Suppose that over the last 20 years,company XYZ has averaged a return of 13%.Over the same period,the Treasury bond rate has averaged 4%.The current estimate of the Treasury bond rate is 6.5%.Using the historical approach,what is the estimate of XYZ's expected return.

A) 13.0%
B) 16.5%
C) 15.5%
D) 19.5%

Question 30

An advantage of the probabilistic approach to estimating an asset's returns is:

A) history always repeats itself.
B) it does not require one to assume that the future will look like the past.
C) recent history is more important than future risk.
D) exact probabilities are easy to estimate.

Question 31

NARRBEGIN: Exhibit 7-1
Exhibit 7-1

Given Exhibit 7-1,what is the expected standard deviation?

A) 957.38%
B) 1058.69%
C) 49.27%
D) 32.54%

Question 32

Suppose that over the last 30 years,company ABC has averaged a return of 10%.Over the same period,the Treasury bond rate has averaged 3%.The current estimate of the Treasury bond rate is 5%.Using the historical approach,what is the estimate of ABC's expected return.

A) 13.0%
B) 12.5%
C) 12.0%
D) 11.0%

Question 33

Suppose that over the last 25 years,company DEF has averaged a return of 7.5%.Over the same period,the Treasury bond rate has averaged 1.5%.The current estimate of the Treasury bond rate is 4%.Using the historical approach,what is the estimate of DEF's expected return.

A) 13.0%
B) 12.5%
C) 12.0%
D) 10.0%

Question 34

A portfolio has 40% invested in Asset 1,50% invested in Asset 2 and 10% invested in Asset 3.Asset 1 has a beta of 1.2,Asset 2 has a beta of 0.8 and Asset 3 has a beta of 1.8,what's the beta of the portfolio?

A) 1.27
B) 0.80
C) 1.06
D) 1.20
E) Cannot tell from given information

Question 35

Asset 1 has a beta of 1.2 and Asset 2 has a beta of 0.6.Which of the following statements is correct?

A) Asset 1 is more volatile than Asset 2.
B) Asset 1 has a higher expected return than Asset 2.
C) In a regression with individual asset's return as the dependent variable and the market's return as the independent variable,the R-squared value is higher for Asset 1 than it is for Asset 2.
D) All of the above statements are correct.

Question 36

Which of the following is not a method used by analysts to estimate an asset's expected return?

A) historical approach
B) probabilistic approach
C) risk-based approach
D) estimation approach

Question 37

A drawback to the historical approach of estimating an asset's expected return is:

A) the risk of the firm may have changed over time.
B) history always repeats itself.
C) that the range of potential outcomes is often very broad.
D) all of the above are drawbacks to the historical approach.

Question 38

The stock of Alpha Company has an expected return of 0.10 and a standard deviation of 0.25.The stock of Gamma Company has an expected return of 0.16 and a standard deviation of 0.40.The correlation coefficient between the two stock's return is 0.2.If a portfolio consists of 40% of Alpha Company and 60% of Gamma Company,what's the expected return of the portfolio?

A) 0.126
B) 0.136
C) 0.160
D) 0.130

Question 39

NARRBEGIN: Exhibit 7-2
Exhibit 7-2

Given Exhibit 7-2,what is the expected return?

A) 10.75%
B) 13.00%
C) 16.00%
D) 17.75%

Question 40

NARRBEGIN: Exhibit 7-1
Exhibit 7-1

Given Exhibit 7-1,what is the expected variance?

A) 957.38%
B) 1058.69%
C) 49.27%
D) 32.54%

Question 41

Which type of risk affects just a few securities at a time?

A) return risk
B) variance risk
C) unsystematic risk
D) systematic risk

Question 42

The beta of the risk-free asset is:

A) -1.0
B) 0.0
C) 0.5
D) 1.0

Question 43

The country with the highest level of systematic risk is:

A) Russia
B) Poland
C) Taiwan
D) USA

Question 44

The first step in the risk-based approach to estimating a security's expected return is to:

A) define what is meant by "risk" and to measure it.
B) quantify how much return we should expect on an asset with a given amount of risk.
C) estimate the risk-free rate.
D) define what is meant by return.

Question 45

NARRBEGIN: Exhibit 7-5
Exhibit 7-5

Given Exhibit 7-5,what is the weight of Security 3?

A) 42.9%
B) 33.3%
C) 23.8%
D) Cannot be determined with the data given

Question 46

If you believed a stock was going to fall in price,a strategy to profit from the stock decline is known as:

A) buying long.
B) buying short.
C) selling long.
D) selling short.

Question 47

NARRBEGIN: Exhibit 7-4
Exhibit 7-4

Given Exhibit 7-4,if the expected return on the portfolio is 9.7%,what is the expected return for Security 3?

A) 10%
B) 11%
C) 12%
D) 13%

Question 48

NARRBEGIN: Exhibit 7-7
Exhibit 7-7

Given Exhibit 7-7,what is the portfolio beta?

A) 0.4987
B) 0.9273
C) 0.3791
D) 1.2667

Question 49

NARRBEGIN: Exhibit 7-5
Exhibit 7-5

Given Exhibit 7-5,what is the weight of Security 2?

A) 42.9%
B) 33.3%
C) 23.8%
D) Cannot be determined with the data given

Question 50

NARRBEGIN: Exhibit 7-4
Exhibit 7-4

Given Exhibit 7-4,what is the weight of Security 1?

A) 25%
B) 35%
C) 45%
D) 55%

Question 51

NARRBEGIN: Exhibit 7-3
Exhibit 7-3

Given Exhibit 7-3,what is the expected return on the portfolio?

A) 14.1%
B) 15.0%
C) 16.3%
D) 17.9%

Question 52

Standard deviation measures:

A) systematic risk.
B) unsystematic risk.
C) total risk.
D) beta risk.

Question 53

NARRBEGIN: Exhibit 7-6
Exhibit 7-6

Given Exhibit 7-6,what is the portfolio beta?

A) 0.4987
B) 0.9273
C) 0.3791
D) 1.2367

Question 54

NARRBEGIN: Exhibit 7-5
Exhibit 7-5

Given Exhibit 7-5,what is the expected return on the portfolio?

A) 9.81%
B) 9.00%
C) 17.31%
D) Cannot be determined with the data given

Question 55

A standardized measure of risk is:

A) alpha
B) beta
C) gamma
D) omega

Question 56

Which type of firm would most likely have the greatest systematic risk?

A) A grocery store chain
B) A electric company
C) A telephone company
D) A vibrating chair manufacturer

Question 57

NARRBEGIN: Exhibit 7-3
Exhibit 7-3

Given Exhibit 7-3,what is the weight of Security 2?

A) 20%
B) 40%
C) 60%
D) 80%

Question 58

NARRBEGIN: Exhibit 7-5
Exhibit 7-5

Given Exhibit 7-5,what is the weight of Security 1?

A) 42.9%
B) 33.3%
C) 23.8%
D) Cannot be determined with the data given

Question 59

Which type of risk affects many different securities?

A) return risk
B) variance risk
C) unsystematic risk
D) systematic risk

Question 60

Investors can eliminate what type of risk by diversifying?

A) systematic risk
B) unsystematic risk
C) beta risk
D) total risk

Question 61

Which of the following approaches to estimating an asset's expected return assumes that the future and the past share much in common?

A) Historical
B) Probabilistic
C) Risk-based
D) all of the above

Question 62

The slope of the security market line is:

A) the return on the market.
B) beta.
C) the market risk premium.
D) the risk-free rate.

Question 63

An investor has $10,000 invested in Treasury securities and $15,000 invested in stock UVW.UVW has a beta of 1.2.What is the beta of the portfolio?

A) 0.00
B) 0.72
C) 1.20
D) 1.60

Question 64

The difference between the return on the market portfolio and the risk-free rate is known as the:

A) total return.
B) systematic premium.
C) unsystematic return.
D) market risk premium.

Question 65

The formula for the Capital Asset Pricing Model is:

A) E(R_i)= R_f + b_i(E(R_m)- R_f)
B) E(R_i)= R_f + b_iE(R_m)
C) E(R_i)=b_i(E(R_m)- R_f)
D) E(R_i)+ R_f = b_i(E(R_m)- R_f)

Question 66

Security I has a beta of 1.3,the risk-free rate is 4%,and the expected return on the market is 11%.What is the expected return for Security I?

A) 15.0%
B) 18.3%
C) 14.6%
D) 13.1%

Question 67

The intercept of the security market line is:

A) E(R_m)- R_f
B) 1/(E(R_m)- R_f)
C) R_f - E(R_m)
D) R_f

Question 68

Modern financial markets are:

A) competitive.
B) transparent.
C) efficient.
D) all of the above.

Question 69

What type of mutual fund managers do extensive analysis to identify mispriced stocks?

A) passive
B) index
C) active
D) short

Question 70

The idea that asset prices fully reflect all available information is known as the:

A) fair price hypothesis.
B) efficient market hypothesis.
C) full information hypothesis.
D) full price hypothesis.

Question 71

A mutual fund that adopts a passive management style is called:

A) an index fund.
B) a research fund.
C) an active fund.
D) a technology fund.

Question 72

Security I has a beta of 1.3,the risk-free rate is 4%,and the expected market risk premium is 11%.What is the expected return for Security I?

A) 15.0%
B) 18.3%
C) 14.6%
D) 13.1%

Question 73

The hypothesis that states that it is nearly impossible to predict exactly when stocks will do well relative to bonds is known as the:

A) fair price hypothesis.
B) efficient market hypothesis.
C) full information hypothesis.
D) full price hypothesis.

Question 74

Active managers:

A) generate lower expenses for their shareholders than passive managers.
B) trade more frequently than passive managers
C) always use trading rules to decide when to buy and sell stocks.
D) all of the above.

Question 75

Portfolio weights must sum to ____.

A) 1
B) 0.99
C) 0
D) Portfolio weights do not need to sum to a particular value.

Question 76

A buy-and-hold strategy:

A) typically earns higher returns,after expenses,than an active stock picking strategy.
B) always earns the lowest returns.
C) always have the lowest risk.
D) typically outperforms most market indexes.

Question 77

Which of the following statements is true?

A) Because expected returns on stocks exceeds expected returns on bonds,stocks should actually outperform bonds in any given year.
B) Because expected returns on stocks exceeds expected returns on bonds,it is more reasonable to expect that stocks will outperform bonds in any given year.
C) Expected return is the return one will actually receive.
D) Both (a)and (c)
E) All of the above statements are true.

Question 78

When investors take a short position in one asset to invest more in another asset,they are using:

A) capital budgeting
B) corporate leverage
C) financial leverage
D) none of the above

Question 79

The slope of the security market line is:

A) E(R_m)- R_f
B) 1/(E(R_m)- R_f)
C) R_f - E(R_m)
D) R_f

Question 80

A fund that attempts to mimic the S&P 500

A) An efficient portfolio
B) A passive portfolio
C) An active portfolio
D) An index portfolio