Question 1

The amount that an investor allocates to the market portfolio is negatively related to
I.the expected return on the market portfolio.
II.the investor's risk aversion coefficient.
III.the risk-free rate of return.
IV.the variance of the market portfolio

Accepted Answer

A)   I and II
B)   II and III
C)   II and IV
D)   II,III,and IV
E)   I,III,and IV D

Question 2

The expected return-beta relationship of the CAPM is graphically represented by

Accepted Answer

A)   the security market line.
B)   the capital market line.
C)   the capital allocation line.
D)   the efficient frontier with a risk-free asset.
E)   the efficient frontier without a risk-free asset. A

Question 3

The market portfolio has a beta of

Accepted Answer

A)   0.
B)   1.
C)   -1.
D)   0.5.
E)   none of these B

Question 4

The value of the market portfolio equals

Accepted Answer

A)   the sum of the values of all equity securities.
B)   the sum of the values of all equity and fixed income securities.
C)   the sum the values of all equity,fixed income,and derivative securities.
D)   the sum of the values of all equity,fixed income,and derivative securities plus the value of all mutual funds.
E)   the entire wealth of the economy.

Question 5

The Security Market Line (SML)is

Accepted Answer

A)   the line that describes the expected return-beta relationship for well-diversified portfolios only.
B)   also called the Capital Allocation Line.
C)   the line that is tangent to the efficient frontier of all risky assets.
D)   the line that represents the expected return-beta relationship.
E)   the line that represents the relationship between an individual security's return and the market's return.

Question 6

The market price of risk

Accepted Answer

A)   is the market risk premium divided by the standard deviation of the market returns.
B)   has a reward-to-risk ratio of [E(rM) - rf]/σ2M.
C)   is the price of a U.S.T-bill.
D)   a and b.
E)   a and c.

Question 7

Which statement is not true regarding the market portfolio?

Accepted Answer

A)   It includes all publicly traded financial assets.
B)   It lies on the efficient frontier.
C)   All securities in the market portfolio are held in proportion to their market values.
D)   It is the tangency point between the capital market line and the indifference curve.
E)   all of these are true.

Question 8

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 by 7%.
B)   overpriced.
C)   fairly priced.
D)   cannot be determined from data provided.
E)   underpriced by 5%.

Question 9

The risk premium on the market portfolio will be proportional to

Accepted Answer

A)   the average degree of risk aversion of the investor population.
B)   the risk of the market portfolio as measured by its variance.
C)   the risk of the market portfolio as measured by its beta.
D)   both a and b are true.
E)   both a and c are true.

Question 10

You invest $600 in security A with a beta of 1.2 and $400 in security B with a beta of 0.90.The beta of the resulting portfolio is

Accepted Answer

A)   1.40
B)   1.00
C)   0.36
D)   1.08
E)   0.80

Question 11

According to the Capital Asset Pricing Model (CAPM),the expected rate of return on any security is equal to

Accepted Answer

A)   Rf + β[E(RM) ].
B)   Rf + σ[E(RM) - Rf].
C)   Rf + β[E(RM) - Rf].
D)   E(RM) + Rf.
E)   none of these.

Question 12

Which statement is true regarding the Capital Market Line (CML)?

Accepted Answer

A)   The CML is the line from the risk-free rate through the market portfolio.
B)   The CML is the best attainable capital allocation line.
C)   The CML is also called the security market line.
D)   The CML always has a positive slope.
E)   The CML is the line from the risk-free rate through the market portfolio,is the best attainable capital allocation line,and it always has a positive slope.

Question 13

Which statement is true regarding the market portfolio?

Accepted Answer

A)   It includes all publicly traded financial assets.
B)   It lies on the efficient frontier.
C)   All securities in the market portfolio are held in proportion to their market values.
D)   It is the tangency point between the capital market line and the indifference curve.
E)   It includes all publicly traded financial assets,lies on the efficient frontier,and all securities in the market portfolio are held in proportion to their market values.

Question 14

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 these.

Question 15

Research by Jeremy Stein of MIT resolves the dispute over whether beta is a sufficient pricing factor by suggesting that managers should use beta to estimate

Accepted Answer

A)   long-term returns but not short-term returns.
B)   short-term returns but not long-term returns.
C)   both long-and short-term returns.
D)   book-to-market ratios.
E)   None of these was suggested by Stein.

Question 16

If investors do not know their investment horizons for certain

Accepted Answer

A)   the CAPM is no longer valid.
B)   the CAPM underlying assumptions are not violated.
C)   the implications of the CAPM are not violated as long as investors' liquidity needs are not priced.
D)   the implications of the CAPM are no longer useful.
E)   none of these are true.

Question 17

A "fairly priced" asset lies

Accepted Answer

A)   above the security market line.
B)   on the security market line.
C)   on the capital market line.
D)   above the capital market line.
E)   below the security market line.

Question 18

According to the Capital Asset Pricing Model (CAPM),which one of the following statements is

Accepted Answer

A)   The expected rate of return on a security decreases in direct proportion to a decrease in the risk-free rate.
B)   The expected rate of return on a security increases as its beta increases.
C)   A fairly priced security has an alpha of zero.
D)   In equilibrium,all securities lie on the security market line.
E)   All of these statements are true.

Question 19

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.

Question 20

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

Accepted Answer

A)   have positive betas.
B)   have zero alphas.
C)   have negative betas.
D)   have positive alphas.
E)   none of these.

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

The amount that an investor allocates to the market portfolio is negatively related to I.the expected return on the market portfolio. II.the investor's risk aversion coefficient. III.the risk-free rate of return. IV.the variance of the market portfolio