Question 1

For international investors without access to imputation tax credits,the traditional form of the CAPM is not applicable.

Accepted Answer

A) True 
 B)False  False

Question 2

Testing the CAPM is difficult,as empirical tests have to rely on __________ data,whereas the CAPM is an __________ model.

Accepted Answer

A)   ex-ante; ex-ante
B)   ex-ante; ex-post
C)   ex-post; ex-ante
D)   ex-post; ex-post C

Question 3

The standard deviation of returns of an inefficient portfolio is __________ the standard deviation of an efficient portfolio,provided both portfolios have equal expected returns.

Accepted Answer

A)   lower than
B)   higher than
C)   the same as B

Question 4

In the context of the capital asset pricing model,the systematic measure of risk is captured by beta.

Accepted Answer

A) True 
 B)False

Question 5

If the distribution of returns is non-normal and positively skewed,the investor has a greater probability of earning __________ returns rather than __________ returns.

Accepted Answer

A)   extreme positive; extreme negative
B)   extreme negative; extreme positive
C)   none of theses choices

Question 6

Empirical results estimated from historical data indicate that betas are always close to zero.

Accepted Answer

A) True 
 B)False

Question 7

Given a correlation coefficient of 0.85 between portfolio A and the market portfolio,a standard deviation of portfolio A of 26% and a standard deviation of the market portfolio of 18%,what is the portfolio beta?

Accepted Answer

A)    0.588 0.588 0.588 
B)    0.691 0.691 0.691 
C)    0.743 0.743 0.743 
D)    1.230 1.230 1.230

Question 8

In using the CAPM with positively skewed asset returns,the estimate of expected returns must be adjusted upwards.

Accepted Answer

A) True 
 B)False

Question 9

The issue that realised returns only relate to actual returns in the long-term is relevant to use of the CAPM because:

Accepted Answer

A)   beta is often measured with error
B)   of issues raised in Roll's critique
C)   no risk-free asset exists
D)   the CAPM is an ex-ante model

Question 10

Imputation tax was introduced in Australia in 1983.

Accepted Answer

A) True 
 B)False

Question 11

The __________ of an asset will help to identify the most appropriate risk-free rate to be used in calculations of expected returns.

Accepted Answer

A)   standard deviation
B)   variance
C)   life
D)   all of the above

Question 12

Assume the CAPM is the correct asset pricing model,and the risk-free rate of return is 6% and the market has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of equal amounts in assets A and B.Asset A has an expected return of 8%.If the portfolio has an expected return of 10%,what is the covariance between asset B and the market portfolio?

Accepted Answer

A)    2.000 2.000 2.000 
B)    3.000 3.000 3.000 
C)    6.000 6.000 6.000 
D)   7.000 7.000 7.000

Question 13

In his famous critique of the CAPM,Roll argued that the CAPM ______________.

Accepted Answer

A)  is not testable because the true market portfolio can never be observed
B)  is of limited use because systematic risk can never be entirely eliminated
C)  should be replaced by the APT
D)  should be replaced by the Fama-French three-factor model

Question 14

Assume the CAPM is the correct asset pricing model.An asset has a standard deviation of 40% and the market has a standard deviation of 15%.What would the correlation of the asset with the market need to be if the asset were to have the same expected return as the market?

Accepted Answer

A)    0.150 0.150 0.150 
B)    0.375 0.375 0.375 
C)    0.600 0.600 0.600 
D)    0.667 0.667 0.667

Question 15

Assume the CAPM is the correct asset pricing model,the risk-free rate of return is 6%,and the market portfolio has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of asset A,which has a beta of 1.6,and asset B,which has a beta of 0.6.If the investor wishes to earn a return identical to that of the risk-free asset,what weight should the investor place in assets A and B?

Accepted Answer

A)    −60% -60 \% −60%  in asset  A \mathrm{A} A  and  160% 160 \% 160%  in asset  B \mathrm{B} B 
B)    0% 0 \% 0%  in asset  A A A  and  100% 100 \% 100%  in asset  B B B 
C)    20% 20 \% 20%  in asset  A A A  and  800% 800 \% 800%  in asset  B B B 
D)    60% 60 \% 60%  in asset A and  40% 40 \% 40%  in asset B

Question 16

The beta of the market:

Accepted Answer

A)   is  −1 -1 −1 
B)   is 0
C)   is 1
D)   depends upon the market

Question 17

Assume the CAPM is the correct asset pricing model,and the risk-free rate of return is 6% and the market portfolio has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of asset A,which has a beta of 1.6,and asset B,which has a beta of 0.6.If the investor wishes to earn a return identical to that of the market portfolio,what weight should the investor place in assets A and B?

Accepted Answer

A)    33% 33 \% 33%  in asset  A \mathrm{A} A  and  67% 67 \% 67%  in asset  B \mathrm{B} B 
B)    40% 40 \% 40%  in asset  A A A  and  60% 60 \% 60%  in asset  B B B 
C)    50% 50 \% 50%  in asset  A A A  and  50% 50 \% 50%  in asset  B B B 
D)    60% 60 \% 60%  in asset A and  40% 40 \% 40%  in asset  B B B

Question 18

Assume the CAPM is the correct asset pricing model,the risk-free rate of return is 6%,and the market portfolio has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of asset A,which has a beta of 0.75,and asset B,which has a beta of 1.25.If the investor wishes to earn a return identical to that of the risk-free asset,what weight should the investor place in assets A and B?

Accepted Answer

A)    −60% -60 \% −60%  in asset  A \mathrm{A} A  and  160% 160 \% 160%  in asset  B \mathrm{B} B 
B)    0% 0 \% 0%  in asset  A A A  and  100% 100 \% 100%  in asset  B B B 
C)    200% 200 \% 200%  in asset  A A A  and  −100% -100 \% −100%  in asset  B B B 
D)    250% 250 \% 250%  in asset  A A A  and  −150% -150 \% −150%  in asset  B B B

Question 19

CBA has a beta of 1.6 and WPL has a beta of 1.8.Given this,calculate the beta for a portfolio consisting of 65% in CBA and 35% in WPL.

Accepted Answer

A)    0.65 0.65 0.65 
B)    1.10 1.10 1.10 
C)    1.30 1.30 1.30 
D)    1.67 1.67 1.67

Question 20

An asset has a standard deviation of 5% and a correlation with the market portfolio of 0.70.If the market has a standard deviation of 28%,what is the beta of the asset?

Accepted Answer

A)    0.13 0.13 0.13 
B)    0.31 0.31 0.31 
C)    0.60 0.60 0.60 
D)    0.68 0.68 0.68

Exam 8: Risky Asset Pricing Models and the Capm

For international investors without access to imputation tax credits,the traditional form of the CAPM is not applicable.

Testing the CAPM is difficult,as empirical tests have to rely on data,whereas the CAPM is an model.

The standard deviation of returns of an inefficient portfolio is __________ the standard deviation of an efficient portfolio,provided both portfolios have equal expected returns.

In the context of the capital asset pricing model,the systematic measure of risk is captured by beta.

If the distribution of returns is non-normal and positively skewed,the investor has a greater probability of earning returns rather than returns.

Empirical results estimated from historical data indicate that betas are always close to zero.

Given a correlation coefficient of 0.85 between portfolio A and the market portfolio,a standard deviation of portfolio A of 26% and a standard deviation of the market portfolio of 18%,what is the portfolio beta?

In using the CAPM with positively skewed asset returns,the estimate of expected returns must be adjusted upwards.

The issue that realised returns only relate to actual returns in the long-term is relevant to use of the CAPM because:

Imputation tax was introduced in Australia in 1983.

The __________ of an asset will help to identify the most appropriate risk-free rate to be used in calculations of expected returns.

In his famous critique of the CAPM,Roll argued that the CAPM ______________.

Assume the CAPM is the correct asset pricing model.An asset has a standard deviation of 40% and the market has a standard deviation of 15%.What would the correlation of the asset with the market need to be if the asset were to have the same expected return as the market?

The beta of the market:

CBA has a beta of 1.6 and WPL has a beta of 1.8.Given this,calculate the beta for a portfolio consisting of 65% in CBA and 35% in WPL.

An asset has a standard deviation of 5% and a correlation with the market portfolio of 0.70.If the market has a standard deviation of 28%,what is the beta of the asset?