Question 1

Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.

Accepted Answer

The assumptions are:
a)The market is com...

Question 2

Standard deviation and beta both measure risk,but they are different in that

Accepted Answer

A)   beta measures both systematic and unsystematic risk.
B)   beta measures only systematic risk while standard deviation is a measure of total risk.
C)   beta measures only unsystematic risk while standard deviation is a measure of total risk.
D)   beta measures both systematic and unsystematic risk while standard deviation measures only systematic risk.
E)   beta measures total risk while standard deviation measures only nonsystematic risk.F) A) and B)
G) None of the above

Question 3

Which statement is

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)   All of these statements are true.F) A) and B)
G) C) and D)

Question 4

The security market line (SML)

Accepted Answer

A)   can be portrayed graphically as the expected return-beta relationship.
B)   can be portrayed graphically as the expected return-standard deviation of market returns relationship.
C)   provides a benchmark for evaluation of investment performance.
D)   a and c.
E)   b and c.F) All of the above
G) D) and E)

Question 5

Discuss the differences between the capital market line and the security market line.

Accepted Answer

The capital market line measures the exc...

Question 6

As a financial analyst,you are tasked with evaluating a capital budgeting project.You were instructed to use the IRR method and you need to determine an appropriate hurdle rate.The risk-free rate is 4 percent and the expected market rate of return is 11 percent.Your company has a beta of 1.0 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM,the appropriate hurdle rate would be ______%.

Accepted Answer

A)   4
B)   7
C)   15
D)   11
E)   1F) A) and E)
G) All of the above

Question 7

Capital Asset Pricing Theory asserts that portfolio returns are best explained by:

Accepted Answer

A)   economic factors.
B)   specific risk.
C)   systematic risk.
D)   diversification.
E)   none of these.F) A) and B)
G) All of the above

Question 8

Given the following two stocks A and B   Security  Expected rate of return  Beta  A 0.121.2 B 0.141.8\begin{array} { l c c } 	ext { Security } & 	ext { Expected rate of return } & 	ext { Beta } \\hline	ext { A } & 0.12 & 1.2 \	ext { B } & 0.14 & 1.8\end{array} Security  A  B ​ Expected rate of return 0.120.14​ Beta 1.21.8​​ 
If the expected market rate of return is 0.09 and the risk-free rate is 0.05,which security would be considered the better buy and why?

Accepted Answer

A)   A because it offers an expected excess return of 1.2%.
B)   B because it offers an expected excess return of 1.8%.
C)   A because it offers an expected excess return of 2.2%.
D)   B because it offers an expected return of 14%.
E)   B because it has a higher beta. F) C) and D)
G) C) and E)

Question 9

In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is

Accepted Answer

A)   unique risk.
B)   beta.
C)   standard deviation of returns.
D)   variance of returns.
E)   none of these.F) A) and D)
G) A) and C)

Question 10

According to the CAPM,the risk premium an investor expects to receive on any stock or portfolio increases:

Accepted Answer

A)   directly with alpha.
B)   inversely with alpha.
C)   directly with beta.
D)   inversely with beta.
E)   in proportion to its standard deviation.F) C) and E)
G) None of the above

Question 11

Your personal opinion is that security X has an expected rate of return of 0.11.It has a beta of 1.5.The risk-free rate is 0.05 and the market expected rate of return is 0.09.According to the Capital Asset Pricing Model,this security is

Accepted Answer

A)   underpriced.
B)   overpriced.
C)   fairly priced.
D)   cannot be determined from data provided.
E)   none of these.F) B) and D)
G) All of the above

Question 12

According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of

Accepted Answer

A)   market risk
B)   unsystematic risk
C)   unique risk.
D)   reinvestment risk.
E)   none of these.F) C) and D)
G) A) and D)

Question 13

Studies of liquidity spreads in security markets have shown that

Accepted Answer

A)   liquid stocks earn higher returns than illiquid stocks.
B)   illiquid stocks earn higher returns than liquid stocks.
C)   both liquid and illiquid stocks earn the same returns.
D)   illiquid stocks are good investments for frequent,short-term traders.
E)   None of these are true.F) A) and B)
G) A) and E)

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

Your personal opinion is that security X has an expected rate of return of 0.11.It has a beta of 1.5.The risk-free rate is 0.05 and the market expected rate of return is 0.09.According to the Capital Asset Pricing Model,this security is

Correct Answer
verified

Capital Asset Pricing Theory asserts that portfolio returns are best explained by:

Correct Answer
verified

Discuss the differences between the capital market line and the security market line.

Correct Answer
verified
The capital market line measures the exc...
View Answer

In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is

Correct Answer
verified

Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.

Correct Answer
verified
The assumptions are:
a)The market is com...
View Answer

Correct Answer
verified

According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of

Correct Answer
verified

Standard deviation and beta both measure risk,but they are different in that

Correct Answer
verified

Studies of liquidity spreads in security markets have shown that

Correct Answer
verified

Correct Answer
verified

Which statement is

Correct Answer
verified

According to the CAPM,the risk premium an investor expects to receive on any stock or portfolio increases:

Correct Answer
verified

The security market line (SML)

Correct Answer
verified

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

Your personal opinion is that security X has an expected rate of return of 0.11.It has a beta of 1.5.The risk-free rate is 0.05 and the market expected rate of return is 0.09.According to the Capital Asset Pricing Model,this security is

Correct AnswerverifiedShow Answer

Capital Asset Pricing Theory asserts that portfolio returns are best explained by:

Correct AnswerverifiedShow Answer

Discuss the differences between the capital market line and the security market line.

Correct AnswerverifiedThe capital market line measures the exc...View AnswerShow Answer

In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is

Correct AnswerverifiedShow Answer

Discuss the assumptions of the capital asset pricing model,and how these assumptions relate to the "real world" investment decision process.

Correct AnswerverifiedThe assumptions are:a)The market is com...View AnswerShow Answer

Correct AnswerverifiedShow Answer

According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of

Correct AnswerverifiedShow Answer

Standard deviation and beta both measure risk,but they are different in that

Correct AnswerverifiedShow Answer

Studies of liquidity spreads in security markets have shown that

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which statement is

Correct AnswerverifiedShow Answer

According to the CAPM,the risk premium an investor expects to receive on any stock or portfolio increases:

Correct AnswerverifiedShow Answer

The security market line (SML)

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
verified
The capital market line measures the exc...
View Answer

Correct Answer
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Correct Answer
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The assumptions are:
a)The market is com...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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