Chapter 09 The Capital Asset Pricing Model.docx

Chapter 09 The Capital Asset Pricing Model.docx

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Chapter09TheCapitalAssetPricingModel

Chapter09

TheCapitalAssetPricingModel

MultipleChoiceQuestions

1. InthecontextoftheCapitalAssetPricingModel（CAPM）therelevantmeasureofriskis 

A. uniquerisk.

B. beta.

C. standarddeviationofreturns.

D. varianceofreturns.

E. skewness.

2. InthecontextoftheCapitalAssetPricingModel（CAPM）therelevantriskis 

A. uniquerisk.

B. systematicrisk.

C. standarddeviationofreturns.

D. varianceofreturns.

E. semi-variance.

3. InthecontextoftheCapitalAssetPricingModel（CAPM）therelevantriskis 

A. uniquerisk.

B. marketrisk.

C. standarddeviationofreturns.

D. varianceofreturns.

E. semi-variance.

4. AccordingtotheCapitalAssetPricingModel（CAPM）awelldiversifiedportfolio'srateofreturnisafunctionof 

A. marketrisk.

B. unsystematicrisk.

C. uniquerisk.

D. reinvestmentrisk.

E. interestraterisk.

5. AccordingtotheCapitalAssetPricingModel（CAPM）awelldiversifiedportfolio'srateofreturnisafunctionof 

A. betarisk.

B. unsystematicrisk.

C. uniquerisk.

D. reinvestmentrisk.

E. interestraterisk.

6. AccordingtotheCapitalAssetPricingModel（CAPM）awelldiversifiedportfolio'srateofreturnisafunctionof 

A. systematicrisk.

B. unsystematicrisk.

C. uniquerisk.

D. reinvestmentrisk.

E. interestraterisk.

7. Themarketportfoliohasabetaof 

A. 0.

B. 1.

C. −1.

D. 0.5.

E. 0.75

8. Therisk-freerateandtheexpectedmarketrateofreturnare0.06and0.12,respectively.Accordingtothecapitalassetpricingmodel（CAPM）,theexpectedrateofreturnonsecurityXwithabetaof1.2isequalto 

A. 0.06.

B. 0.144.

C. 0.12.

D. 0.132.

E. 0.18.

9. Therisk-freerateandtheexpectedmarketrateofreturnare0.056and0.125,respectively.Accordingtothecapitalassetpricingmodel（CAPM）,theexpectedrateofreturnonasecuritywithabetaof1.25isequalto 

A. 0.142.

B. 0.144.

C. 0.153.

D. 0.134.

E. 0.117.

10. Whichstatementisnottrueregardingthemarketportfolio?

A. Itincludesallpubliclytradedfinancialassets.

B. Itliesontheefficientfrontier.

C. Allsecuritiesinthemarketportfolioareheldinproportiontotheirmarketvalues.

D. Itisthetangencypointbetweenthecapitalmarketlineandtheindifferencecurve.

E. Itliesonalinethatrepresentstheexpectedrisk-returnrelationship.

11. Whichstatementistrueregardingthemarketportfolio?

A. Itincludesallpubliclytradedfinancialassets.

B. Itliesontheefficientfrontier.

C. Allsecuritiesinthemarketportfolioareheldinproportiontotheirmarketvalues.

D. Itisthetangencypointbetweenthecapitalmarketlineandtheindifferencecurve.

E. Itincludesallpubliclytradedfinancialassets,liesontheefficientfrontier,andallsecuritiesinthemarketportfolioareheldinproportiontotheirmarketvalues.

12. WhichstatementisnottrueregardingtheCapitalMarketLine（CML）?

A. TheCMListhelinefromtherisk-freeratethroughthemarketportfolio.

B. TheCMListhebestattainablecapitalallocationline.

C. TheCMLisalsocalledthesecuritymarketline.

D. TheCMLalwayshasapositiveslope.

E. TheriskmeasurefortheCMLisstandarddeviation.

13. WhichstatementistrueregardingtheCapitalMarketLine（CML）?

A. TheCMListhelinefromtherisk-freeratethroughthemarketportfolio.

B. TheCMListhebestattainablecapitalallocationline.

C. TheCMLisalsocalledthesecuritymarketline.

D. TheCMLalwayshasapositiveslope.

E. TheCMListhelinefromtherisk-freeratethroughthemarketportfolio,isthebestattainablecapitalallocationline,anditalwayshasapositiveslope.

14. Themarketrisk,beta,ofasecurityisequalto 

A. thecovariancebetweenthesecurity'sreturnandthemarketreturndividedbythevarianceofthemarket'sreturns.

B. thecovariancebetweenthesecurityandmarketreturnsdividedbythestandarddeviationofthemarket'sreturns.

C. thevarianceofthesecurity'sreturnsdividedbythecovariancebetweenthesecurityandmarketreturns.

D. thevarianceofthesecurity'sreturnsdividedbythevarianceofthemarket'sreturns.

E. thevarianceofthesecurity'sreturndividedbythestandarddeviationofthemarket'sreturns.

15. AccordingtotheCapitalAssetPricingModel（CAPM）,theexpectedrateofreturnonanysecurityisequalto 

A. Rf+[E（RM）].

B. Rf+[E（RM）−Rf].

C. [E（RM）−Rf].

D. E（RM）+Rf.

E. Rf-[E（RM）−Rf].

16. TheSecurityMarketLine（SML）is 

A. thelinethatdescribestheexpectedreturn-betarelationshipforwell-diversifiedportfoliosonly.

B. alsocalledtheCapitalAllocationLine.

C. thelinethatistangenttotheefficientfrontierofallriskyassets.

D. thelinethatrepresentstheexpectedreturn-betarelationship.

E. alsocalledtheCapitalMarketLine.

17. AccordingtotheCapitalAssetPricingModel（CAPM）,fairlypricedsecurities 

A. havepositivebetas.

B. havezeroalphas.

C. havenegativebetas.

D. havepositivealphas.

E. havenon-zeroalphas.

18. AccordingtotheCapitalAssetPricingModel（CAPM）,underpricedsecurities 

A. havepositivebetas.

B. havezeroalphas.

C. havenegativebetas.

D. havepositivealphas.

E. havenegativealphas.

19. AccordingtotheCapitalAssetPricingModel（CAPM）,overpricedsecurities 

A. havepositivebetas.

B. havezeroalphas.

C. havenegativealphas.

D. havepositivealphas.

E. havenegativebetas.

20. AccordingtotheCapitalAssetPricingModel（CAPM）, 

A. asecuritywithapositivealphaisconsideredoverpriced.

B. asecuritywithazeroalphaisconsideredtobeagoodbuy.

C. asecuritywithanegativealphaisconsideredtobeagoodbuy.

D. asecuritywithapositivealphaisconsideredtobeunderpriced.

E. asecuritywithapositivebetaisconsideredtobeunderpriced.

21. AccordingtotheCapitalAssetPricingModel（CAPM）,whichoneofthefollowingstatementsisfalse?

A. Theexpectedrateofreturnonasecurityincreasesindirectproportiontoadecreaseintherisk-freerate.

B. Theexpectedrateofreturnonasecurityincreasesasitsbetaincreases.

C. Afairlypricedsecurityhasanalphaofzero.

D. Inequilibrium,allsecuritieslieonthesecuritymarketline.

E. Allofthesearecorrect.

22. Inawelldiversifiedportfolio 

A. marketriskisnegligible.

B. systematicriskisnegligible.

C. unsystematicriskisnegligible.

D. nondiversifiableriskisnegligible.

E. riskdoesnotexist.

23. Empiricalresultsregardingbetasestimatedfromhistoricaldataindicatethat 

A. betasareconstantovertime.

B. betasofallsecuritiesarealwaysgreaterthanone.

C. betasarealwaysnearzero.

D. betasappeartoregresstowardoneovertime.

E. betasarealwayspositive.

24. Yourpersonalopinionisthatasecurityhasanexpectedrateofreturnof0.11.Ithasabetaof1.5.Therisk-freerateis0.05andthemarketexpectedrateofreturnis0.09.AccordingtotheCapitalAssetPricingModel,thissecurityis 

A. underpriced.

B. overpriced.

C. fairlypriced.

D. cannotbedeterminedfromdataprovided.

E. caneitherbeoverpricedorunderpricedbutnotfairlypriced.

25. Therisk-freerateis7percent.Theexpectedmarketrateofreturnis15percent.Ifyouexpectastockwithabetaof1.3toofferarateofreturnof12percent,youshould 

A. buythestockbecauseitisoverpriced.

B. sellshortthestockbecauseitisoverpriced.

C. sellthestockshortbecauseitisunderpriced.

D. buythestockbecauseitisunderpriced.

E. holdthestockbecauseitisfairlypriced.

26. Youinvest$600inasecuritywithabetaof1.2and$400inanothersecuritywithabetaof0.90.Thebetaoftheresultingportfoliois 

A. 1.40.

B. 1.00.

C. 0.36.

D. 1.08.

E. 0.80.

27. Asecurityhasanexpectedrateofreturnof0.10andabetaof1.1.Themarketexpectedrateofreturnis0.08andtherisk-freerateis0.05.Thealphaofthestockis 

A. 1.7%.

B. −1.7%.

C. 8.3%.

D. 5.5%.

E. −5.5%.

28. YouropinionisthatCSCOhasanexpectedrateofreturnof0.13.Ithasabetaof1.3.Therisk-freerateis0.04andthemarketexpectedrateofreturnis0.115.AccordingtotheCapitalAssetPricingModel,thissecurityis 

A. underpricedby3%.

B. overpriced.

C. fairlypriced.

D. cannotbedeterminedfromdataprovided.

E. underpricedby5%.

29. YouropinionisthatCSCOhasanexpectedrateofreturnof0.1375.Ithasabetaof1.3.Therisk-freerateis0.04andthemarketexpectedrateofreturnis0.115.AccordingtotheCapitalAssetPricingModel,thissecurityis 

A. underpricedby10%.

B. overpriced.

C. fairlypriced.

D. cannotbedeterminedfromdataprovided.

E. underpricedby5%.

30. YouropinionisthatCSCOhasanexpectedrateofreturnof0.15.Ithasabetaof1.3.Therisk-freerateis0.04andthemarketexpectedrateofreturnis0.115.AccordingtotheCapitalAssetPricingModel,thissecurityis 

A. underpriced.

B. overpricedby10%.

C. fairlypriced.

D. cannotbedeterminedfromdataprovided.

E. overpricedby5%.

31. YouropinionisthatBoeinghasanexpectedrateofreturnof0.112.Ithasabetaof0.92.Therisk-freerateis0.04andthemarketexpectedrateofreturnis0.10.AccordingtotheCapitalAssetPricingModel,thissecurityis 

A. underpriced.

B. overpricedby7%.

C. fairlypriced.

D. cannotbedeterminedfromdataprovided.

E. overpricedby5%.

32. YouropinionisthatBoeinghasanexpectedrateofreturnof0.0952.Ithasabetaof0.92.Therisk-freerateis0.04andthemarketexpectedrateofreturnis0.10.AccordingtotheCapitalAssetPricingModel,thissecurityis 

A. underpricedby7%.

B. overpriced.

C