Question 1

An overpriced 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. 
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.

Question 2

Assume that a security is fairly priced and has an expected rate of return of 0.17.The market expected rate of return is 0.11, and the risk-free rate is 0.04.The beta of the stock is

Accepted Answer

A) 1.25. 
B) 1.86. 
C) 1. 
D) 0.95. 
A) 1.25. 
B) 1.86. 
C) 1. 
D) 0.95.

Question 3

Your opinion is that CSCO has an expected rate of return of 0.13.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.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. 
A) underpriced. 
B) overpriced. 
C) fairly priced. 
D) Cannot be determined from data provided.

Question 4

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. 
A) economic factors. 
B) specific risk. 
C) systematic risk. 
D) diversification.

Question 5

In equilibrium, the marginal price of risk for a risky security must be

Accepted Answer

A) equal to the marginal price of risk for the market portfolio. 
B) greater than the marginal price of risk for the market portfolio. 
C) less than the marginal price of risk for the market portfolio. 
D) adjusted by its degree of nonsystematic risk. 
A) equal to the marginal price of risk for the market portfolio. 
B) greater than the marginal price of risk for the market portfolio. 
C) less than the marginal price of risk for the market portfolio. 
D) adjusted by its degree of nonsystematic risk.

Question 6

The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively.According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to

Accepted Answer

A) 0.06. 
B) 0.144. 
C) 0.12. 
D) 0.132. 
A) 0.06. 
B) 0.144. 
C) 0.12. 
D) 0.132.

Question 7

One of the assumptions of the CAPM is that investors exhibit myopic behavior.What does this mean?

Accepted Answer

A) They plan for one identical holding period. 
B) They are price takers who can't affect market prices through their trades. 
C) They are mean-variance optimizers. 
D) They have the same economic view of the world. 
A) They plan for one identical holding period. 
B) They are price takers who can't affect market prices through their trades. 
C) They are mean-variance optimizers. 
D) They have the same economic view of the world.

Question 8

What is the expected return of a zero-beta security?

Accepted Answer

A) The market rate of return 
B) Zero rate of return 
C) A negative rate of return 
D) The risk-free rate 
A) The market rate of return 
B) Zero rate of return 
C) A negative rate of return 
D) The risk-free rate

Question 9

Which of the following statements about the mutual-fund theorem is true? I) It is similar to the separation property.
II) It implies that a passive investment strategy can be efficient.
III) It implies that efficient portfolios can be formed only through active strategies.
IV) It means that professional managers have superior security-selection strategies.

Accepted Answer

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

Question 10

The market portfolio has a beta of

Accepted Answer

A) 0. 
B) 1. 
C) -1. 
D) 0.5. 
A) 0. 
B) 1. 
C) -1. 
D) 0.5.

Question 11

The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively.According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to

Accepted Answer

A) 0.142. 
B) 0.144. 
C) 0.153. 
D) 0.134. 
A) 0.142. 
B) 0.144. 
C) 0.153. 
D) 0.134.

Question 12

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

Accepted Answer

A) Rf+ $\beta$ [E(RM)]. 
B) Rf+$\beta$ [E(RM) -Rf]. 
C) $\beta$ [E(RM) -Rf]. 
D) E(RM) +Rf. 
A) Rf+ $\beta$ [E(RM)]. 
B) Rf+$\beta$ [E(RM) -Rf]. 
C) $\beta$ [E(RM) -Rf]. 
D) E(RM) +Rf.

Question 13

The market risk, beta, of a security is equal to

Accepted Answer

A) the covariance between the security's return and the market return divided by the variance of the market's returns. 
B) the covariance between the security and market returns divided by the standard deviation of the market's returns. 
C) the variance of the security's returns divided by the covariance between the security and market returns. 
D) the variance of the security's returns divided by the variance of the market's returns. 
A) the covariance between the security's return and the market return divided by the variance of the market's returns. 
B) the covariance between the security and market returns divided by the standard deviation of the market's returns. 
C) the variance of the security's returns divided by the covariance between the security and market returns. 
D) the variance of the security's returns divided by the variance of the market's returns.

Question 14

Your opinion is that Boeing has an expected rate of return of 0.08.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. 
B) overpriced. 
C) fairly priced. 
D) Cannot be determined from data provided. 
A) underpriced. 
B) overpriced. 
C) fairly priced. 
D) Cannot be determined from data provided.

Question 15

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. 
A) market risk is negligible. 
B) systematic risk is negligible. 
C) unsystematic risk is negligible. 
D) nondiversifiable risk is negligible.

Question 16

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. 
B) overpriced. 
C) fairly priced. 
D) Cannot be determined from data provided. 
A) underpriced. 
B) overpriced. 
C) fairly priced. 
D) Cannot be determined from data provided.

Question 17

You invest $600 in a security with a beta of 1.2 and $400 in another security 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. 
A) 1.40. 
B) 1.00. 
C) 0.36. 
D) 1.08.

Question 18

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) the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its variance. 
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) the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its variance.

Question 19

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

Accepted Answer

A) beta risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk. 
A) beta risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk.

Question 20

You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7.The beta of the resulting portfolio is

Accepted Answer

A) 1.40. 
B) 1.15. 
C) 0.36. 
D) 1.08. 
A) 1.40. 
B) 1.15. 
C) 0.36. 
D) 1.08.

Exam 9: The Capital Asset Pricing Model

An overpriced security will plot

Assume that a security is fairly priced and has an expected rate of return of 0.17.The market expected rate of return is 0.11, and the risk-free rate is 0.04.The beta of the stock is

Your opinion is that CSCO has an expected rate of return of 0.13.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.According to the Capital Asset Pricing Model, this security is

Capital asset pricing theory asserts that portfolio returns are best explained by

In equilibrium, the marginal price of risk for a risky security must be

The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively.According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to

One of the assumptions of the CAPM is that investors exhibit myopic behavior.What does this mean?

What is the expected return of a zero-beta security?

The market portfolio has a beta of

The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively.According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to

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

The market risk, beta, of a security is equal to

Your opinion is that Boeing has an expected rate of return of 0.08.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

In a well-diversified portfolio,

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

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

The risk premium on the market portfolio will be proportional to

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

You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7.The beta of the resulting portfolio is

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

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Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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