Question 1

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 2

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

Accepted Answer

A)  positive betas. 
B)  zero alphas. 
C)  negative betas. 
D)  positive alphas. 
A)  positive betas. 
B)  zero alphas. 
C)  negative betas. 
D)  positive alphas.

Question 3

Your opinion is that security A has an expected rate of return of 0.145. It has a beta of 1.5. The risk-free rate is 0.04, and the market expected rate of return is 0.11. 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

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%, and the expected market rate of return is 12%. Your company has a beta of 1.6, 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)  16.8%. 
B)  12.7%. 
C)  11.5%. 
D)  8.4%. 
E)  5.4%. 
A)  16.8%. 
B)  12.7%. 
C)  11.5%. 
D)  8.4%. 
E)  5.4%.

Question 5

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 6

Which statement is not 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 risk measure for the CML is standard deviation. 
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 risk measure for the CML is standard deviation.

Question 7

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

Accepted Answer

A)  unique risk. 
B)  systematic risk. 
C)  standard deviation of returns. 
D)  variance of returns. 
A)  unique risk. 
B)  systematic risk. 
C)  standard deviation of returns. 
D)  variance of returns.

Question 8

A stock generates a perpetual cash flow of $6 per share, per year. The market index has an expected return of 10% and the risk free rate is 4%. If the stock's listed beta is 1.0 and I believe the true beta is 1.2, how much is the stock overpriced?

Accepted Answer

A)  $13.58 
B)  $15.88 
C)  $33.20 
D)  $44.12 
A)  $13.58 
B)  $15.88 
C)  $33.20 
D)  $44.12

Question 9

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 the options are correct. 
A)  market risk. 
B)  unsystematic risk. 
C)  unique risk. 
D)  reinvestment risk. 
E)  None of the options are correct.

Question 10

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%, and the expected market rate of return is 11%. Your company has a beta of 0.67, 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)  8.69%. 
C)  15%. 
D)  11%. 
E)  0.75%. 
A)  4%. 
B)  8.69%. 
C)  15%. 
D)  11%. 
E)  0.75%.

Question 11

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 3%, and the expected market rate of return is 11%. Your company has a beta of 1.3, 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)  4.2%. 
B)  7.6%. 
C)  12.4%. 
D)  13.4%. 
E)  15.0%. 
A)  4.2%. 
B)  7.6%. 
C)  12.4%. 
D)  13.4%. 
E)  15.0%.

Question 12

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. 
E)  0.80. 
A)  1.40. 
B)  1.15. 
C)  0.36. 
D)  1.08. 
E)  0.80.

Question 13

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. 
E)  either above or below the security-market line depending on its standard deviation. 
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 14

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 15

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)  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.

Question 16

According to the Capital Asset Pricing Model (CAPM), overpriced securities have

Accepted Answer

A)  positive betas. 
B)  zero alphas. 
C)  negative alphas. 
D)  positive alphas. 
A)  positive betas. 
B)  zero alphas. 
C)  negative alphas. 
D)  positive alphas.

Question 17

The expected return-beta relationship

Accepted Answer

A)  is the most familiar expression of the CAPM to practitioners. 
B)  refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. 
C)  assumes that investors hold well-diversified portfolios. 
D)  All of the options are true. 
E)  None of the options are true. 
A)  is the most familiar expression of the CAPM to practitioners. 
B)  refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. 
C)  assumes that investors hold well-diversified portfolios. 
D)  All of the options are true. 
E)  None of the options are true.

Question 18

Given are the following two stocks A and B: $\begin{array}{lll}
\text { Security } & \text { Expected Rate of return } & \text { Beta } \
\text { A } & 0.12 & 1.2 \
\text { B } & 0.14 & 1.8
\end{array}$
 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 abnormal return of 1.2%. 
B)  B because it offers an expected abnormal return of 1.8%. 
C)  A because it offers an expected abnormal return of 2.2%. 
D)  B because it offers an expected return of 14%. 
E)  B because it has a higher beta. 
A)  A because it offers an expected abnormal return of 1.2%. 
B)  B because it offers an expected abnormal return of 1.8%. 
C)  A because it offers an expected abnormal return of 2.2%. 
D)  B because it offers an expected return of 14%. 
E)  B because it has a higher beta.

Question 19

The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should

Accepted Answer

A)  buy the stock because it is overpriced. 
B)  sell short the stock because it is overpriced. 
C)  sell the stock short because it is underpriced. 
D)  buy the stock because it is underpriced. 
E)  None of the options, as the stock is fairly priced. 
A)  buy the stock because it is overpriced. 
B)  sell short the stock because it is overpriced. 
C)  sell the stock short because it is underpriced. 
D)  buy the stock because it is underpriced. 
E)  None of the options, as the stock is fairly priced.

Question 20

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.

Exam 9: The Capital Asset Pricing Model

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

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

Your opinion is that security A has an expected rate of return of 0.145. It has a beta of 1.5. The risk-free rate is 0.04, and the market expected rate of return is 0.11. According to the Capital Asset Pricing Model, this security is

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

Which statement is not true regarding the capital market line (CML)?

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

A stock generates a perpetual cash flow of $6 per share, per year. The market index has an expected return of 10% and the risk free rate is 4%. If the stock's listed beta is 1.0 and I believe the true beta is 1.2, how much is the stock overpriced?

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

An overpriced security will plot

The market portfolio has a beta of

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

According to the Capital Asset Pricing Model (CAPM), overpriced securities have

The expected return-beta relationship

Given are the following two stocks A and B: Security Expected Rate of return Beta A 0.12 1.2 B 0.14 1.8 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?

The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should

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

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