Question 1

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

Accepted Answer

A)  Rf + β [E(RM)]. 
B)  ​Rf + β [E(RM) −Rf]. 
C)  β [E(RM) −Rf]. 
D)  E(RM) + Rf. 
A)  Rf + β [E(RM)]. 
B)  ​Rf + β [E(RM) −Rf]. 
C)  β [E(RM) −Rf]. 
D)  E(RM) + Rf.

Question 2

The capital asset pricing model assumes

Accepted Answer

A)  all investors are price takers. 
B)  all investors have the same holding period. 
C)  investors pay taxes on capital gains. 
D)  all investors are price takers and have the same holding period. 
E)  all investors are price takers, have the same holding period, and pay taxes on capital gains. 
A)  all investors are price takers. 
B)  all investors have the same holding period. 
C)  investors pay taxes on capital gains. 
D)  all investors are price takers and have the same holding period. 
E)  all investors are price takers, have the same holding period, and pay taxes on capital gains.

Question 3

According to the Capital Asset Pricing Model (CAPM), a security with a

Accepted Answer

A)  positive alpha is considered overpriced. 
B)  zero alpha is considered to be a good buy. 
C)  negative alpha is considered to be a good buy. 
D)  positive alpha is considered to be underpriced. 
A)  positive alpha is considered overpriced. 
B)  zero alpha is considered to be a good buy. 
C)  negative alpha is considered to be a good buy. 
D)  positive alpha is considered to be underpriced.

Question 4

Which statement is true regarding the market portfolio?I) It includes all publicly traded financial assets.II) It lies on the efficient frontier.III) All securities in the market portfolio are held in proportion to their market values.IV) It is the tangency point between the capital market line and the indifference curve.

Accepted Answer

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

Question 5

Which statement is not true regarding the market portfolio?

Accepted Answer

A)  It includes all publicly-traded financial assets. 
B)  It lies on the efficient frontier. 
C)  All securities in the market portfolio are held in proportion to their market values. 
D)  It is the tangency point between the capital market line and the indifference curve. 
E)  All of the options are true. 
A)  It includes all publicly-traded financial assets. 
B)  It lies on the efficient frontier. 
C)  All securities in the market portfolio are held in proportion to their market values. 
D)  It is the tangency point between the capital market line and the indifference curve. 
E)  All of the options are true.

Question 6

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 7

The risk-free rate and the expected market rate of return are 0.04 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.4 is equal to

Accepted Answer

A)  6% 
B)  14.4% 
C)  12% 
D)  15.2% 
E)  18% 
A)  6% 
B)  14.4% 
C)  12% 
D)  15.2% 
E)  18%

Question 8

You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3. The beta of the resulting portfolio is

Accepted Answer

A)  1.40. 
B)  1.00. 
C)  0.52. 
D)  1.08. 
E)  0.80. 
A)  1.40. 
B)  1.00. 
C)  0.52. 
D)  1.08. 
E)  0.80.

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

Question 10

An underpriced 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 11

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

Accepted Answer

A)  both systematic and unsystematic risk. 
B)  only systematic risk, while standard deviation is a measure of total risk. 
C)  only unsystematic risk, while standard deviation is a measure of total risk. 
D)  both systematic and unsystematic risk, while standard deviation measures only systematic risk. 
E)  total risk, while standard deviation measures only nonsystematic risk. 
A)  both systematic and unsystematic risk. 
B)  only systematic risk, while standard deviation is a measure of total risk. 
C)  only unsystematic risk, while standard deviation is a measure of total risk. 
D)  both systematic and unsystematic risk, while standard deviation measures only systematic risk. 
E)  total risk, while standard deviation measures only nonsystematic risk.

Question 12

Your opinion is that CSCO has an expected rate of return of 0.15. 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. 
E)  None of the options are correct. 
A)  underpriced. 
B)  overpriced. 
C)  fairly priced. 
D)  Cannot be determined from data provided. 
E)  None of the options are correct.

Question 13

Your personal opinion is that a security 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. 
A)  underpriced. 
B)  overpriced. 
C)  fairly priced. 
D)  Cannot be determined from data provided.

Question 14

The risk-free rate is 5%. The expected market rate of return is 11%. If you expect stock X with a beta of 2.1 to offer a rate of return of 15%, you should

Accepted Answer

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

Question 15

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

Accepted Answer

A)  positive betas. 
B)  zero alphas. 
C)  negative betas. 
D)  positive alphas. 
E)  None of the options are correct. 
A)  positive betas. 
B)  zero alphas. 
C)  negative betas. 
D)  positive alphas. 
E)  None of the options are correct.

Question 16

If investors do not know their investment horizons for certain,

Accepted Answer

A)  the CAPM is no longer valid. 
B)  the CAPM underlying assumptions are not violated. 
C)  the implications of the CAPM are not violated as long as investors' liquidity needs are not priced. 
D)  the implications of the CAPM are no longer useful. 
A)  the CAPM is no longer valid. 
B)  the CAPM underlying assumptions are not violated. 
C)  the implications of the CAPM are not violated as long as investors' liquidity needs are not priced. 
D)  the implications of the CAPM are no longer useful.

Question 17

Empirical results regarding betas estimated from historical data indicate that betas

Accepted Answer

A)  are constant over time. 
B)  are always greater than one. 
C)  are always near zero. 
D)  appear to regress toward one over time. 
E)  are always positive. 
A)  are constant over time. 
B)  are always greater than one. 
C)  are always near zero. 
D)  appear to regress toward one over time. 
E)  are always positive.

Question 18

A stock generates a perpetual cash flow of $5 per share, per year. The market index has an expected return of 11% and the risk free rate is 3%. If the stock's listed beta is 0.8 and I believe the true beta is 0.5, how much of a premium will I pay for the stock?

Accepted Answer

A)  $16.58 
B)  $18.24 
C)  $53.19 
D)  $71.43 
A)  $16.58 
B)  $18.24 
C)  $53.19 
D)  $71.43

Question 19

The CAPM applies to

Accepted Answer

A)  portfolios of securities only. 
B)  individual securities only. 
C)  efficient portfolios of securities only. 
D)  efficient portfolios and efficient individual securities only. 
E)  all portfolios and individual securities. 
A)  portfolios of securities only. 
B)  individual securities only. 
C)  efficient portfolios of securities only. 
D)  efficient portfolios and efficient individual securities only. 
E)  all portfolios and individual securities.

Question 20

A "fairly-priced" asset lies

Accepted Answer

A)  above the security-market line. 
B)  on the security-market line. 
C)  on the capital-market line. 
D)  above the capital-market line. 
E)  below the security-market line. 
A)  above the security-market line. 
B)  on the security-market line. 
C)  on the capital-market line. 
D)  above the capital-market line. 
E)  below the security-market line.

Exam 9: The Capital Asset Pricing Model

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

The capital asset pricing model assumes

According to the Capital Asset Pricing Model (CAPM), a security with a

Which statement is not true regarding the market 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

The risk-free rate and the expected market rate of return are 0.04 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.4 is equal to

You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3. The beta of the resulting portfolio is

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

An underpriced security will plot

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

Your opinion is that CSCO has an expected rate of return of 0.15. 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

Your personal opinion is that a security 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

The risk-free rate is 5%. The expected market rate of return is 11%. If you expect stock X with a beta of 2.1 to offer a rate of return of 15%, you should

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

If investors do not know their investment horizons for certain,

Empirical results regarding betas estimated from historical data indicate that betas

A stock generates a perpetual cash flow of $5 per share, per year. The market index has an expected return of 11% and the risk free rate is 3%. If the stock's listed beta is 0.8 and I believe the true beta is 0.5, how much of a premium will I pay for the stock?

The CAPM applies to

A "fairly-priced" asset lies

The Investment Environment

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

Efficient Diversification

Index Models

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral 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

Futures Markets

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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