Question 1

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. 
E)  None of the options are true. 
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. 
E)  None of the options are true.

Question 2

A security has an expected rate of return of 0.13 and a beta of 2.1. The market expected rate of return is 0.09, and the risk-free rate is 0.045. The alpha of the stock is

Accepted Answer

A)  −0.95%. 
B)  −1.7%. 
C)  8.3%. 
D)  5.5%. 
A)  −0.95%. 
B)  −1.7%. 
C)  8.3%. 
D)  5.5%.

Question 3

Assume that a security is fairly priced and has an expected rate of return of 0.13. The market expected rate of return is 0.13, and the risk-free rate is 0.04. The beta of the stock is

Accepted Answer

A)  1.25. 
B)  1.7. 
C)  1. 
D)  0.95. 
A)  1.25. 
B)  1.7. 
C)  1. 
D)  0.95.

Question 4

Your opinion is that security C has an expected rate of return of 0.106. It has a beta of 1.1. 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 5

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

Accepted Answer

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

Question 6

According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false?

Accepted Answer

A)  The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate. 
B)  The expected rate of return on a security increases as its beta increases. 
C)  A fairly priced security has an alpha of zero. 
D)  In equilibrium, all securities lie on the security market line. 
E)  All of the statements are true. 
A)  The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate. 
B)  The expected rate of return on a security increases as its beta increases. 
C)  A fairly priced security has an alpha of zero. 
D)  In equilibrium, all securities lie on the security market line. 
E)  All of the statements are true.

Question 7

You invest 55% of your money in security A with a beta of 1.4 and the rest of your money in security B with a beta of 0.9. The beta of the resulting portfolio is

Accepted Answer

A)  1.466. 
B)  1.157. 
C)  0.968. 
D)  1.082. 
E)  1.175. 
A)  1.466. 
B)  1.157. 
C)  0.968. 
D)  1.082. 
E)  1.175.

Question 8

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

Question 9

The capital asset pricing model assumes

Accepted Answer

A)  all investors are rational. 
B)  all investors have the same holding period. 
C)  investors have heterogeneous expectations. 
D)  all investors are rational and have the same holding period. 
E)  all investors are rational, have the same holding period, and have heterogeneous expectations. 
A)  all investors are rational. 
B)  all investors have the same holding period. 
C)  investors have heterogeneous expectations. 
D)  all investors are rational and have the same holding period. 
E)  all investors are rational, have the same holding period, and have heterogeneous expectations.

Question 10

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

Question 11

You invest $700 in a security with a beta of 1.4 and $300 in another security with a beta of 0.8. The beta of the resulting portfolio is

Accepted Answer

A)  1.40. 
B)  1.00. 
C)  0.36. 
D)  1.22. 
E)  0.80. 
A)  1.40. 
B)  1.00. 
C)  0.36. 
D)  1.22. 
E)  0.80.

Question 12

The market is expected to generate a 11% return and the risk free rate is 4%. A portfolio manager has 80% of her capital allocated to stock A with a beta of 0.9, which generated a total return of 12%. 20% of her capital is allocated to stock B with a beta of 1.3, which generated a total return of 13%. What Alpha was generated by the manager by allocating more capital to stock A?

Accepted Answer

A)  0.85% 
B)  1.18% 
C)  1.34% 
D)  1.59% 
A)  0.85% 
B)  1.18% 
C)  1.34% 
D)  1.59%

Question 13

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 11%, you should

Accepted Answer

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

Question 14

For the CAPM that examines illiquidity premiums, if there is correlation among assets due to common systematic risk factors, the illiquidity premium on asset i is a function of

Accepted Answer

A)  the market's volatility. 
B)  asset i's volatility. 
C)  the trading costs of security i. 
D)  the risk-free rate. 
E)  the money supply. 
A)  the market's volatility. 
B)  asset i's volatility. 
C)  the trading costs of security i. 
D)  the risk-free rate. 
E)  the money supply.

Question 15

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 10%, you should

Accepted Answer

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

Question 16

The security market line (SML) is

Accepted Answer

A)  the line that describes the expected return-beta relationship for well-diversified portfolios only. 
B)  also called the capital allocation line. 
C)  the line that is tangent to the efficient frontier of all risky assets. 
D)  the line that represents the expected return-beta relationship. 
E)  All of the options. 
A)  the line that describes the expected return-beta relationship for well-diversified portfolios only. 
B)  also called the capital allocation line. 
C)  the line that is tangent to the efficient frontier of all risky assets. 
D)  the line that represents the expected return-beta relationship. 
E)  All of the options.

Question 17

The risk-free rate and the expected market rate of return are 0.05 and 0.13, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.1 is equal to

Accepted Answer

A)  13.8% 
B)  14.4% 
C)  15.3% 
D)  13.4% 
E)  11.7% 
A)  13.8% 
B)  14.4% 
C)  15.3% 
D)  13.4% 
E)  11.7%

Question 18

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 13%, you should

Accepted Answer

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

Question 19

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 5%, and the expected market rate of return is 10%. 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)  10%. 
B)  5%. 
C)  8.35%. 
D)  28.35%. 
E)  0.67%. 
A)  10%. 
B)  5%. 
C)  8.35%. 
D)  28.35%. 
E)  0.67%.

Question 20

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.

Exam 9: The Capital Asset Pricing Model

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

A security has an expected rate of return of 0.13 and a beta of 2.1. The market expected rate of return is 0.09, and the risk-free rate is 0.045. The alpha of the stock is

Assume that a security is fairly priced and has an expected rate of return of 0.13. The market expected rate of return is 0.13, and the risk-free rate is 0.04. The beta of the stock is

Your opinion is that security C has an expected rate of return of 0.106. It has a beta of 1.1. 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 the context of the Capital Asset Pricing Model (CAPM), the relevant risk is

According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false?

You invest 55% of your money in security A with a beta of 1.4 and the rest of your money in security B with a beta of 0.9. The beta of the resulting portfolio is

The capital asset pricing model assumes

The risk premium on the market portfolio will be proportional to

You invest $700 in a security with a beta of 1.4 and $300 in another security with a beta of 0.8. The beta of the resulting portfolio is

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 11%, you should

For the CAPM that examines illiquidity premiums, if there is correlation among assets due to common systematic risk factors, the illiquidity premium on asset i is a function of

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 10%, you should

The security market line (SML) is

The risk-free rate and the expected market rate of return are 0.05 and 0.13, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.1 is equal to

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 13%, you should

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

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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

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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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