Question 1

Select the incorrect statement regarding the CML.

Accepted Answer

A) The CML is an equilibrium relationship for efficient portfolios and individual securities. 
B) The CML represents the risk-return tradeoff for efficient portfolios. 
C) The intercept of the CML is the reward to investors for deferring consumption. 
D) The CML relies on standard deviation as the measure of risk. 
A) The CML is an equilibrium relationship for efficient portfolios and individual securities. 
B) The CML represents the risk-return tradeoff for efficient portfolios. 
C) The intercept of the CML is the reward to investors for deferring consumption. 
D) The CML relies on standard deviation as the measure of risk.

Question 2

Under the Market model,the regression line that results when the return of a security is plotted against the market index return is the:

Accepted Answer

A) SML. 
B) CML. 
C) characteristic line. 
D) slope. 
A) SML. 
B) CML. 
C) characteristic line. 
D) slope.

Question 3

Most professional investors use the S&P 500 as a general gauge of total market performance.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is not one of the assumptions of the CMT?

Accepted Answer

A) All investors have the same one-period time horizon. 
B) There are no personal income taxes. 
C) There is no interest rate charged on borrowing. 
D) There are no transaction costs. 
A) All investors have the same one-period time horizon. 
B) There are no personal income taxes. 
C) There is no interest rate charged on borrowing. 
D) There are no transaction costs.

Question 5

The expected market return is 9 percent.The risk-free rate is 1 percent,and XYZ Co.has a beta of 1.4.XYZ's risk premium is:

Accepted Answer

A) 8 percent. 
B) 11.2 percent. 
C) 12.2 percent. 
D) 10.3 percent 
A) 8 percent. 
B) 11.2 percent. 
C) 12.2 percent. 
D) 10.3 percent

Question 6

The introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into a straight line.

Accepted Answer

A) True 
 B)False

Question 7

The expected market return is 16 percent.The risk-free rate of return is 7 percent,and BC Co.has a beta of 1.1.BC's required rate of return is:

Accepted Answer

A) 17.6 percent. 
B) 16.0 percent. 
C) 16.9 percent. 
D) 23.0 percent. 
A) 17.6 percent. 
B) 16.0 percent. 
C) 16.9 percent. 
D) 23.0 percent.

Question 8

Two points define a straight line.What two points could be most readily identified to estimate the SML?

Accepted Answer

The risk-free rate because the

Question 9

The separation theorem states that:

Accepted Answer

A) systematic risk is separate from unsystematic risk. 
B) individual security risk is separate from portfolio risk. 
C) the investment decision is separate from the financing decision. 
D) the borrowing portfolio is separate from the lending portfolio. 
A) systematic risk is separate from unsystematic risk. 
B) individual security risk is separate from portfolio risk. 
C) the investment decision is separate from the financing decision. 
D) the borrowing portfolio is separate from the lending portfolio.

Question 10

When markets are in equilibrium,the CML is upward sloping:

Accepted Answer

A) because it shows the optimum combination of risky securities. 
B) because the price of risk must always be positive. 
C) because it contains all securities weighted by their market values. 
D) because investors expect returns to increase over time. 
A) because it shows the optimum combination of risky securities. 
B) because the price of risk must always be positive. 
C) because it contains all securities weighted by their market values. 
D) because investors expect returns to increase over time.

Question 11

The CML states that all investors should invest in the same portfolio of risky assets.

Accepted Answer

A) True 
 B)False

Question 12

If a certain stock has a beta greater than 1.0,it means:

Accepted Answer

A) the stock's return has greater than average sensitivity to the market return. 
B) the stock would be an attractive holding during a bear market. 
C) an investor will earn a higher return on the stock than the market returns. 
D) the stock is less risky than the market portfolio. 
A) the stock's return has greater than average sensitivity to the market return. 
B) the stock would be an attractive holding during a bear market. 
C) an investor will earn a higher return on the stock than the market returns. 
D) the stock is less risky than the market portfolio.

Question 13

Which of the following is not a characteristic of the risk factors in the APT?

Accepted Answer

A) The factors must be readily observable in risk/return space. 
B) Each factor must have a pervasive influence on stock returns. 
C) The factors must influence expected return. 
D) Factors must be unpredictable. 
A) The factors must be readily observable in risk/return space. 
B) Each factor must have a pervasive influence on stock returns. 
C) The factors must influence expected return. 
D) Factors must be unpredictable.

Question 14

In a declining market,a portfolio manager should attempt to increase the overall beta of the portfolio.

Accepted Answer

A) True 
 B)False

Question 15

What is the formula for the slope of the CML?What does it represent?

Accepted Answer

The slope is [E(RM)- RF]/σM.It

Question 16

Like the CAPM,the APT assumes a single-period investment horizon.

Accepted Answer

A) True 
 B)False

Question 17

Some securities are considered to be "defensive" in that they tend to hold their value or increase in value when the majority of securities are losing value,such as during a recession.What could one conclude about the betas of defensive securities?

Accepted Answer

One would expect the

Question 18

The arbitrage pricing theory (APT):

Accepted Answer

A) considers only one factor and is a narrower model than the CAPM. 
B) considers more factors than the CAPM and is a broader model. 
C) is useful only for well-diversified portfolios of common stock. 
D) is easy to implement because the factors are readily observable. 
A) considers only one factor and is a narrower model than the CAPM. 
B) considers more factors than the CAPM and is a broader model. 
C) is useful only for well-diversified portfolios of common stock. 
D) is easy to implement because the factors are readily observable.

Question 19

Tests of the CAPM suggest the trade-off between expected return and risk is an upward-sloping straight line.

Accepted Answer

A) True 
 B)False

Question 20

The APT is based on the:

Accepted Answer

A) law of averages. 
B) law of attraction. 
C) law of accelerating return. 
D) law of one price. 
A) law of averages. 
B) law of attraction. 
C) law of accelerating return. 
D) law of one price.

Exam 9: Asset Pricing Models

Select the incorrect statement regarding the CML.

Under the Market model,the regression line that results when the return of a security is plotted against the market index return is the:

Most professional investors use the S&P 500 as a general gauge of total market performance.

Which of the following is not one of the assumptions of the CMT?

The expected market return is 9 percent.The risk-free rate is 1 percent,and XYZ Co.has a beta of 1.4.XYZ's risk premium is:

The introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into a straight line.

The expected market return is 16 percent.The risk-free rate of return is 7 percent,and BC Co.has a beta of 1.1.BC's required rate of return is:

Two points define a straight line.What two points could be most readily identified to estimate the SML?

The separation theorem states that:

When markets are in equilibrium,the CML is upward sloping:

The CML states that all investors should invest in the same portfolio of risky assets.

If a certain stock has a beta greater than 1.0,it means:

Which of the following is not a characteristic of the risk factors in the APT?

In a declining market,a portfolio manager should attempt to increase the overall beta of the portfolio.

What is the formula for the slope of the CML?What does it represent?

Like the CAPM,the APT assumes a single-period investment horizon.

Some securities are considered to be "defensive" in that they tend to hold their value or increase in value when the majority of securities are losing value,such as during a recession.What could one conclude about the betas of defensive securities?

The arbitrage pricing theory (APT):

Tests of the CAPM suggest the trade-off between expected return and risk is an upward-sloping straight line.

The APT is based on the:

Understanding Investments

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Securities Markets and Market Indexes

How Securities Are Traded

The Risks and Returns From Investing

Portfolio Theory

Portfolio Selection

Common Stock Valuation

Common Stocks: Analysis and Strategy

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