Question 1

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 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

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 4

Studies of liquidity spreads in security markets have shown that

Accepted Answer

A) liquid stocks earn higher returns than illiquid stocks. 
B) illiquid stocks earn higher returns than liquid stocks. 
C) both liquid and illiquid stocks earn the same returns. 
D) illiquid stocks are good investments for frequent, short-term traders. 
A) liquid stocks earn higher returns than illiquid stocks. 
B) illiquid stocks earn higher returns than liquid stocks. 
C) both liquid and illiquid stocks earn the same returns. 
D) illiquid stocks are good investments for frequent, short-term traders.

Question 5

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A) the CAPM is no longer valid.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A) the CAPM is no longer valid.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 6

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 7

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 8

The capital asset pricing model assumes

Accepted Answer

A) all investors are fully informed. 
B) all investors are rational. 
C) all investors are mean-variance optimizers. 
D) taxes are an important consideration. 
E) all investors are fully informed, are rational, and are mean-variance optimizers. 
A) all investors are fully informed. 
B) all investors are rational. 
C) all investors are mean-variance optimizers. 
D) taxes are an important consideration. 
E) all investors are fully informed, are rational, and are mean-variance optimizers.

Question 9

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 10

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 is 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 is true.

Question 11

A security has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08 and the risk-free rate is 0.05.The alpha of the stock is

Accepted Answer

A) 1.7%. 
B) -1.7%. 
C) 8.3%. 
D) 5.5%. 
A) 1.7%. 
B) -1.7%. 
C) 8.3%. 
D) 5.5%.

Question 12

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 13

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 14

Discuss the assumptions of the capital asset pricing model and how these assumptions relate to the "real world" investment decision process.

Accepted Answer

The assumptions are:
(a) The market is c

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 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 16

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 17

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 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 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 19

Your opinion is that Boeing has an expected rate of return of 0.112.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 20

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.

Exam 9: The Capital Asset Pricing Model

The security market line (SML) is

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

The CAPM applies to

Studies of liquidity spreads in security markets have shown that

If investors do not know their investment horizons for certain,

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

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

The capital asset pricing model assumes

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

A security has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08 and the risk-free rate is 0.05.The alpha of the stock is

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

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

Discuss the assumptions of the capital asset pricing model and how these assumptions relate to the "real world" investment decision process.

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

An underpriced security will plot

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

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

Your opinion is that Boeing has an expected rate of return of 0.112.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

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

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