Question 1

The security market line (SML)

Accepted Answer

A) can be portrayed graphically as the expected return-beta relationship. 
B) can be portrayed graphically as the expected return-standard deviation of market returns relationship. 
C) provides a benchmark for evaluation of investment performance. 
D) can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance. 
E) can be portrayed graphically as the expected return-standard deviation of market returns relationship and provides a benchmark for evaluation of investment performance. 
A) can be portrayed graphically as the expected return-beta relationship. 
B) can be portrayed graphically as the expected return-standard deviation of market returns relationship. 
C) provides a benchmark for evaluation of investment performance. 
D) can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance. 
E) can be portrayed graphically as the expected return-standard deviation of market returns relationship and provides a benchmark for evaluation of investment performance.

Question 2

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 3

Empirical results regarding betas estimated from historical data indicate that betas

Accepted Answer

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

Question 4

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 5

Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.

Accepted Answer

The CAPM can be used to establish a hurd

Question 6

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 7

The capital asset pricing model assumes

Accepted Answer

A) all investors are price takers. 
B) all investors have the same holding period. 
C) investors have homogeneous expectations. 
D) all investors are price takers and have the same holding period. 
E) all investors are price takers, have the same holding period, and have homogeneous expectations. 
A) all investors are price takers. 
B) all investors have the same holding period. 
C) investors have homogeneous expectations. 
D) all investors are price takers and have the same holding period. 
E) all investors are price takers, have the same holding period, and have homogeneous expectations.

Question 8

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.

Question 9

Security A has an expected rate of return of 0.10 and a beta of 1.3.The market expected rate of return is 0.10 and the risk-free rate is 0.04.The alpha of the stock is

Accepted Answer

A) 1.7%. 
B) -1.8%. 
C) 8.3%. 
D) 5.5%. 
A) 1.7%. 
B) -1.8%. 
C) 8.3%. 
D) 5.5%.

Question 10

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 11

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 12

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 13

One of the assumptions of the CAPM is that investors exhibit myopic behavior.What does this mean

Accepted Answer

A) They plan for one identical holding period. 
B) They are price takers who can't affect market prices through their trades. 
C) They are mean-variance optimizers. 
D) They have the same economic view of the world. 
E) They pay no taxes or transactions costs. 
A) They plan for one identical holding period. 
B) They are price takers who can't affect market prices through their trades. 
C) They are mean-variance optimizers. 
D) They have the same economic view of the world. 
E) They pay no taxes or transactions costs.

Question 14

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

Accepted Answer

A) systematic risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk. 
A) systematic risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk.

Question 15

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 16

Given are the following two stocks A and B:   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 excess return of 1.2%. 
B) B because it offers an expected excess return of 1.8%. 
C) A because it offers an expected excess 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 excess return of 1.2%. 
B) B because it offers an expected excess return of 1.8%. 
C) A because it offers an expected excess return of 2.2%. 
D) B because it offers an expected return of 14%. 
E) B because it has a higher beta.

Question 17

The amount that an investor allocates to the market portfolio is negatively related to I) the expected return on the market portfolio.
II) the investor's risk aversion coefficient.
III) the risk-free rate of return.
IV) the variance of the market portfolio.

Accepted Answer

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

Question 18

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 19

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

Question 20

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.

Exam 9: The Capital Asset Pricing Model

The security market line (SML)

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

Empirical results regarding betas estimated from historical data indicate that betas

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

Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.

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 capital asset pricing model assumes

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

Security A has an expected rate of return of 0.10 and a beta of 1.3.The market expected rate of return is 0.10 and the risk-free rate is 0.04.The alpha of the stock is

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

What is the expected return of a zero-beta security

One of the assumptions of the CAPM is that investors exhibit myopic behavior.What does this mean

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

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

Given are the following two stocks A and B: 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 amount that an investor allocates to the market portfolio is negatively related to I) the expected return on the market portfolio. II) the investor's risk aversion coefficient. III) the risk-free rate of return. IV) the variance of the market portfolio.

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

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

Which statement is not true regarding the market portfolio

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

Optimal Risky Portfolios

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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