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) A and C. 
E) B and C. 
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) A and C. 
E) B and C. D

Question 2

The expected return - beta relationship of the CAPM is graphically represented by

Accepted Answer

A) the security market line. 
B) the capital market line. 
C) the capital allocation line. 
D) the efficient frontier with a risk-free asset. 
E) the efficient frontier without a risk-free asset. 
A) the security market line. 
B) the capital market line. 
C) the capital allocation line. 
D) the efficient frontier with a risk-free asset. 
E) the efficient frontier without a risk-free asset. A

Question 3

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 above. 
A) beta risk. 
B) unsystematic risk. 
C) unique risk. 
D) reinvestment risk. 
E) none of the above. A

Question 4

Which statement is not true regarding the Capital Market Line (CML)?

Accepted Answer

A) The CML is the line from the risk-free rate through the market portfolio. 
B) The CML is the best attainable capital allocation line. 
C) The CML is also called the security market line. 
D) The CML always has a positive slope. 
E) The risk measure for the CML is standard deviation. 
A) The CML is the line from the risk-free rate through the market portfolio. 
B) The CML is the best attainable capital allocation line. 
C) The CML is also called the security market line. 
D) The CML always has a positive slope. 
E) The risk measure for the CML is standard deviation.

Question 5

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%. 
E) none of the above. 
A) -0.95%. 
B) -1.7%. 
C) 8.3%. 
D) 5.5%. 
E) none of the above.

Question 6

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 7

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 above. 
A) underpriced. 
B) overpriced. 
C) fairly priced. 
D) cannot be determined from data provided. 
E) none of the above.

Question 8

The risk-free rate and the expected market rate of return are 0.06 and 0.12,respectively.According to the capital asset pricing model (CAPM),the expected rate of return on security X with a beta of 1.2 is equal to.

Accepted Answer

A) 0.06. 
B) 0.144. 
C) 0.12. 
D) 0.132. 
E) 0.18. 
A) 0.06. 
B) 0.144. 
C) 0.12. 
D) 0.132. 
E) 0.18.

Question 9

Which statement is true regarding the Capital Market Line (CML)?

Accepted Answer

A) The CML is the line from the risk-free rate through the market portfolio. 
B) The CML is the best attainable capital allocation line. 
C) The CML is also called the security market line. 
D) The CML always has a positive slope. 
E) A,B,and D are true. 
A) The CML is the line from the risk-free rate through the market portfolio. 
B) The CML is the best attainable capital allocation line. 
C) The CML is also called the security market line. 
D) The CML always has a positive slope. 
E) A,B,and D are true.

Question 10

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

Accepted Answer

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

Question 11

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.

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 percent and the expected market rate of return is 10 percent.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

The market portfolio has a beta of

Accepted Answer

A) 0. 
B) 1. 
C) -1. 
D) 0.5. 
E) none of the above 
A) 0. 
B) 1. 
C) -1. 
D) 0.5. 
E) none of the above

Question 14

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%. 
E) none of the above. 
A) 1.7%. 
B) -1.8%. 
C) 8.3%. 
D) 5.5%. 
E) none of the above.

Question 15

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

Question 16

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 above 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 above statements are true.

Question 17

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 4 percent and the expected market rate of return is 11 percent.Your company has a beta of 0.75 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) 4 
B) 9.25 
C) 15 
D) 11 
E) 0.75 
A) 4 
B) 9.25 
C) 15 
D) 11 
E) 0.75

Question 18

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

Accepted Answer

A) unique risk. 
B) beta. 
C) standard deviation of returns. 
D) variance of returns. 
E) none of the above. 
A) unique risk. 
B) beta. 
C) standard deviation of returns. 
D) variance of returns. 
E) none of the above.

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 4 percent and the expected market rate of return is 11 percent.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) 4 
B) 8.69 
C) 15 
D) 11 
E) 0.75 
A) 4 
B) 8.69 
C) 15 
D) 11 
E) 0.75

Question 20

Capital Asset Pricing Theory asserts that portfolio returns are best explained by:

Accepted Answer

A) economic factors. 
B) specific risk. 
C) systematic risk. 
D) diversification. 
E) none of the above. 
A) economic factors. 
B) specific risk. 
C) systematic risk. 
D) diversification. 
E) none of the above.

Exam 9: The Capital Asset Pricing Model

The security market line (SML)

The expected return - beta relationship of the CAPM is graphically represented by

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 Capital Market Line (CML)?

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 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

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

The risk-free rate and the expected market rate of return are 0.06 and 0.12,respectively.According to the capital asset pricing model (CAPM),the expected rate of return on security X with a beta of 1.2 is equal to.

Which statement is true regarding the Capital Market Line (CML)?

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

A "fairly priced" asset lies

The market portfolio has a beta of

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

The capital asset pricing model assumes

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

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

Capital Asset Pricing Theory asserts that portfolio returns are best explained by:

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

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