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 
E)  can be portrayed graphically as the expected return-standard deviation of market-returns relationship and 
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 
E)  can be portrayed graphically as the expected return-standard deviation of market-returns relationship and

Question 2

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 3

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 4

The market risk, beta, of a security is equal to

Accepted Answer

A)  the covariance between the security's return and the market return divided by the variance of the market's returns. 
B)  the covariance between the security and market returns divided by the standard deviation of the market's returns. 
C)  the variance of the security's returns divided by the covariance between the security and market returns. 
D)  the variance of the security's returns divided by the variance of the market's returns. 
A)  the covariance between the security's return and the market return divided by the variance of the market's returns. 
B)  the covariance between the security and market returns divided by the standard deviation of the market's returns. 
C)  the variance of the security's returns divided by the covariance between the security and market returns. 
D)  the variance of the security's returns divided by the variance of the market's returns.

Question 5

Empirical results regarding betas estimated from historical data indicate that betas

Accepted Answer

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

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

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

Question 8

The expected return-beta relationship

Accepted Answer

A)  is the most familiar expression of the CAPM to practitioners. 
B)  refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. 
C)  assumes that investors hold well-diversified portfolios. 
D)  All of the options are true. 
E)  None of the options are true. 
A)  is the most familiar expression of the CAPM to practitioners. 
B)  refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. 
C)  assumes that investors hold well-diversified portfolios. 
D)  All of the options are true. 
E)  None of the options are true.

Question 9

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 10

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 11

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 12

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

Accepted Answer

A)  positive betas. 
B)  zero alphas. 
C)  negative betas. 
D)  positive alphas. 
E)  None of the options are correct. 
A)  positive betas. 
B)  zero alphas. 
C)  negative betas. 
D)  positive alphas. 
E)  None of the options are correct.

Question 13

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%, and the
Expected market rate of return is 11%. Your company has a beta of 1.4, 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)  13.8%. 
B)  7%. 
C)  15%. 
D)  4%. 
E)  1.4%. 
A)  13.8%. 
B)  7%. 
C)  15%. 
D)  4%. 
E)  1.4%.

Question 14

Standard deviation and beta both measure risk, but they are different in that beta measures

Accepted Answer

A)  both systematic and unsystematic risk. 
B)  only systematic risk, while standard deviation is a measure of total risk. 
C)  only unsystematic risk, while standard deviation is a measure of total risk. 
D)  both systematic and unsystematic risk, while standard deviation measures only systematic risk. 
E)  total risk, while standard deviation measures only nonsystematic risk. 
A)  both systematic and unsystematic risk. 
B)  only systematic risk, while standard deviation is a measure of total risk. 
C)  only unsystematic risk, while standard deviation is a measure of total risk. 
D)  both systematic and unsystematic risk, while standard deviation measures only systematic risk. 
E)  total risk, while standard deviation measures only nonsystematic risk.

Question 15

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 16

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 17

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 18

You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3. The beta of the resulting portfolio is

Accepted Answer

A)  1.40. 
B)  1.00. 
C)  0.52. 
D)  1.08. 
E)  0.80. 
A)  1.40. 
B)  1.00. 
C)  0.52. 
D)  1.08. 
E)  0.80.

Question 19

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.

Question 20

An overpriced 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.

Exam 9: The Capital Asset Pricing Model

The security market line (SML)

A "fairly-priced" asset lies

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 market risk, beta, of a security is equal to

Empirical results regarding betas estimated from historical data indicate that betas

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

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

The expected return-beta relationship

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 risk 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 10%, you should

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

Standard deviation and beta both measure risk, but they are different in that beta measures

The CAPM applies to

The capital asset pricing model assumes

You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3. The beta of the resulting portfolio is

Which statement is not true regarding the market portfolio?

An overpriced security will plot

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

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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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