Question 1

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 2

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 3

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 4

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 5

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 are 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 are true.

Question 6

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 7

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 8

Given are the following two stocks A and B: $$\begin{array} { c c c } 
&{ \text { Expected } } \
\text { Security } & \text { Rate of return } & \text { Beta } \
\text { A } & 0.12 & 1.2 \
\text { B } & 0.14 & 1.8 \
\hline
\end{array}$$ 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 9

You invest $600 in a security with a beta of 1.2 and $400 in another security with a beta of 0.90. The beta of the resulting portfolio is

Accepted Answer

A)  1.40. 
B)  1.00. 
C)  0.36. 
D)  1.08. 
E)  0.80. 
A)  1.40. 
B)  1.00. 
C)  0.36. 
D)  1.08. 
E)  0.80.

Question 10

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.

Question 11

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.

Question 12

The market portfolio has a beta of

Accepted Answer

A)  0. 
B)  1. 
C)  -1. 
D)  0.5. 
A)  0. 
B)  1. 
C)  -1. 
D)  0.5.

Question 13

Assume that a security is fairly priced and has an expected rate of return of 0.13. The market expected rate of return is 0.13, and the risk-free rate is 0.04. The beta of the stock is

Accepted Answer

A)  1.25. 
B)  1.7. 
C)  1. 
D)  0.95. 
A)  1.25. 
B)  1.7. 
C)  1. 
D)  0.95.

Question 14

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 15

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 16

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 17

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.

Exam 9: The Capital Asset Pricing Model

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

An underpriced security will plot

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 0.13 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

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

Given are the following two stocks A and B: Expected Security Rate of return Beta A 0.12 1.2 B 0.14 1.8 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?

You invest $600 in a security with a beta of 1.2 and $400 in another security with a beta of 0.90. The beta of the resulting portfolio is

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

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

The market portfolio has a beta of

Assume that a security is fairly priced and has an expected rate of return of 0.13. The market expected rate of return is 0.13, and the risk-free rate is 0.04. The beta of the stock is

Studies of liquidity spreads in security markets have shown that

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

The capital asset pricing model assumes

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

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Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

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The Efficient Market Hypothesis

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Empirical Evidence on Security Returns

Bond Prices and Yields

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Managing Bond Portfolios

Macroeconomic and Industry Analysis

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Financial Statement Analysis

Options Markets: Introduction

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