Question 1

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. D

Question 2

The risk-free rate is 7%.The expected market rate of return is 15%.If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should

Accepted Answer

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

Question 3

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

Question 4

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

Question 5

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.

Question 6

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to

Accepted Answer

A)  Rf + β [E(RM) ].
B)  Rf + β [E(RM)  - Rf].
C)  β [E(RM)  - Rf].
D)  E(RM)  + Rf.

Question 7

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

Accepted Answer

A)  positive betas.
B)  zero alphas.
C)  negative alphas.
D)  positive alphas.

Question 8

A security has an expected rate of return of 0.15 and a beta of 1.25.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)  -1.7%.
C)  8.3%.
D)  3.5%.

Question 9

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.

Question 10

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.

Question 11

The risk-free rate is 4%.The expected market rate of return is 12%.If you expect stock X with a beta of 1.0 to offer a rate of return of 10%, you should

Accepted Answer

A)  buy stock X because it is overpriced.
B)  sell short stock X because it is overpriced.
C)  sell short stock X because it is underpriced.
D)  buy stock X because it is underpriced.
E)  None of the options, as the stock is fairly priced

Question 12

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.

Question 13

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

Accepted Answer

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

Question 14

Your personal opinion is that a security has an expected rate of return of 0.11.It has a beta of 1.5.The risk-free rate is 0.05 and the market expected rate of return is 0.09.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.

Question 15

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.

Question 16

The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively.According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to

Accepted Answer

A)  0.142.
B)  0.144.
C)  0.153.
D)  0.134.
E)  0.117.

Question 17

In a well-diversified portfolio

Accepted Answer

A)  market risk is negligible.
B)  systematic risk is negligible.
C)  unsystematic risk is negligible.
D)  nondiversifiable risk is negligible.

Question 18

List and discuss two of the assumptions of the CAPM.

Accepted Answer

The answer of List and discuss two of the assumptions...

Question 19

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

Question 20

The market portfolio has a beta of

Accepted Answer

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

Exam 9: The Capital Asset Pricing Model