Question 1

According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have

Accepted Answer

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

Question 2

The capital asset pricing model assumes

Accepted Answer

A)   all investors are price takers.
B)   all investors have the same holding period.
C)   investors pay taxes on capital gains.
D)   all investors are price takers and have the same holding period.
E)   all investors are price takers, have the same holding period, and pay taxes on capital gains. D

Question 3

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.11% = 5% + 1.5(9% - 5%)  = 11.0%; therefore, the security is fairly priced. C

Question 4

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.

Question 5

Capital asset pricing theory asserts that portfolio returns are best explained by

Accepted Answer

A)   reinvestment risk.
B)   specific risk.
C)   systematic risk.
D)   diversification.

Question 6

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.

Question 7

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 11%, 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.

Question 8

The risk premium on the market portfolio will be proportional to

Accepted Answer

A)   the average degree of risk aversion of the investor population..
B)   the  risk of the market portfolio as measured by its variance.
C)   The risk of the market portfolio as measured by its beta.
D)   the average degree of risk aversion of the investor population and the risk of the market portfolio as. 
E)   The average degree of risk aversion of the investor population and the risk of the market portfolio as.

Question 9

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

Accepted Answer

A)   r f + [E(r M) ].
B)   r f + [E(r M)  - r f ].
C)   [E(rM)  - r f ].
D)   E(r M)  + r f .

Question 10

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.

Question 11

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 options are correct.

Question 12

If investors do not know their investment horizons for certain,

Accepted Answer

A)   the CAPM is no longer valid.
B)   the CAPM underlying assumptions are not violated.
C)   the implications of the CAPM are not violated as long as investors' liquidity needs are not priced.
D)   the implications of the CAPM are no longer useful.

Question 13

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 14

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 15

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 13%, 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.

Question 16

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 are correct.

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%, and the
Expected market rate of return is 11%. Your company has a beta of 1.0, 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)   7%.
C)   15%.
D)   11%.
E)   1%.

Question 18

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 19

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 20

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.

Exam 9: The Capital Asset Pricing Model

According to the Capital Asset Pricing Model (CAPM) , fairly-priced securities have

The capital asset pricing model assumes

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

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

Capital asset pricing theory asserts that portfolio returns are best explained by

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

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 11%, you should

The risk premium on the market portfolio will be proportional to

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

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

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

If investors do not know their investment horizons for certain,

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

In a well-diversified portfolio,

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 13%, you should

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

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

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

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