Deck 6: Asset Pricing Models

Question 1

Beta is a measure of

A) company specific risk
B) industry risk
C) diversifiable risk
D) systematic risk
E) unique risk

Answer 1

C

Question 2

Utilising the security market line an investor owning a stock with a beta of −2 would expect the stock's return to ____ in a market that was expected to decline 15 per cent.

A) rise or fall an indeterminate amount
B) fall by 3 per cent
C) fall by 30 per cent
D) rise by 13 per cent
E) rise by 30 per cent

Answer 2

E

Question 3

All portfolios on the capital market line are

A) perfectly positively correlated.
B) perfectly negatively correlated.
C) unique from each other.
D) weakly correlated.
E) unrelated except that they contain the risk free asset.

Answer 3

A

Question 4

What does WRF = −0.50 mean?

A) The investor can borrow money at the risk-free rate.
B) The investor can lend money at the current market rate.
C) The investor can borrow money at the current market rate.
D) The investor can borrow money at the prime rate of interest.
E) The investor can lend money at the prime rate of interest.

Question 5

Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.

A) 11.13%
B) 14.97%
C) 16.25%
D) 22.25%
E) 17.0%

Question 6

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

A) zero beta model.
B) unstable beta or a higher borrowing rate.
C) zero beta model or a higher borrowing rate.
D) higher borrowing rate.
E) unstable beta.

Question 7

A completely diversified portfolio would have a correlation with the market portfolio that is

A) equal to zero because it has only unsystematic risk.
B) equal to one because it has only systematic risk.
C) less than zero because it has only systematic risk.
D) less than one because it has only unsystematic risk.
E) less than one because it has only systematic risk.

Question 8

As the number of securities in a portfolio increases, the amount of systematic risk

A) remains constant.
B) decreases.
C) increases.
D) changes.
E) none of the above.

Question 9

In the presence of transactions costs, the SML will be

A) a single straight line.
B) a kinked line.
C) a set of lines rather than a single straight line.
D) a curve rather than a single straight line.
E) impossible to determine.

Question 10

Theoretically, the correlation coefficient between a completely diversified portfolio and the market portfolio should be

A) −1.0.
B) +1.0.
C) 0.0.
D) −0.5.
E) +0.5.

Question 11

The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing model (CAPM) uses ____.

A) beta; total risk
B) standard deviation; total risk
C) standard deviation; systematic risk
D) unsystematic risk; total risk
E) systematic risk; beta

Question 12

When identifying undervalued and overvalued assets, which of the following statements is false?

A) An asset is properly valued if its estimated rate of return is equal to its required rate of return.
B) An asset is considered overvalued if its estimated rate of return is below its required rate of return.
C) An asset is considered undervalued if its estimated rate of return is above its required rate of return.
D) An asset is considered overvalued if its required rate of return is below its estimated rate of return.
E) None of the above (that is, all are true statements).

Question 13

Which of the following would most closely resemble the true market portfolio?

A) Stocks
B) Stocks and bonds
C) Stocks, bonds and foreign securities
D) Stocks, bonds, foreign securities and options
E) Stocks, bonds, foreign securities, options and coins

Question 14

Which of the following statements about the risk-free asset is correct?

A) The risk-free asset is defined as an asset for which there is uncertainty regarding the expected rate of return. b. The standard deviation of return for the risk-free asset is equal to zero.
C) The standard deviation of return for the risk-free asset cannot be zero, since division by zero is undefined.
D) Choices a and b.
E) Choices a and c.

Question 15

Which of the following is not an assumption of the Capital Market Theory?

A) All investors are Markowitz efficient investors.
B) All investors have homogeneous expectations.
C) There are no taxes or transaction costs in buying or selling assets.
D) All investments are indivisible so it is impossible to buy or sell fractional shares.
E) All investors have the same one period time horizon.