Question 1

According to the Capital Asset Pricing Model (CAPM), underpriced securities have
A)positive betas.
B)zeroalphas.
C)negative betas.
D)positive alphas.

Accepted Answer

CAPM suggests that a security's expected return is based on its beta, which measures the market risk associated with the security. Alpha represents the difference between a security's expected return and its actual return based on its beta. Positive alpha suggests that the security has outperformed its expected return, indicating that it is underpriced. Therefore, securities with positive alphas can be considered underpriced according to CAPM.

Question 2

According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false?
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.

Accepted Answer

According to the CAPM, the expected rate of return on a security is directly proportional to its beta and the market risk premium, but not to the risk-free rate. Therefore, statement A is false. Statements B, C, and D are all true according to the CAPM.

Question 3

In a well-diversified portfolio,
A)market risk is negligible.
B)systematic risk is negligible.
C)unsystematic risk is negligible.
D)nondiversifiable risk is negligible.

Accepted Answer

Unsystematic risk refers to the risk that is specific to an individual company or industry and can be eliminated through diversification. By having a well-diversified portfolio, the unsystematic risk can be effectively eliminated, thereby reducing the overall risk of the portfolio. However, systematic risk (which is the risk inherent in the overall market) cannot be eliminated through diversification, and therefore it is not negligible in a well-diversified portfolio. Nondiversifiable risk is another name for systematic risk, so option D is incorrect. Market risk is also another name for systematic risk, so option A is incorrect.

Question 4

Which statement is not true regarding the capital market line (CML)?
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.

Accepted Answer

The statement that the CML is also called the security market line is not true. The security market line (SML) is a different line that shows the expected return of a security based on its beta, whereas the CML shows the optimal portfolio allocation between the risk-free asset and the market portfolio.

Question 5

In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is
A)unique risk.
B)market risk.
C)standard deviation of returns.
D)variance of returns.

Accepted Answer

The relevant risk in the CAPM is market risk, which is the risk that cannot be diversified away and is driven by economic factors affecting the entire market. Unique risk, which is the risk specific to individual assets, can be diversified away. The standard deviation and variance of returns are measures of overall risk, but do not specify which type of risk is relevant in the CAPM.

Question 6

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

Accepted Answer

According to CAPM, a security's alpha measures its excess return over its expected return based on the security's beta. A positive alpha means the security has performed better than its expected return based on the beta and the market, which indicates that the security is undervalued and potentially underpriced. Therefore, choice D is the best choice.

Question 7

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of
A)beta risk.
B)unsystematic risk.
C)unique risk.
D)reinvestment risk.

Accepted Answer

According to CAPM, a well-diversified portfolio's rate of return is determined by the portfolio's beta risk, which is the only systematic risk factor. Unsystematic risk, unique risk, and reinvestment risk are not considered in CAPM.

Question 8

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

Accepted Answer

The correct answer is A because the expected rate of return on a security with a beta of 1.25 is equal to the risk-free rate plus the beta of the security multiplied by the expected market rate of return minus the risk-free rate. In this case, the expected rate of return on a security with a beta of 1.25 is equal to 0.056 + 1.25 * (0.125 - 0.056) = 0.142.

Question 9

According to the Capital Asset Pricing Model (CAPM), overpriced securities have
A)positive betas.
B)zero alphas.
C)negative alphas.
D)positive alphas.

Accepted Answer

According to CAPM, securities with negative alphas are considered overpriced. This means that their expected returns are lower than what is predicted by their beta value.

Question 10

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of
A)systematic risk.
B)unsystematic risk.
C)unique risk.
D)reinvestment risk.

Accepted Answer

CAPM states that the rate of return of a well-diversified portfolio is a function of systematic risk, measured by beta. In other words, the expected return of the portfolio depends on the level of risk that cannot be avoided through diversification. Unsystematic risk, unique risk, and reinvestment risk are not considered in the CAPM formula.

Question 11

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

Accepted Answer

Beta measures the market risk of a security by comparing its returns to the overall market's returns. It is calculated by the covariance between the security's return and the market return divided by the variance of the market's returns.

Question 12

The market portfolio has a beta of
A)0.
B)1.
C)-1.
D)0.5.

Accepted Answer

The market portfolio, by definition, has a beta of 1. So, the best choice is letter B.

Question 13

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A)R_f+ $\beta$ [E(R_M)]. B)R_f+$\beta$ [E(R_M) -R_f]. C)$\beta$ [E(R_M) -R_f]. D)E(R_M) +R_f.

Accepted Answer

According to the CAPM, the expected rate of return on any security is equal to the risk-free rate plus a premium based on the market risk (beta). Thus, the equation is: 
Expected return = Risk-free rate + Beta * (Expected market return - Risk-free rate)
or 
E(Ri) = Rf + beta(Rm - Rf)

Option B is the closest match to this formula where expected return on a security is calculated as the sum of risk-free rate and the product of the market risk premium and the security's beta.

Question 14

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
A)0.06.
B)0.144.
C)0.12.
D)0.132.

Accepted Answer

The CAPM formula is:
Expected return = risk-free rate + beta*(market return - risk-free rate)

Plugging in the numbers,
Expected return on security X = 0.06 + 1.2*(0.12 - 0.06) = 0.132.

Therefore, the correct choice is D.

Question 15

According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have
A)positive betas.
B)zero alphas.
C)negative betas.
D)positive alphas.

Accepted Answer

According to the CAPM, a security's expected return is determined by its beta (systematic risk) and the risk-free rate. The alpha (excess return) is the difference between the actual return and the expected return based on the security's beta. In other words, if a security is fairly-priced, its expected return will be in line with the CAPM's prediction, and there will be no alpha (excess return). Therefore, the correct answer is B, zero alphas.

Question 16

In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
A)unique risk.
B)beta.
C)standard deviation of returns.
D)variance of returns.

Accepted Answer

In the Capital Asset Pricing Model (CAPM), the relevant measure of risk is beta. Beta measures the sensitivity of an asset's returns to changes in the market returns. It is used to calculate the expected return of an asset by comparing its level of risk to the risk of the overall market. Unique risk, standard deviation of returns, and variance of returns are measures of total risk, but they are not the relevant measure of risk in the CAPM.

Question 17

In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is
A)unique risk.
B)systematic risk.
C)standard deviation of returns.
D)variance of returns.

Accepted Answer

According to the CAPM, the relevant risk is systematic risk, which is also known as non-diversifiable risk. This type of risk impacts the entire market or a particular segment of the market, and cannot be eliminated through diversification. The standard deviation and variance of returns are measures of total risk, which includes both systematic and unique risk. Therefore, they are not the most relevant risk in the context of the CAPM.

Question 18

Which statement is not true regarding the market portfolio?
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.

Accepted Answer

The statement "It is the tangency point between the capital market line and the indifference curve" is not true. The market portfolio is simply the portfolio of all financial assets in the market, held in proportion to their market values. The tangency point between the capital market line and the indifference curve is the optimal portfolio for an investor given their risk preferences and available assets.

Question 19

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of
A)market risk.
B)unsystematic risk.
C)unique risk.
D)reinvestment risk.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is primarily determined by the market risk, which is also known as systematic risk. Unsystematic risk, unique risk, and reinvestment risk are not considered in the CAPM.

Question 20

The security market line (SML) is
A)the line that describes the expected return-beta relationship for well-diversified portfolios only.
B)also called the capital allocation line.
C)the line that is tangent to the efficient frontier of all risky assets.
D)the line that represents the expected return-beta relationship.

Accepted Answer

The security market line (SML) represents the expected return-beta relationship for all risky assets, not just well-diversified portfolios. It is not the same as the capital allocation line or tangent to the efficient frontier. Therefore, the best choice is D - the line that represents the expected return-beta relationship.

Quiz 9: The Capital Asset Pricing Model

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

According to the Capital Asset Pricing Model (CAPM) , which one of the following statements is false?

In a well-diversified portfolio,

Which statement is not true regarding the capital market line (CML) ?

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

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

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

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

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

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

The market portfolio has a beta of

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

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

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

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

Which statement is not true regarding the market portfolio?

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

The security market line (SML) is