Question 1

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.
E)none of the above.

Accepted Answer

The relevant measure of risk in the CAPM is beta, which measures systemic risk or the sensitivity of a stock's returns to the overall market. Unique risk, standard deviation of returns, and variance of returns are not relevant in the CAPM because they do not capture the market risk component that is being considered in the model.

Question 2

Which statement is 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.
E)A,B,and D are true.

Accepted Answer

E

Question 3

The market portfolio has a beta of
A)0.
B)1.
C)-1.
D)0.5.
E)none of the above

Accepted Answer

By definition, the beta of the market portfolio is 1.

Question 4

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.
E)none of the above.

Accepted Answer

According to the CAPM, a well diversified portfolio's rate of return is a function of beta risk, which measures the systematic risk of the portfolio. Unsystematic risks, unique risks, and reinvestment risks are not considered in the CAPM.

Question 5

According to the Capital Asset Pricing Model (CAPM),
A)a security with a positive alpha is considered overpriced.
B)a security with a zero alpha is considered to be a good buy.
C)a security with a negative alpha is considered to be a good buy.
D)a security with a positive alpha is considered to be underpriced.
E)none of the above.

Accepted Answer

The answer of According to the Capital Asset Pricing Model...

Question 6

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.
E)none of the above.

Accepted Answer

The CAPM states that the expected return on a well-diversified portfolio is a function of its systematic risk, as measured by beta. Unsystematic risk and unique risk are diversifiable, and therefore should not have an impact on the overall return of a well-diversified portfolio. Reinvestment risk is not directly captured by the CAPM.

Question 7

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.
E)none of the above.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of market risk. The model states that the expected return of an asset or portfolio is equal to the risk-free rate plus the market premium multiplied by beta, which measures the sensitivity of the asset or portfolio to market movements. Therefore, the rate of return is tied to market risk and not affected by unsystematic risk, unique risk, or reinvestment risk.

Question 8

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.
E)all of the above.

Accepted Answer

The Security Market Line (SML) represents the expected return-beta relationship, specifically for individual assets or portfolios. It is not limited to well-diversified portfolios only, nor is it related to the Capital Allocation Line or the efficient frontier. Therefore, option D is the correct answer.

Question 9

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.
E)none of the above.

Accepted Answer

In the CAPM, the relevant risk is market risk, which cannot be diversified away through a well-diversified portfolio. Unique risk, standard deviation, and variance of returns are all measures of total risk, but are not relevant in the context of the CAPM.

Question 10

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.
E)none of the above.

Accepted Answer

The CAPM assumes that investors are only concerned with systematic risk, which is the risk that is inherent in the market or economy as a whole and cannot be diversifiable. Therefore, the relevant risk in CAPM is systematic risk. Unique risks, or risks that are specific to an individual stock or company, are not relevant in CAPM because they can be diversified away. Standard deviation and variance are measures of total risk, which includes both systematic and unique risks.

Question 11

Which statement is 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.
E)A,B,and C are true.

Accepted Answer

A) The market portfolio includes all publicly traded financial assets.
B) The market portfolio lies on the efficient frontier.
C) All securities in the market portfolio are held in proportion to their market values.

Question 12

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.
E)none of the above.

Accepted Answer

The market risk, beta, of a security is measured by its covariance with the market divided by the variance of the market's returns. This is expressed in the standard formula for beta: beta = cov(ri,rm)/var(rm). Therefore, the correct option is A.

Question 13

According to the Capital Asset Pricing Model (CAPM),the expected rate of return on any security is equal to A)R_f+ β [E(R_M)]. B)R_f+ β [E(R_M) - R_f]. C)β [E(R_M) - R_f]. D)E(R_M) + R_f. E)none of the above.

Accepted Answer

According to CAPM, the expected rate of return on any security is equal to the risk-free rate plus the beta of the security multiplied by the market risk premium (i.e., the difference between the expected market return and the risk-free rate). Mathematically, this can be expressed as R_f+ β [E(R_M) - R_f], which is option B.

Question 14

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.
E)All of the above are true.

Accepted Answer

The statement "It is the tangency point between the capital market line and the indifference curve" is not true regarding the market portfolio. The tangency point between the capital market line and the indifference curve represents the optimal portfolio for a specific investor, whereas the market portfolio includes all publicly traded financial assets held in proportion to their market values.

Question 15

According to the Capital Asset Pricing Model (CAPM),underpriced securities
A)have positive betas.
B)have zero alphas.
C)have negative betas.
D)have positive alphas.
E)none of the above.

Accepted Answer

The answer of According to the Capital Asset Pricing Model...

Question 16

According to the Capital Asset Pricing Model (CAPM),overpriced securities
A)have positive betas.
B)have zero alphas.
C)have negative alphas.
D)have positive alphas.
E)none of the above.

Accepted Answer

The answer of According to the Capital Asset Pricing Model...

Question 17

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
E)0.117

Accepted Answer

E(R) = 5.6% + 1.25(12.5 - 5.6) = 14.225%.

Question 18

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.
E)The risk measure for the CML is standard deviation.

Accepted Answer

The CML is not the same as the security market line (SML). The CML represents the efficient frontier of risky assets, whereas the SML is used to price individual securities or portfolios based on their risk and expected return.

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.
A)0.06.
B)0.144.
C)0.12.
D)0.132.
E)0.18.

Accepted Answer

The CAPM formula is:

Expected return on security X = Risk-free rate + Beta of X * (Expected market rate of return - Risk-free rate)

Plugging in the values given in the question:

Expected return on security X = 0.06 + 1.2 * (0.12 - 0.06)
Expected return on security X = 0.132

Therefore, the expected rate of return on security X is 0.132 or 13.2%. The correct answer is D.

Question 20

According to the Capital Asset Pricing Model (CAPM),fairly priced securities
A)have positive betas.
B)have zero alphas.
C)have negative betas.
D)have positive alphas.
E)none of the above.

Accepted Answer

According to the CAPM, the expected return of a security is determined by its beta (systematic risk) and the market risk premium. The market risk premium is the difference between the expected return of the market portfolio and the risk-free rate. Fairly priced securities have zero alphas, meaning that their expected returns are exactly in line with what is predicted by the CAPM. This is because a security's alpha represents its excess return beyond what can be attributed to its beta and market risk premium, so a zero alpha implies that the security is fairly priced based on its systematic risk.

Quiz 9: The Capital Asset Pricing Model

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

Which statement is true regarding the Capital Market Line (CML) ?

The market portfolio has a beta of

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

According to the Capital Asset Pricing Model (CAPM) ,

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

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

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

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

Which statement is true regarding the market portfolio?

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

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

Which statement is not true regarding the market portfolio?

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

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

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

Which statement is not true regarding the Capital Market Line (CML) ?

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