Question 1

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

Both the capital market line and the security market line depict risk/return relationships. However, the riskmeasure for the CML is standard deviation and the risk measure for the SML is beta (thus the CML is not alsocalled the security market line; the other statements are true).

Question 2

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

variance.

Question 3

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

Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.

Question 4

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

A security with a positive alpha is one that is expected to yield an abnormal positive rate of return, based on theperceived risk of the security, and thus is underpriced.

Question 5

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

Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.

Question 6

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

Accepted Answer

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

Question 7

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

Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.

Question 8

Which statement is true regarding the capital market line (CML)? I) The CML is the line from the risk-free rate through the market portfolio.
II) The CML is the best attainable capital allocation line.
III) The CML is also called the security market line.
IV) The CML always has a positive slope.
A) I only
B) II only
C) III only
D) IV only
E) I, II, and IV

Accepted Answer

measure for the CML is standard deviation and the risk measure for the SML is beta (thus the CML is not alsocalled the security market line; the other statements are true).

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 the Capital Asset Pricing Model (CAPM), overpriced securities have negative alphas.

Question 10

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

E(R) = 6% + 1.2(12 - 6) = 13.2%.

Question 11

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 options are true.

Accepted Answer

The tangency point between the capital market line and the indifference curve is the optimal portfolio for aparticular investor.

Question 12

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

A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).

Question 13

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

With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk thatinfluences return according to the CAPM.

Question 14

Which statement is true regarding the market portfolio? I) It includes all publicly traded financial assets.
II) It lies on the efficient frontier.
III) All securities in the market portfolio are held in proportion to their market values.
IV) It is the tangency point between the capital market line and the indifference curve.
A) I only
B) II only
C) III only
D) IV only
E) I, II, and III

Accepted Answer

The tangency point between the capital market line and the indifference curve is the optimal portfolio for aparticular investor.

Question 15

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 options are correct.

Accepted Answer

With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk thatinfluences return according to the CAPM.

Question 16

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 options.

Accepted Answer

The SML is a measure of expected return per unit of risk, where risk is defined as beta (systematic risk).

Question 17

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 options are correct.

Accepted Answer

With a diversified portfolio, the only risk remaining is market, or systematic, risk. This is the only risk thatinfluences return according to the CAPM.

Question 18

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

Accepted Answer

The expected rate of return on any security is equal to the risk-free rate plus the systematic risk of the security(beta) times the market risk premium, E(rM - rf ).

Question 19

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

Accepted Answer

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

Question 20

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%.

Quiz 9: The Capital Asset Pricing Model

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

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

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

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

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

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

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

Which statement is true regarding the capital market line (CML) ? I) The CML is the line from the risk-free rate through the market portfolio. II) The CML is the best attainable capital allocation line. III) The CML is also called the security market line. IV) The CML always has a positive slope.

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

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

Which statement is not true regarding the market portfolio?

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

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

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) , the expected rate of return on any security is equal To

The market portfolio has a beta 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