Question 1

Which of the following is correct regarding the SML?

Accepted Answer

The Security Market Line (SML) represents the expected return of a security or portfolio in relation to its beta with the market. The slope of the SML is determined by the market price of risk, which increases with the marginal investor's risk aversion. Therefore, a greater risk aversion leads to a steeper SML, as investors require higher returns for taking on additional risk.

Question 2

According to the SML,the 91-day Government of Canada T-bill is which of the following?

Accepted Answer

According to the SML, the 91-day Government of Canada T-bill is considered a risk-free asset as it has no default risk, making it an appropriate benchmark for determining the required rate of return on a stock.

Question 3

Which of the following is correct regarding the total risk of a stock?

Accepted Answer

The answer of Which of the following is correct regarding...

Question 4

Which of the following determines the slope of the SML?

Accepted Answer

The slope of the SML is determined by investors' risk aversion. The more risk-averse investors are, the steeper the SML will be. Similarly, less risk-averse investors will result in a flatter SML. The other choices (A, B, and D) may have an impact on the expected return on an individual security, but they do not determine the slope of the SML.

Question 5

Which of the following best describes the beta coefficient?

Accepted Answer

The beta coefficient measures a stock's market risk relative to the market portfolio, which is represented by a beta of 1. If a stock has a beta greater than 1, it is considered riskier than the market, while a beta less than 1 indicates lower risk than the market. The beta coefficient cannot measure diversifiable risk, as this type of risk can be reduced through diversification in a well-diversified portfolio.

Question 6

Which of the following best describes behavioural finance?

Accepted Answer

Behavioural finance is an interdisciplinary approach that combines finance and social psychology to explain the occurrence and persistence of securities mispricing. It suggests that investors often make irrational decisions based on behavioural biases and cognitive errors, causing asset prices to deviate from their intrinsic values.

Question 7

Which of the following is correct regarding a change in beta and its potential impact on a stock's price?

Accepted Answer

Beta is a measure of a stock's volatility in relation to the overall market. A higher beta indicates greater volatility and risk, while a lower beta implies less volatility and risk. The required rate of return on a stock is directly affected by its beta. Therefore, any change in beta is likely to affect the required rate of return, which, in turn, will have an impact on the stock's price.

Question 8

An investor purchased 100 shares of Suncor at $36.50 and later sold his investment at $32.60.If he received $.90 in dividends,what was his total dollar return?

Accepted Answer

The total dollar return is calculated by finding the difference in the purchase and sale prices, then adding any dividends received. The purchase price was $36.50 per share for 100 shares, totaling $3650. The sale price was $32.60 per share for 100 shares, totaling $3260. The difference is $3650 - $3260 = -$390. Adding the dividends received, which is $.90 per share for 100 shares or $90, the total return is -$390 + $90 = -$300.

Question 9

Which of the following is correct regarding the SML?

Accepted Answer

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of 0, or the risk-free rate. The X-axis intercept of the SML represents the required return of the market portfolio, not a portfolio with a specific beta. Therefore, choices A, C, and D are incorrect.

Question 10

An investor has $100,000 to invest.If she invests 30% in Stock A,40% in Stock B,and the remainder in a market index exchange-traded fund (ETF),calculate the investor's portfolio beta.BetaStock A .75Stock B 1.4

Accepted Answer

The portfolio beta is calculated by multiplying the proportion of the total investment in each asset by its beta and then summing these products. For Stock A, this is 0.30 * 0.75 = 0.225. For Stock B, it's 0.40 * 1.4 = 0.56. The remainder (30%) is invested in a market index ETF, which has a beta of 1 (since it tracks the market), so 0.30 * 1 = 0.30. Adding these together gives 0.225 + 0.56 + 0.30 = 1.085, which rounds to 1.09.

Question 11

By definition,which of the following is correct regarding the beta of the market?

Accepted Answer

The market beta is defined as 1 because it serves as the benchmark for comparing the volatility of individual stocks or portfolios. A beta of 1 indicates that the security's price will move with the market.

Question 12

Which of the following best describes the relationship between a stock's beta and its standard deviation?

Accepted Answer

Beta measures a stock's volatility relative to the market, not its overall volatility. A low standard deviation indicates lower overall volatility, but beta specifically measures market-relative volatility. Thus, a stock can have a low standard deviation (low overall volatility) but still have a high beta if it's highly sensitive to market movements. However, the statement as given in the options does not directly correlate standard deviation with beta in a way that is universally accurate, making all options technically incorrect in a broad financial context. The closest to being conceptually accurate is B, as it might imply that lower overall volatility could be associated with lower market-relative volatility, but this is not a direct or exclusive relationship.

Quiz 7: Risk, Return, and the Capital Asset Pricing Model

Which of the following is correct regarding the SML?

According to the SML,the 91-day Government of Canada T-bill is which of the following?

Which of the following is correct regarding the total risk of a stock?

Which of the following determines the slope of the SML?

Which of the following best describes the beta coefficient?

Which of the following best describes behavioural finance?

Which of the following is correct regarding a change in beta and its potential impact on a stock's price?

An investor purchased 100 shares of Suncor at $36.50 and later sold his investment at $32.60.If he received $.90 in dividends,what was his total dollar return?

Which of the following is correct regarding the SML?

An investor has $100,000 to invest.If she invests 30% in Stock A,40% in Stock B,and the remainder in a market index exchange-traded fund (ETF) ,calculate the investor's portfolio beta.BetaStock A .75Stock B 1.4

By definition,which of the following is correct regarding the beta of the market?

Which of the following best describes the relationship between a stock's beta and its standard deviation?