Question 1

The capital asset pricing model
A)provides a risk-return trade off in which risk is measured in terms of the market volatility.
B)provides a risk-return trade off in which risk is measured in terms of beta.
C)measures risk as the coefficient of variation between security and market rates of return.
D)depicts the total risk of a security.

Accepted Answer

The Capital Asset Pricing Model (CAPM) provides a risk-return trade off in which risk is measured in terms of beta. Beta is a measure of a stock's volatility in relation to the overall market. The model suggests that the expected return on an asset is equal to the risk-free rate plus a premium based on the asset's beta. This means that the higher the beta, the higher the expected return and vice versa. Therefore, the CAPM is a tool commonly used to evaluate the risk and expected return of a security or asset.

Question 2

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

Accepted Answer

This statement is correct as per the Capital Asset Pricing Model (CAPM). The model states that the expected return on an asset is proportional to its beta, which measures the asset's volatility relative to the overall market. Therefore, the higher the beta of an asset, the higher the expected return and also the higher the risk associated with it. This indicates a clear risk-return tradeoff in the market.

Question 3

The T-bill return is used in the CAPM model as the risk free rate.

Accepted Answer

The risk-free rate in the CAPM model is typically represented by the return on T-bills, which are considered to have negligible risk.

Question 4

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?
A)0.97
B)1.02
C)1.12
D)1.21

Accepted Answer

Let Beta portfolio = (beta stock A * total investment in stock A + beta stock B * total investment in stock B + beta stock C * total investment in stock C) / Total investment in portfolio
Beta portfolio = (0.85 * 100,000 + 1.05 * 200,000 + 1.25 * 300,000) / (100,000 + 200,000 + 300,000) = 1.12

Question 5

If the Beta for stock A equals zero,then
A)stock A's required return is equal to the required return on the market portfolio.
B)stock A's required return is equal to the risk-free rate of return.
C)stock A has a guaranteed return.
D)stock A's required return is greater than the required return on the market portfolio.

Accepted Answer

A beta of zero implies that the stock is not correlated with the market, which means that the risk of the stock is equal to the risk of the risk-free asset. Therefore, the required return on stock A will be equal to the risk-free rate of return.

Question 6

Which of the following measures the average relationship between a stock's returns and the market's returns?
A)coefficient of validation
B)standard deviation
C)geometric regression
D)beta coefficient

Accepted Answer

Beta coefficient measures the average relationship between a stock's returns and the market's returns. Option A) Coefficient of validation is not a financial term. Option B) Standard deviation measures the variability of returns, not the relationship between a stock's returns and the market's returns. Option C) Geometric regression is not a measure used in finance.

Question 7

An investor currently holds the following portfolio:  If the risk-free rate of return is 2% and the market risk premium is 7%,then the required return on the portfolio is
A)14.91%.
B)15.93%.
C)21.91%.
D)23.93%.

Accepted Answer

To calculate the required return on the portfolio, we need to use the Capital Asset Pricing Model (CAPM):

Expected Return = Risk-Free Rate + Beta x Market Risk Premium

First, we need to calculate the portfolio beta. Since we are not given the individual betas of the securities in the portfolio, we have to use the portfolio weights to calculate the portfolio beta:

Portfolio Beta = (Weight of Stock A x Beta of Stock A) + (Weight of Stock B x Beta of Stock B) + (Weight of Stock C x Beta of Stock C)

= (0.30 x 0.9) + (0.40 x 1.2) + (0.30 x 1.5) = 1.23

Next, we can use the given risk-free rate and market risk premium to calculate the expected return:

Expected Return = 2% + 1.23 x 7% = 15.91%

Therefore, the required return on the portfolio is 15.91%, which is closest to option B (15.93%).

Question 8

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?
A)1.37
B)2.01
C)1.85
D)1.57

Accepted Answer

The answer of Assume that you have $165,000 invested in...

Question 9

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

Accepted Answer

This is known as the capital asset pricing model (CAPM), which assumes that the required rate of return for an asset is based on the risk-free rate of return (such as the yield on U.S. Treasury securities) plus a risk premium that reflects the additional return investors require to compensate them for taking on additional risk.

Question 10

An investor currently holds the following portfolio:  The beta for the portfolio is
A)1.99.
B)1.77.
C)1.45.
D)1.27.

Accepted Answer

The answer of An investor currently holds the following portfolio:...

Question 11

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

Accepted Answer

The security market line represents the expected return based on the stock's beta (systematic risk). Stocks that plot above the security market line are deemed undervalued because their actual returns are higher than what is required for the level of risk they possess. In other words, investors can potentially earn higher returns than the amount of risk they are taking on, making the stock a profitable investment.

Question 12

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's risk premium.

Accepted Answer

According to the CAPM formula, an asset's required rate of return is equal to the risk-free rate plus the asset's beta multiplied by the market risk premium. Therefore, for each unit of beta, the asset's required rate of return will increase by the market risk premium.

Question 13

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's return.

Accepted Answer

According to the CAPM, for each unit of Beta, an asset's required rate of return increases by the market risk premium, which is the market's return minus the risk-free rate, not the market's return itself.

Question 14

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then
A)the required return on stock B will increase more than the required return on stock A.
B)the required returns on stocks A and B will both increase by the same amount.
C)the required returns on stocks A and B will remain the same.
D)the required return on stock A will increase more than the required return on stock B.

Accepted Answer

The required return on a stock is influenced by its beta, which measures its sensitivity to market movements. A higher beta indicates a higher sensitivity to market changes. Since Stock B has a higher beta (1.8) compared to Stock A (1.2), an increase in the market risk premium will result in a larger increase in the required return for Stock B than for Stock A.

Question 15

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is
A)36%.
B)34%.
C)26%.
D)22%.

Accepted Answer

The answer of The risk-free rate of interest is 4%...

Question 16

A typical measure for the risk-free rate of return is the
A)U.S.Treasury Bill rate.
B)prime lending rate.
C)money market rate.
D)short-term AAA-rated bond rate.

Accepted Answer

The U.S. Treasury Bill rate is often considered the most accurate measure of the risk-free rate of return because it is backed by the full faith and credit of the U.S. government and is therefore considered to have no default risk. The other options listed may also be used as proxies for the risk-free rate, but are not as reliable or universally accepted.

Question 17

The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

Accepted Answer

The CAPM (Capital Asset Pricing Model) does not specify that the S&P 500 or any specific index must be used as the measure of market return; it requires the use of a broad market portfolio, which can be represented by different indexes depending on the market being analyzed.

Question 18

What is diversifying among different kinds of assets known as?
A)portfolio funding
B)capital asset classification
C)asset allocation
D)multi-diversification

Accepted Answer

Diversifying among different kinds of assets is known as asset allocation. This strategy helps to spread out an investor's risk as they are investing in a mix of assets such as stocks, bonds, and cash. This helps to minimize the impact of any losses in one particular asset class. Therefore, option C is the correct answer. The other options (A, B, and D) are not accurate definitions of diversifying among different kinds of assets.

Question 19

Stock A has a beta of 1.2 and a standard deviation of returns of 14%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the risk-free rate of return increases and the market risk premium remains constant,then
A)the required return on stock B will increase more than the required return on stock A.
B)the required returns on stocks A and B will both increase by the same amount.
C)the required returns on stocks A and B will not change.
D)the required return on stock A will increase more than the required return on stock B.

Accepted Answer

The answer of Stock A has a beta of 1.2...

Question 20

Which of the following statements is MOST correct regarding beta?
A)Beta must be calculated using at least 5 years of monthly returns data to be accurate.
B)Beta can only be measured properly using daily returns.
C)Beta for a particular company remains constant over time.
D)Even professionals may not agree on the measurement of beta.

Accepted Answer

Beta can be measured using different methods and assumptions, leading to slightly different results. Therefore, even professionals may not always agree on the precise measurement of beta.

Quiz 6: The Meaning and Measurement of Risk and Return

The capital asset pricing model

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

The T-bill return is used in the CAPM model as the risk free rate.

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

If the Beta for stock A equals zero,then

Which of the following measures the average relationship between a stock's returns and the market's returns?

An investor currently holds the following portfolio: If the risk-free rate of return is 2% and the market risk premium is 7%,then the required return on the portfolio is

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

An investor currently holds the following portfolio: The beta for the portfolio is

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's risk premium.

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's return.

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is

A typical measure for the risk-free rate of return is the

The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

What is diversifying among different kinds of assets known as?

Stock A has a beta of 1.2 and a standard deviation of returns of 14%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the risk-free rate of return increases and the market risk premium remains constant,then

Which of the following statements is MOST correct regarding beta?