Question 1

Empirical results regarding betas estimated from historical data indicate that betas

Accepted Answer

Betas vary over time, betas may be negative or less than one, and betas are not always near zero; however, betas do appear to regress toward one over time.

Question 2

As a financial analyst, you are tasked with evaluating a capital budgeting project.You were instructed to use the IRR method and you need to determine an appropriate hurdle rate.The risk-free rate is 4% and the expected market rate of return is 11%.Your company has a beta of 0.75 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be

Accepted Answer

The hurdle rate should be the required return from CAPM, or (R = 4% + 0.75(11% - 4%) = 9.25%.

Question 3

Your personal opinion is that a security has an expected rate of return of 0.11.It has a beta of 1.5.The risk-free rate is 0.05 and the market expected rate of return is 0.09.According to the Capital Asset Pricing Model, this security is

Accepted Answer

11% = 5% + 1.5(9% - 5%) = 11.0%; therefore, the security is fairly priced.

Question 4

Your opinion is that CSCO has an expected rate of return of 0.15.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.According to the Capital Asset Pricing Model, this security is

Accepted Answer

15% - [4% + 1.3(11.5% - 4%)] = 1.25%; therefore, the security is underpriced.

Question 5

You invest $600 in a security with a beta of 1.2 and $400 in another security with a beta of 0.90.The beta of the resulting portfolio is

Accepted Answer

0.6(1.2) + 0.4(0.90) = 1.08.

Question 6

As a financial analyst, you are tasked with evaluating a capital budgeting project.You were instructed to use the IRR method and you need to determine an appropriate hurdle rate.The risk-free rate is 5% and the expected market rate of return is 10%.Your company has a beta of 0.67 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be

Accepted Answer

The hurdle rate should be the required return from CAPM, or (R = 5% + 0.67(10% - 5%) = 8.35%.

Question 7

Your opinion is that Boeing has an expected rate of return of 0.08.It has a beta of 0.92.The risk-free rate is 0.04 and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model, this security is

Accepted Answer

8.0% - [4% + 0.92(10% - 4%)] = -1.52%; therefore, the security is overpriced.

Question 8

Your opinion is that Boeing has an expected rate of return of 0.112.It has a beta of 0.92.The risk-free rate is 0.04 and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model, this security is

Accepted Answer

11.2% - [4% + 0.92(10% - 4%)] = 1.68%; therefore, the security is underpriced.

Question 9

As a financial analyst, you are tasked with evaluating a capital budgeting project.You were instructed to use the IRR method and you need to determine an appropriate hurdle rate.The risk-free rate is 4% and the expected market rate of return is 11%.Your company has a beta of 1.0 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be

Accepted Answer

The hurdle rate should be the required return from CAPM, or (R = 4% + 1.0(11% - 4%) = 11%.

Question 10

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect CAT with a beta of 1.0 to offer a rate of return of 11%, you should

Accepted Answer

11% = 4% + 1.0(11% - 4%) = 11.0%; therefore, CAT is fairly priced.

Question 11

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect CAT with a beta of 1.0 to offer a rate of return of 10%, you should

Accepted Answer

10% < 4% + 1.0(11% - 4%) = 11.0%; therefore, CAT is overpriced and should be shorted.

Question 12

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

Accepted Answer

"The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate" is false.

Question 13

A security has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08 and the risk-free rate is 0.05.The alpha of the stock is

Accepted Answer

10% - [5% +1.1(8% - 5%)] = 1.7%.

Question 14

The risk-free rate is 7%.The expected market rate of return is 15%.If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should

Accepted Answer

12% < 7% + 1.3(15% - 7%) = 17.40%; therefore, stock is overpriced and should be shorted.

Question 15

Your opinion is that Boeing has an expected rate of return of 0.0952.It has a beta of 0.92.The risk-free rate is 0.04 and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model, this security is

Accepted Answer

9.52% - [4% + 0.92(10% - 4%)] = 0.0%; therefore, the security is fairly priced.

Question 16

As a financial analyst, you are tasked with evaluating a capital budgeting project.You were instructed to use the IRR method and you need to determine an appropriate hurdle rate.The risk-free rate is 4% and the expected market rate of return is 11%.Your company has a beta of 1.4 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be

Accepted Answer

The hurdle rate should be the required return from CAPM, or (R = 4% + 1.4(11% - 4%) = 13.8%.

Question 17

As a financial analyst, you are tasked with evaluating a capital budgeting project.You were instructed to use the IRR method and you need to determine an appropriate hurdle rate.The risk-free rate is 4% and the expected market rate of return is 11%.Your company has a beta of 0.67 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be

Accepted Answer

The hurdle rate should be the required return from CAPM, or (R = 4% + 0.67(11% - 4%) = 8.69%.

Question 18

Your opinion is that CSCO has an expected rate of return of 0.13.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.According to the Capital Asset Pricing Model, this security is

Accepted Answer

11.5% - [4% + 1.3(11.5% - 4%)] = -2.25%; therefore, the security is overpriced.

Question 19

Your opinion is that CSCO has an expected rate of return of 0.1375.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.According to the Capital Asset Pricing Model, this security is

Accepted Answer

13.75% - [4% + 1.3(11.5% - 4%)] = 0.0%; therefore, the security is fairly priced.

Question 20

In a well-diversified portfolio

Accepted Answer

Market, systematic, or nondiversifiable, risk is present in a diversified portfolio; the unsystematic risk has been eliminated.

Quiz 9: The Capital Asset Pricing Model