Question 1

Securities with betas greater than l should have:
A)expected returns higher than the market.:::::
B)required returns higher than the market return.
C)required returns lower than the market return.
D)no systematic risk.

Accepted Answer

Beta is a measure of systematic risk, and securities with betas greater than 1 are considered to be riskier than the market as a whole. This means that investors will demand a higher required rate of return to compensate for the additional risk. Therefore, choice B is correct as it states that securities with betas greater than 1 will have required returns higher than the market return.

Question 2

Select the correct statement regarding the market portfolio.It:
A)is readily and precisely observable.
B)is a risky portfolio.
C)is the lowest point of tangency between the risk-free rate and the efficient frontier.
D)should be composed of stocks or bonds.

Accepted Answer

The market portfolio is a risky portfolio that contains all assets in the market in proportion to their respective weighting in the market. Option A is incorrect as the market portfolio is not always directly observable. Option C is incorrect as the point of tangency between the risk-free rate and the efficient frontier is the portfolio with the highest Sharpe ratio, which may not necessarily be the market portfolio. Option D is incorrect as the market portfolio can contain any asset traded in the market, including stocks, bonds, and other securities.

Question 3

The expected return on the market for next period is 11 percent.The risk free rate of return is 4 percent,and Alpha Company has a beta of 1.1.The market risk premium is
A)7.7 percent.
B)7 percent.
C)11 percent.
D)12.1 percent.

Accepted Answer

The market risk premium is calculated as the expected return on the market minus the risk-free rate. Therefore, it is 11% - 4% = 7%.

Question 4

The expected market return is 16 percent.The risk-free rate of return is 7 percent,and BC Co.has a beta of 1.1.Their required rate of return is
A)17.6 percent.
B)16.0 percent.
C)16.9 percent.
D) 	23.0 percent.

Accepted Answer

The answer of The expected market return is 16 percent.The...

Question 5

Which of the following is an assumption of the CMT?
A)Single investors can affect the market by their buying and selling decisions.
B)There is no inflation.
C)Investors prefer capital gains over dividends.
D)Different investors have different probability distributions..

Accepted Answer

The Capital Market Theory (CMT) assumes that there is no inflation, meaning that the risk-free rate is constant and not affected by inflationary changes.

Question 6

Which of the following is the correct calculation for the required rate of return under the CAPM?
A)beta (market risk premium)
B)beta + market risk premium
C)risk-free rate + risk premium
D)risk-free rate(market risk premium)

Accepted Answer

The required rate of return under the Capital Asset Pricing Model (CAPM) is calculated as the risk-free rate plus the product of beta and the market risk premium. Therefore, the correct calculation is option C, which is risk-free rate + risk premium.

Question 7

When markets are in equilibrium,the CML will be upward sloping
A)because it shows the optimum combination of risky securities.
B)because the price of risk must always be positive.
C)because it contains all securities weighted by their market values.
D)because the CML indicates the required return for each portfolio risk level.

Accepted Answer

The Capital Market Line (CML) is upward sloping because it represents the trade-off between risk and return, and the price of risk (market risk premium) must be positive to compensate investors for taking on additional risk.

Question 8

What does it mean when the CAPM is called "robust?"
A)The CAPM requires no assumptions.
B)Even if most of the assumptions of the CAPM are relaxed,most of the conclusions will still hold.
C)The CAPM is based on realistic assumptions.
D)No other model can represent stock returns better than the CAPM.

Accepted Answer

When a model is called "robust," it means that it can withstand changes in assumptions or inputs without significantly affecting the validity of its conclusions. In the case of the CAPM, this means that even if some of the assumptions (such as perfect competition or efficient markets) do not hold in reality, the model can still provide useful insights and predictions about the relationship between risk and return. However, it does not mean that the CAPM requires no assumptions or that no other model can represent stock returns better.

Question 9

Select the INCORRECT statement regarding the CML.
A)The CML is an equilibrium relationship for efficient portfolios and individual securities.
B)The CML represents the risk-return tradeoff in equilibrium for efficient portfolios.
C)The intercept of the CML is the reward per unit of time available to investors for deferring consumption.
D)Standard deviation is the measure of risk which determines a portfolio's equilibrium return.

Accepted Answer

The CML is an equilibrium relationship for efficient portfolios, not individual securities. Individual securities are evaluated using the Security Market Line (SML).

Question 10

Which of the following regarding investors and the CMT is true?
A)Investors recognize that all the assumptions of the CMT are unrealistic.
B)Investors recognize that all of the CMT assumptions are not unrealistic.
C)Investors are not aware of the assumptions of the CMT model.
D)Investors recognize the CMT is useless for individual investors.

Accepted Answer

Investors recognize that not all of the CMT assumptions are unrealistic.

Question 11

__________,the CML can be downward sloping.
A)Ex post
B)When investors are risk-lovers
C)When the SML is upward sloping
D)When the risk premium for the market is very high

Accepted Answer

The Capital Market Line (CML) can be downward sloping ex post if the actual return on the market portfolio is less than the risk-free rate, which can occur in certain market conditions.

Question 12

The Capital Asset Pricing Model:
A)has serious flaws because of its complexity.
B)measures relevant risk of a security and shows the relationship between risk and expected return.
C)was developed by Markowitz in the 1930s.
D)discounts almost all of the Markowitz portfolio theory.

Accepted Answer

The Capital Asset Pricing Model (CAPM) measures relevant risk of a security and shows the relationship between risk and expected return. While it may have limitations, it is widely used in finance for calculating expected return on an investment based on its risk. Markowitz did develop modern portfolio theory, but the CAPM is a separate concept that builds on it. Option D is incorrect as the CAPM is based on Markowitz portfolio theory.

Question 13

The _________ is a plot of __________.
A)CML ...individual stocks and efficient portfolios
B)CML ...both efficient and inefficient portfolios,only
C)SML ...individual securities and efficient portfolios
D)SML ...individual securities,inefficient portfolios,and efficient portfolios.

Accepted Answer

The answer of The _________ is a plot of __________.
A)CML...

Question 14

The slope of the CML is the:
A)standard deviation for efficient portfolios.:::::
B)market price of risk for efficient portfolios.
C)risk-free rate.
D)risk premium for the market portfolio.

Accepted Answer

The slope of the Capital Market Line (CML) represents the market price of risk for efficient portfolios. It measures the additional expected return that an investor will receive for taking on one unit of risk beyond the risk-free rate. Therefore, option B is the correct choice. Option A is incorrect because the standard deviation of efficient portfolios is represented by the horizontal axis on the graph. Option C is incorrect because the risk-free rate is represented by the y-intercept of the CML. Option D is incorrect because the risk premium for the market portfolio is represented by the difference between the expected return of the market portfolio and the risk-free rate.

Question 15

Which of the following is generally used as a proxy for the risk-free rate of return?
A)savings account
B)certificate of deposit
C)Treasury bill
D)Treasury bond

Accepted Answer

Treasury bills are generally considered a proxy for the risk-free rate of return because they are issued by the government and are assumed to have virtually no risk of default. Savings accounts and certificates of deposit may offer low risk, but the interest rates may not reflect the true risk-free rate. Treasury bonds are considered a low-risk investment, but they have longer maturities and thus are subject to more interest rate risk.

Question 16

The separation theorem states that:
A)systematic risk is separate from unsystematic risk.
B)individual security risk is separate from portfolio risk.
C)the investment decision is separate from the financing decision.
D)borrowing portfolio is separate from the lending portfolio.

Accepted Answer

Systematic risk is the risk that affects the entire market or a large segment of it, while unsystematic risk is the risk that is specific to a particular company or industry. The separation theorem states that systematic risk can be diversified away through diversification, while unsystematic risk cannot.

Question 17

Under the CMT,the relevant risk to consider with any security is:
A)its correlation with other securities in the portfolio.
B)its covariance with the market portfolio.
C)its deviation from the portfolio required rate of return.
D)its variance from the risk-free rate of return.

Accepted Answer

The relevant risk to consider under the Capital Market Theory (CMT) is the covariance of the security with the market portfolio. This measures how the security co-moves with the overall market, and is a key determinant of its systematic risk or market risk. By contrast, options A, C, and D relate to other concepts such as diversification, required return, and risk-free rate, which are important but not the primary focus of the CMT.

Question 18

Which of the following statements about the difference between the SML and the CML is TRUE?
A)The intercept of the CML is the origin while the intercept of the SML is RF.
B)CML consists of efficient portfolios,while the SML is concerned with all portfolios or securities.
C)CML could be downward sloping while that is impossible for the SML.
D)CML and the SML are essentially the same except in terms of the securities represented.

Accepted Answer

The CML is concerned only with efficient portfolios, while the SML considers all portfolios or securities. The intercept of the CML is the risk-free rate, while the intercept of the SML is the origin. The CML can never be downward sloping, while the SML must always be upward sloping. Although the two lines are similar in concept, they are not essentially the same.

Question 19

Which of the following is not one of the assumptions of the CMT?
A)All investors have the same one-period time horizon.
B)There are no personal income taxes.
C)There is no interest rate charged on borrowing.
D)There are no transaction costs.

Accepted Answer

The assumption of no interest rate charged on borrowing goes against the widely accepted concept of time value of money. Therefore, all the other options are assumptions of the CMT.

Question 20

Under the separation theorem,all investors should:
A)hold the same portfolio of risky assets and therefore have the same risk/return combination.
B)have different optimal portfolios.
C)have the same portfolio of risky assets and achieve their own risk-return combination through borrowing and lending.
D)hold the same portfolio of risky assets and the same expected return but at different levels of risk

Accepted Answer

The answer of Under the separation theorem,all investors should:
A)hold the...

Quiz 9: Asset Pricing Models

Securities with betas greater than l should have:

Select the correct statement regarding the market portfolio.It:

The expected return on the market for next period is 11 percent.The risk free rate of return is 4 percent,and Alpha Company has a beta of 1.1.The market risk premium is

The expected market return is 16 percent.The risk-free rate of return is 7 percent,and BC Co.has a beta of 1.1.Their required rate of return is

Which of the following is an assumption of the CMT?

Which of the following is the correct calculation for the required rate of return under the CAPM?

When markets are in equilibrium,the CML will be upward sloping

What does it mean when the CAPM is called "robust?"

Select the INCORRECT statement regarding the CML.

Which of the following regarding investors and the CMT is true?

__________,the CML can be downward sloping.

The Capital Asset Pricing Model:

The _ is a plot of __.

The slope of the CML is the:

Which of the following is generally used as a proxy for the risk-free rate of return?

The separation theorem states that:

Under the CMT,the relevant risk to consider with any security is:

Which of the following statements about the difference between the SML and the CML is TRUE?

Which of the following is not one of the assumptions of the CMT?

Under the separation theorem,all investors should: