Question 1

In the context of the capital asset pricing model, the systematic measure of risk is captured by ________.

Accepted Answer

A)   unique risk
B)   beta
C)   the standard deviation of returns
D)   the variance of returnsE) All of the above
F) A) and B)

Question 2

The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is ________.

Accepted Answer

A)   .5
B)   2.5
C)   3.5
D)   5E) B) and C)
F) A) and D)

Question 3

A stock has a beta of 1.3. The systematic risk of this stock is ________ the stock market as a whole.

Accepted Answer

A)   higher than
B)   lower than
C)   equal to
D)   indeterminable compared toE) A) and D)
F) B) and C)

Question 4

According to the capital asset pricing model, in equilibrium ________.

Accepted Answer

A)   all securities' returns must lie below the capital market line
B)   all securities' returns must lie on the security market line
C)   the slope of the security market line must be less than the market risk premium
D)   any security with a beta of 1 must have an excess return of zeroE) B) and C)
F) A) and D)

Question 5

Standard deviation of portfolio returns is a measure of ________.

Accepted Answer

A)   total risk
B)   relative systematic risk
C)   relative nonsystematic risk
D)   relative business riskE) C) and D)
F) B) and D)

Question 6

Which of the following are assumptions of the simple CAPM model?
I. Individual trades of investors do not affect a stock's price.
II. All investors plan for one identical holding period.
III. All investors analyze securities in the same way and share the same economic view of the world.
IV. All investors have the same level of risk aversion.

Accepted Answer

A)   I, II, and IV only
B)   I, II, and III only
C)   II, III, and IV only
D)   I, II, III, and IVE) A) and D)
F) A) and C)

Question 7

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

Accepted Answer

A)   Advisor A was better because he generated a larger alpha.
B)   Advisor B was better because she generated a larger alpha.
C)   Advisor A was better because he generated a higher return.
D)   Advisor B was better because she achieved a good return with a lower beta.E) A) and D)
F) B) and C)

Question 8

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should ________.

Accepted Answer

A)   buy stock X because it is overpriced
B)   buy stock X because it is underpriced
C)   sell short stock X because it is overpriced
D)   sell short stock X because it is underpricedE) B) and C)
F) C) and D)

Question 9

Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is ________ if no arbitrage opportunities exist.

Accepted Answer

A)   13.5%
B)   15%
C)   16.25%
D)   23%E) None of the above
F) B) and D) C

Question 10

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y ________.

Accepted Answer

A)   are in equilibrium
B)   offer an arbitrage opportunity
C)   are both underpriced
D)   are both fairly pricedE) A) and C)
F) A) and B)

Question 11

Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is ________.

Accepted Answer

A)   -1.7%
B)   3.7%
C)   5.5%
D)   8.7%E) B) and C)
F) All of the above

Question 12

Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The risk premium is 2.25%. If the risk-free rate of return is 4%, the expected return on the market portfolio is ________.

Accepted Answer

A)   6.75%
B)   9%
C)   10.75%
D)   12%E) A) and B)
F) A) and C)

Question 13

You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return?

Accepted Answer

A)   1%
B)   2%
C)   -1%
D)   -2%E) C) and D)
F) None of the above

Question 14

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is ________.

Accepted Answer

A)   fairly priced
B)   overpriced
C)   underpriced
D)   none of these answersE) None of the above
F) C) and D) B

Question 15

The expected return of the risky-asset portfolio with minimum variance is ________.

Accepted Answer

A)   the market rate of return
B)   zero
C)   the risk-free rate
D)   The answer cannot be determined from the information given.E) A) and C)
F) B) and C)

Question 16

Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security ________ would be considered the better buy because ________.

Accepted Answer

A)   A; it offers an expected excess return of .2%
B)   A; it offers an expected excess return of 2.2%
C)   B; it offers an expected excess return of 1.8%
D)   B; it offers an expected return of 2.4%E) None of the above
F) All of the above

Question 17

According to the capital asset pricing model, fairly priced securities have ________.

Accepted Answer

A)   negative betas
B)   positive alphas
C)   positive betas
D)   zero alphasE) None of the above
F) A) and D)

Question 18

What is the expected return on the market?

Accepted Answer

A)   0%
B)   5%
C)   10%
D)   15%E) A) and B)
F) B) and D)

Question 19

If all investors become more risk averse, the SML will ________ and stock prices will ________.

Accepted Answer

A)   shift upward; rise
B)   shift downward; fall
C)   have the same intercept with a steeper slope; fall
D)   have the same intercept with a flatter slope; riseE) A) and C)
F) A) and D) C

Question 20

The CAPM ________.

Accepted Answer

A)   predicts the relationship between risk and expected return of an asset
B)   provides a benchmark rate of return for evaluating possible investments
C)   helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace
D)   All of the options.E) None of the above
F) All of the above

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

In the context of the capital asset pricing model, the systematic measure of risk is captured by ________.

Correct Answer
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The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is ________.

Correct Answer
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A stock has a beta of 1.3. The systematic risk of this stock is ________ the stock market as a whole.

Correct Answer
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According to the capital asset pricing model, in equilibrium ________.

Correct Answer
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Standard deviation of portfolio returns is a measure of ________.

Correct Answer
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Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

Correct Answer
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The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should ________.

Correct Answer
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C

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y ________.

Correct Answer
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Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is ________.

Correct Answer
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Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The risk premium is 2.25%. If the risk-free rate of return is 4%, the expected return on the market portfolio is ________.

Correct Answer
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You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return?

Correct Answer
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Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is ________.

Correct Answer
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B

The expected return of the risky-asset portfolio with minimum variance is ________.

Correct Answer
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Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security would be considered the better buy because .

Correct Answer
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According to the capital asset pricing model, fairly priced securities have ________.

Correct Answer
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What is the expected return on the market?

Correct Answer
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If all investors become more risk averse, the SML will and stock prices will .

Correct Answer
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C

The CAPM ________.

Correct Answer
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Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

In the context of the capital asset pricing model, the systematic measure of risk is captured by ________.

Correct AnswerverifiedShow Answer

The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is ________.

Correct AnswerverifiedShow Answer

A stock has a beta of 1.3. The systematic risk of this stock is ________ the stock market as a whole.

Correct AnswerverifiedShow Answer

According to the capital asset pricing model, in equilibrium ________.

Correct AnswerverifiedShow Answer

Standard deviation of portfolio returns is a measure of ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

Correct AnswerverifiedShow Answer

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y ________.

Correct AnswerverifiedShow Answer

Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is ________.

Correct AnswerverifiedShow Answer

Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The risk premium is 2.25%. If the risk-free rate of return is 4%, the expected return on the market portfolio is ________.

Correct AnswerverifiedShow Answer

You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return?

Correct AnswerverifiedShow Answer

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is ________.

Correct AnswerverifiedB

The expected return of the risky-asset portfolio with minimum variance is ________.

Correct AnswerverifiedShow Answer

Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security ________ would be considered the better buy because ________.

Correct AnswerverifiedShow Answer

According to the capital asset pricing model, fairly priced securities have ________.

Correct AnswerverifiedShow Answer

What is the expected return on the market?

Correct AnswerverifiedShow Answer

If all investors become more risk averse, the SML will ________ and stock prices will ________.

Correct AnswerverifiedC

The CAPM ________.

Correct AnswerverifiedShow Answer

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C

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B

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Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security would be considered the better buy because .

Correct Answer
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If all investors become more risk averse, the SML will and stock prices will .

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C

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