Chapter 09 - The Capital Asset Pricing Model

Chapter 09

The Capital Asset Pricing Model

Multiple Choice Questions

1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A. unique risk. B. beta.

C. standard deviation of returns. D. variance of returns. E. skewness.

2. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is A. unique risk. B. systematic risk.

C. standard deviation of returns. D. variance of returns. E. semi-variance.

3. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is A. unique risk. B. market risk.

C. standard deviation of returns. D. variance of returns. E. semi-variance.

4. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. market risk.

B. unsystematic risk. C. unique risk.

D. reinvestment risk. E. interest rate risk.

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Chapter 09 - The Capital Asset Pricing Model

5. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. beta risk.

B. unsystematic risk. C. unique risk.

D. reinvestment risk. E. interest rate risk.

6. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. systematic risk. B. unsystematic risk. C. unique risk.

D. reinvestment risk. E. interest rate risk.

7. The market portfolio has a beta of A. 0. B. 1. C. ?1. D. 0.5. E. 0.75

8. The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to A. 0.06. B. 0.144. C. 0.12. D. 0.132. E. 0.18.

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Chapter 09 - The Capital Asset Pricing Model

9. The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to A. 0.142. B. 0.144. C. 0.153. D. 0.134. E. 0.117.

10. Which statement is not true regarding the market portfolio? A. It includes all publicly traded financial assets. B. It lies on the efficient frontier.

C. All securities in the market portfolio are held in proportion to their market values. D. It is the tangency point between the capital market line and the indifference curve. E. It lies on a line that represents the expected risk-return relationship.

11. Which statement is true regarding the market portfolio? A. It includes all publicly traded financial assets. B. It lies on the efficient frontier.

C. All securities in the market portfolio are held in proportion to their market values. D. It is the tangency point between the capital market line and the indifference curve.

E. It includes all publicly traded financial assets, lies on the efficient frontier, and all securities in the market portfolio are held in proportion to their market values.

12. Which statement is not true regarding the Capital Market Line (CML)? A. The CML is the line from the risk-free rate through the market portfolio. B. The CML is the best attainable capital allocation line. C. The CML is also called the security market line. D. The CML always has a positive slope.

E. The risk measure for the CML is standard deviation.

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Chapter 09 - The Capital Asset Pricing Model

13. Which statement is true regarding the Capital Market Line (CML)? A. The CML is the line from the risk-free rate through the market portfolio. B. The CML is the best attainable capital allocation line. C. The CML is also called the security market line. D. The CML always has a positive slope.

E. The CML is the line from the risk-free rate through the market portfolio, is the best attainable capital allocation line, and it always has a positive slope.

14. The market risk, beta, of a security is equal to

A. the covariance between the security's return and the market return divided by the variance of the market's returns.

B. the covariance between the security and market returns divided by the standard deviation of the market's returns.

C. the variance of the security's returns divided by the covariance between the security and market returns.

D. the variance of the security's returns divided by the variance of the market's returns.

E. the variance of the security's return divided by the standard deviation of the market's returns.

15. According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A. Rf+ ? [E(RM)]. B. Rf+ ? [E(RM) ? Rf]. C. ? [E(RM) ? Rf]. D. E(RM) + Rf.

E. Rf- ? [E(RM) ? Rf].

16. The Security Market Line (SML) is

A. the line that describes the expected return-beta relationship for well-diversified portfolios only.

B. also called the Capital Allocation Line.

C. the line that is tangent to the efficient frontier of all risky assets. D. the line that represents the expected return-beta relationship. E. also called the Capital Market Line.

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