Chapter 09 - The Capital Asset Pricing Model

52. An underpriced security will plot A. on the Security Market Line. B. below the Security Market Line. C. above the Security Market Line.

D. either above or below the Security Market Line depending on its covariance with the market. E. either above or below the Security Market Line depending on its standard deviation. An underpriced security will have a higher expected return than the SML would predict; therefore it will plot above the SML.

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: CAPM

53. An overpriced security will plot A. on the Security Market Line. B. below the Security Market Line. C. above the Security Market Line.

D. either above or below the Security Market Line depending on its covariance with the market. E. either above or below the Security Market Line depending on its standard deviation. An overpriced security will have a lower expected return than the SML would predict; therefore it will plot below the SML.

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: CAPM

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Chapter 09 - The Capital Asset Pricing Model

54. The risk premium on the market portfolio will be proportional to A. the average degree of risk aversion of the investor population. B. the risk of the market portfolio as measured by its variance. C. the risk of the market portfolio as measured by its beta.

D. both the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its variance.

E. both the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its beta.

The risk premium on the market portfolio is proportional to the average degree of risk aversion of the investor population and the risk of the market portfolio measured by its variance.

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: CAPM

55. In equilibrium, the marginal price of risk for a risky security must be A. equal to the marginal price of risk for the market portfolio. B. greater than the marginal price of risk for the market portfolio. C. less than the marginal price of risk for the market portfolio. D. adjusted by its degree of nonsystematic risk.

E. unrelated to the marginal price of risk for the market portfolio.

In equilibrium, the marginal price of risk for a risky security must be equal to the marginal price of risk for the market. If not, investors will buy or sell the security until they are equal.

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: CAPM

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