Chapter 09 - The Capital Asset Pricing Model

17. According to the Capital Asset Pricing Model (CAPM), fairly priced securities A. have positive betas. B. have zero alphas. C. have negative betas. D. have positive alphas. E. have non-zero alphas.

18. According to the Capital Asset Pricing Model (CAPM), underpriced securities A. have positive betas. B. have zero alphas. C. have negative betas. D. have positive alphas. E. have negative alphas.

19. According to the Capital Asset Pricing Model (CAPM), overpriced securities A. have positive betas. B. have zero alphas. C. have negative alphas. D. have positive alphas. E. have negative betas.

20. According to the Capital Asset Pricing Model (CAPM), A. a security with a positive alpha is considered overpriced. B. a security with a zero alpha is considered to be a good buy. C. a security with a negative alpha is considered to be a good buy. D. a security with a positive alpha is considered to be underpriced. E. a security with a positive beta is considered to be underpriced.

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Chapter 09 - The Capital Asset Pricing Model

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

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

B. The expected rate of return on a security increases as its beta increases. C. A fairly priced security has an alpha of zero.

D. In equilibrium, all securities lie on the security market line. E. All of these are correct.

22. In a well diversified portfolio A. market risk is negligible. B. systematic risk is negligible. C. unsystematic risk is negligible. D. nondiversifiable risk is negligible. E. risk does not exist.

23. Empirical results regarding betas estimated from historical data indicate that A. betas are constant over time.

B. betas of all securities are always greater than one. C. betas are always near zero.

D. betas appear to regress toward one over time. E. betas are always positive.

24. 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 A. underpriced. B. overpriced. C. fairly priced.

D. cannot be determined from data provided.

E. can either be overpriced or underpriced but not fairly priced.

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Chapter 09 - The Capital Asset Pricing Model

25. The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent, you should A. buy the stock because it is overpriced.

B. sell short the stock because it is overpriced. C. sell the stock short because it is underpriced. D. buy the stock because it is underpriced. E. hold the stock because it is fairly priced.

26. 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 A. 1.40. B. 1.00. C. 0.36. D. 1.08. E. 0.80.

27. 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 A. 1.7%. B. ?1.7%. C. 8.3%. D. 5.5%. E. ?5.5%.

28. 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 A. underpriced by 3%. B. overpriced. C. fairly priced.

D. cannot be determined from data provided. E. underpriced by 5%.

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Chapter 09 - The Capital Asset Pricing Model

29. 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 A. underpriced by 10%. B. overpriced. C. fairly priced.

D. cannot be determined from data provided. E. underpriced by 5%.

30. 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 A. underpriced.

B. overpriced by 10%. C. fairly priced.

D. cannot be determined from data provided. E. overpriced by 5%.

31. 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 A. underpriced.

B. overpriced by 7%. C. fairly priced.

D. cannot be determined from data provided. E. overpriced by 5%.

32. 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 A. underpriced by 7%. B. overpriced. C. fairly priced.

D. cannot be determined from data provided. E. underpriced by 5%.

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