Chapter 09 - The Capital Asset Pricing Model

33. Your opinion is that Boeing has an expected rate of return of 0.08. 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 3%. B. overpriced. C. fairly priced.

D. cannot be determined from data provided. E. underpriced by 1%.

34. As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4 percent and the expected market rate of return is 11 percent. Your company has a beta of 1.0 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be ______%. A. 4 B. 7 C. 15 D. 11 E. 1

35. As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4 percent and the expected market rate of return is 11 percent. Your company has a beta of 1.4 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be ______%. A. 13.8 B. 7 C. 15 D. 4 E. 1.4

9-9

Chapter 09 - The Capital Asset Pricing Model

36. As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4 percent and the expected market rate of return is 11 percent. Your company has a beta of 0.75 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be ______%. A. 4 B. 9.25 C. 15 D. 11 E. 0.75

37. As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4 percent and the expected market rate of return is 11 percent. Your company has a beta of 0.67 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be ______%. A. 4 B. 8.69 C. 15 D. 11 E. 0.75

38. As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 5 percent and the expected market rate of return is 10 percent. Your company has a beta of 0.67 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be ______%. A. 10 B. 5 C. 8.35 D. 28.35 E. 0.67

9-10

Chapter 09 - The Capital Asset Pricing Model

39. The risk-free rate is 4 percent. The expected market rate of return is 11 percent. If you expect CAT with a beta of 1.0 to offer a rate of return of 10 percent, you should A. buy CAT because it is overpriced.

B. sell short CAT because it is overpriced.

C. sell stock short CAT because it is underpriced. D. buy CAT because it is underpriced. E. hold CAT because it is fairly priced.

40. The risk-free rate is 4 percent. The expected market rate of return is 11 percent. If you expect CAT with a beta of 1.0 to offer a rate of return of 11 percent, you should A. buy CAT because it is overpriced.

B. sell short CAT because it is overpriced.

C. sell stock short CAT because it is underpriced. D. buy CAT because it is underpriced. E. hold CAT because it is fairly priced.

41. The risk-free rate is 4 percent. The expected market rate of return is 11 percent. If you expect CAT with a beta of 1.0 to offer a rate of return of 13 percent, you should A. buy CAT because it is overpriced.

B. sell short CAT because it is overpriced.

C. sell stock short CAT because it is underpriced. D. buy CAT because it is underpriced. E. hold CAT because it is fairly priced.

42. You invest 55% of your money in security A with a beta of 1.4 and the rest of your money in security B with a beta of 0.9. The beta of the resulting portfolio is A. 1.466. B. 1.157. C. 0.968. D. 1.082. E. 1.175.

9-11

Chapter 09 - The Capital Asset Pricing Model

43. Given the following two stocks A and B

If the expected market rate of return is 0.09 and the risk-free rate is 0.05, which security would be considered the better buy and why?

A. A because it offers an expected excess return of 1.2%. B. B because it offers an expected excess return of 1.8%. C. A because it offers an expected excess return of 2.2%. D. B because it offers an expected return of 14%. E. B because it has a higher beta.

44. Capital Asset Pricing Theory asserts that portfolio returns are best explained by: A. economic factors. B. specific risk. C. systematic risk. D. diversification. E. unique risk.

45. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases: A. directly with alpha. B. inversely with alpha. C. directly with beta. D. inversely with beta.

E. in proportion to its standard deviation.

46. What is the expected return of a zero-beta security? A. The market rate of return. B. Zero rate of return.

C. A negative rate of return. D. The risk-free rate.

E. A return much higher than the risk-free rate.

9-12