Chapter 09 - The Capital Asset Pricing Model
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.
A security with a positive alpha is one that is expected to yield an abnormal positive rate of return, based on the perceived risk of the security, and thus is underpriced.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: CAPM
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.
The statement that the expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate is false.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: CAPM
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Chapter 09 - The Capital Asset Pricing Model
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.
Market, systematic, or nondiversifiable, risk is present in a diversified portfolio; the unsystematic