1、Chapter 9 The Capital Asset Pricing ModelMultiple Choice Questions1.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)none of the above. Answer: B Difficulty: Easy Rationale: Once,
2、 a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.2.According to the Capital Asset Pricing Model (CAPM) a well diversified portfolios rate of return is a function of A)market risk B)unsystematic risk C)unique risk. D)reinvestment risk. E)none of the a
3、bove. Answer: A Difficulty: Easy Rationale: With a diversified portfolio, the only risk remaining is market, or systematic, risk. This is the only risk that influences return according to the CAPM.3.The market portfolio has a beta of A)0. B)1. C)-1. D)0.5. E)none of the above Answer: B Difficulty: E
4、asy Rationale: By definition, the beta of the market portfolio is 1.4.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)0.1
5、44. C)0.12. D)0.132 E)0.18 Answer: D Difficulty: Easy Rationale: E(R) = 6% + 1.2(12 - 6) = 13.2%.5.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 o
6、f 1.25 is equal to A)0.1225 B)0.144. C)0.153. D)0.134 E)0.117 Answer: A Difficulty: Easy Rationale: E(R) = 5.6% + 1.25(12.5 - 5.6) = 14.225%.6.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 se
7、curities 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)All of the above are true. Answer: D Difficulty: Moderate Rationale: The tangency point between the capital market line and the ind
8、ifference curve is the optimal portfolio for a particular investor.7.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
9、 security market line. D)The CML always has a positive slope. E)The risk measure for the CML is standard deviation. Answer: C Difficulty: Moderate Rationale: Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the risk measure for the CML is standard
10、deviation and the risk measure for the SML is beta (thus C is not true; the other statements are true).8.The market risk, beta, of a security is equal to A)the covariance between the securitys return and the market return divided by the variance of the markets returns. B)the covariance between the s
11、ecurity and market returns divided by the standard deviation of the markets returns. C)the variance of the securitys returns divided by the covariance between the security and market returns. D)the variance of the securitys returns divided by the variance of the markets returns. E)none of the above.
12、 Answer: A Difficulty: Moderate Rationale: Beta is a measure of how a securitys return covaries with the market returns, normalized by the market variance.9.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
13、) E(RM) - Rf. D)E(RM) + Rf. E)none of the above. Answer: B Difficulty: Moderate Rationale: The expected rate of return on any security is equal to the risk free rate plus the systematic risk of the security (beta) times the market risk premium, E(RM - Rf).10.The Security Market Line (SML) is A)the l
14、ine 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)the line that repres
15、ents the relationship between an individual securitys return and the markets return. Answer: D Difficulty: Moderate Rationale: The SML is a measure of expected return per unit of risk, where risk is defined as beta (systematic risk).11.According to the Capital Asset Pricing Model (CAPM), fairly pric
16、ed securities A)have positive betas. B)have zero alphas. C)have negative betas. D)have positive alphas. E)none of the above. Answer: B Difficulty: Moderate Rationale: A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).12.According to the Capital Asset Pric
17、ing Model (CAPM), under priced securities A)have positive betas. B)have zero alphas. C)have negative betas. D)have positive alphas. E)none of the above. Answer: D Difficulty: Moderate 13.According to the Capital Asset Pricing Model (CAPM), over priced securities A)have positive betas. B)have zero al
18、phas. C)have negative betas. D)have positive alphas. E)none of the above. Answer: C Difficulty: Moderate Rationale: A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).14.According to the Capital Asset Pricing Model (CAPM), A)a security with a positive alph
19、a 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)none of the above. Answer: D Difficulty: Moderate Rationale: A security
20、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.15.According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false? A)The expected rate of return on a
21、security decreases 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 the above statements a
22、re true. Answer: A Difficulty: Moderate Rationale: Statements B, C, and D are true, but statement A is false.16.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)none of the above.
23、 Answer: C Difficulty: Moderate Rationale: Market, or systematic, or nondiversifiable, risk is present in a diversified portfolio; the unsystematic risk has been eliminated.17.Empirical results regarding betas estimated from historical data indicate that A)betas are constant over time. B)betas of al
24、l 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. Answer: D Difficulty: Moderate Rationale: Betas vary over time, betas may be negative or less than one, betas are not always near zero; however, betas
25、do appear to regress toward one over time.18.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.
26、 B)overpriced. C)fairly priced. D)cannot be determined from data provided. E)none of the above. Answer: C Difficulty: Moderate Rationale: 11% = 5% + 1.5(9% - 5%) = 11.0%; therefore, the security is fairly priced.19.The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If
27、 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)none of the above, as t
28、he stock is fairly priced. Answer: B Difficulty: Moderate Rationale: 12% 7% + 1.3(15% - 7%) = 17.40%; therefore, stock is overpriced and should be shorted.20.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.
29、40 B)1.00 C)0.36 D)1.08 E)0.80 Answer: D Difficulty: Moderate Rationale: 0.6(1.2) + 0.4(0.90) = 1.08.21.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
30、)5.5%. E)none of the above. Answer: A Difficulty: Moderate Rationale: 10% - 5% +1.1(8% - 5%) = 1.7%.22.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 Pr
31、icing Model, this security is A)underpriced. B)overpriced. C)fairly priced. D)cannot be determined from data provided. E)none of the above. Answer: B Difficulty: Moderate Rationale: 11.5% - 4% + 1.3(11.5% - 4%) = -2.25%; therefore, the security is overpriced.23.Your opinion is that CSCO has an expec
32、ted 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. B)overpriced. C)fairly priced. D)cannot be determined from data provided. E)none of the above.
33、 Answer: C Difficulty: Moderate Rationale: 13.75% - 4% + 1.3(11.5% - 4%) = 0.0%; therefore, the security is fairly priced.24.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 t
34、o the Capital Asset Pricing Model, this security is A)underpriced. B)overpriced. C)fairly priced. D)cannot be determined from data provided. E)none of the above. Answer: A Difficulty: Moderate Rationale: 15% - 4% + 1.3(11.5% - 4%) = 1.25%; therefore, the security is under priced.25.Your opinion is t
35、hat 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. C)fairly priced. D)cannot be determined from data provided
36、. E)none of the above. Answer: A Difficulty: Moderate Rationale: 11.2% - 4% + 0.92(10% - 4%) = 1.68%; therefore, the security is under priced.26.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 ret
37、urn is 0.10. 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)none of the above. Answer: C Difficulty: Moderate Rationale: 9.52% - 4% + 0.92(10% - 4%) = 0.0%; therefore, the security is fairly pr
38、iced.27.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. B)overpriced. C)fairly priced. D)cannot be deter
39、mined from data provided. E)none of the above. Answer: C Difficulty: Moderate Rationale: 8.0% - 4% + 0.92(10% - 4%) = -1.52%; therefore, the security is overpriced.28.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 ra
40、te of return of 10 percent, you should A)buy stock X because it is overpriced. B)sell short stock X because it is overpriced. C)sell stock short X because it is underpriced. D)buy stock X because it is underpriced. E)none of the above, as the stock is fairly priced. Answer: B Difficulty: Moderate Ra
41、tionale: 10% 4% + 1.0(11% - 4%) = 11.0%; therefore, stock is under priced.31.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 Answer: E Difficulty:
42、 Moderate Rationale: 0.55(1.4) + 0.45(0.90) = 1.175.32.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 offe
