Chapter 09 The Capital Asset Pricing Model

Chapter 09 - The Capital Asset Pricing Model

4. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. market risk.

B. unsystematic risk. C. unique risk.

D. reinvestment risk. E. interest rate risk.

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.

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

5. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. beta risk.

B. unsystematic risk. C. unique risk.

D. reinvestment risk. E. interest rate risk.

With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk that influences return according to the CAPM.

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

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Chapter 09 - The Capital Asset Pricing Model

6. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. systematic risk. B. unsystematic risk. C. unique risk.

D. reinvestment risk. E. interest rate risk.

With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk that influences return according to the CAPM.

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

7. The market portfolio has a beta of A. 0. B. 1. C. -1. D. 0.5. E. 0.75

By definition, the beta of the market portfolio is 1.

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

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Chapter 09 - The Capital Asset Pricing Model

8. 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. 0.144. C. 0.12. D. 0.132. E. 0.18.

E(R) = 6% + 1.2(12 ? 6) = 13.2%.

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

9. 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 of 1.25 is equal to A. 0.142 B. 0.144 C. 0.153 D. 0.134 E. 0.117

E(R) = 5.6% + 1.25(12.5 ? 5.6) = 14.225%.

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

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Chapter 09 - The Capital Asset Pricing Model

10. 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 securities 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. it lies on a line that represents the expected risk-return relationship.

The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.

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

11. Which statement is true regarding the market portfolio? A. It includes all publicly traded financial assets. B. It lies on the efficient frontier.

C. All securities 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. It includes all publicly traded financial assets, lies on the efficient frontier, and all securities in the market portfolio are held in proportion to their market values.

The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.

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

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