Chapter 09 The Capital Asset Pricing Model

Chapter 09 - The Capital Asset Pricing Model

12. 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 security market line. D. The CML always has a positive slope.

E. The risk measure for the CML is standard deviation.

Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus C is not true; the other statements are true).

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

13. Which statement is 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 security market line. D. The CML always has a positive slope.

E. The CML is the line from the risk-free rate through the market portfolio, is the best attainable capital allocation line, and it always has a positive slope.

Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus C is not true; the other statements are true).

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Chapter 09 - The Capital Asset Pricing Model

14. The market risk, beta, of a security is equal to

A. the covariance between the security's return and the market return divided by the variance of the market's returns.

B. the covariance between the security and market returns divided by the standard deviation of the market's returns.

C. the variance of the security's returns divided by the covariance between the security and market returns.

D. the variance of the security's returns divided by the variance of the market's returns.

E. the variance of the security's return divided by the standard deviation of the market's returns. Beta is a measure of how a security's return covaries with the market returns, normalized by the market variance.

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

15. 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. ? [E(RM) - Rf]. D. E(RM) + Rf.

E. Rf- ? [E(RM) - Rf].

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).

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Chapter 09 - The Capital Asset Pricing Model

16. The Security Market Line (SML) is

A. the line 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. also called the Capital Market Line.

The SML is a measure of expected return per unit of risk, where risk is defined as beta (systematic risk).

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

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.

A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).

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Chapter 09 - The Capital Asset Pricing Model

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.

According to the Capital Asset Pricing Model (CAPM), underpriced securities have positive alphas.

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

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.

According to the Capital Asset Pricing Model (CAPM), overpriced securities have negative alphas.

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