Chapter 13 Fin 300
The capital asset pricing model (CAPM) assumes
-A risk-free asset has no systematic risk. -The reward-to-risk ratio is constant. -The market rate of return can be approximated.
A stock with an actual return that lies above the security market line has
A higher return than expected for the level of risk assumed
Unsystematic risk
Can be effectively eliminated by portfolio diversification
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the
Cost of capital
Which one of the following is an example of diversifiable risk?
Earthquake damages an entire town. Toymakers are required to improve their safety standards
example of systematic risk
Investors panic causing security prices around the globe to fall precipitously.
The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock
Is underpriced
Which of the following statements concerning risk are correct?
Non diversifiable risk is measured by beta, Systematic risk is another name for non diversifiable risk
The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.
Risk premium
a positively sloped linear function that is created when expected returns are graphed against security betas?
Security market line
The intercept point of the security market line is the rate of return which corresponds to
The risk-free rate
Unexpected returns
can be either positive or negative in the short term but tend to be zero over the long-term.