FIN4504 CH 7

Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A. .5 B. .7 C. 1 D. 1.2

1.2

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________. A.1.14 B. 1.2 C. 1.26 D. 1.5

1.26

The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________. A. .5 B. 2.5 C. 3.5 D. 5

2.5

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? A.6% B. 15.6% C. 18% D. 21.6%

21.6%

The expected market rate of return is 9% and the risk-free rate is 5%. Security A and B have the beta of 1.2 and 1.8 respectively and they are expected to generate 10% and 14% return respectively. Security __________ would be considered the better buy because_________. A.A; it offers an expected excess return of .2% B. A; it offers an expected excess return of 2.2% C. B; it offers an expected excess return of 1.8% D. B; it offers an expected return of 2.4%

B; it offers an expected excess return of 1.8%

In a simple CAPM world which of the following statements is (are) correct? I. All investors will choose to hold the market portfolio, which includes all risky assets in the world. II. Investors' complete portfolio will vary depending on their risk aversion. III. The return per unit of risk will be identical for all individual assets. IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio. A.I, II, and III only B. II, III, and IV only C. I, III, and IV only D. I, II, III, and IV

I, II, III, and IV

Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price. II. All investors plan for one identical holding period. III. All investors analyze securities in the same way and share the same economic view of the world. IV. All investors have the same level of risk aversion. A.I, II, and IV only B. I, II, and III only C. II, III, and IV only D. I, II, III, and IV

I, II, and III only

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: I. Highly significant in predicting future stock returns II. Relatively useless in predicting future stock returns III. A good predictor of the firm's specific risk A.I only B. II only C. I and III only D. I, II, and III

II only

The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________. A.SDA Corp. stock is underpriced B. SDA Corp. stock is fairly priced C. SDA Corp. stock's alpha is -.75% D. SDA Corp. stock alpha is .75%

SDA Corp. stock's alpha is -.75%

According to the capital asset pricing model, an underpriced security will plot _________. A.above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line

above the security market line

According to the capital asset pricing model, a fairly priced security will plot _________. A.above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line

along the security market line

According to the capital asset pricing model, an overpriced security will plot _________. A.above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line

below the security market line

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________. A. expected returns to fall; risk premiums to fall B. expected returns to rise; risk premiums to fall C. expected returns to rise; risk premiums to rise D. expected returns to fall; risk premiums to rise

expected returns to fall; risk premiums to fall

If enough investors decide to sell stocks, they are likely to drive down stock prices, thereby causing _________ and _________. A. expected returns to fall; risk premiums to fall B. expected returns to rise; risk premiums to fall C. expected returns to rise; risk premiums to rise D. expected returns to fall; risk premiums to rise

expected returns to rise; risk premiums to rise