Chapter 9 - CM

Capital market theory assumes that: a. Investors have homogeneous expectations. b. Investors make decisions over a multiple-period investment horizon. c. Investors are risk averse. d. a and c only. e. All of the above.

A & C only

In graphically depicting the model for security returns usually referred to as the market model, the slope of the line can be thought of as the: a. Beta factor. a. Error term. b. Residual term. c. Alpha factor. d. None of the above.

Beta factor

The security market line (SML) is a graphical depiction of: a. The market model. b. The capital asset pricing model. c. The capital market model. d. The market index. a. None of the above.

CAPM

An appealing feature of the APT model is that: a. It makes fewer assumptions about investor behavior and the market structure. a. Is simple to use. b. Is easier to implement. c. Is more accurate in estimating the expected rate of return of an asset. d. None of the above.

It makes fewer assumptions about investor behavior and the market structure.

The multifactor CAPM is attractive because: a. It is simple to use. b. It recognized nonmarket risks. c. It is easier to implement. d. All of the above. a. None of the above.

It recognized nonmarket risks.

The capital asset pricing model assumes that the expected return of a security is determined by: a. Multifactor risk. b. The asset's beta only. c. Arbitrage risk. a. Extra-market sources of risk. b. None of the above.

The asset's beta only

The difference between the expected return in the market and the riskfree rate is called: a. The market risk premium. b. The market price of risk. c. The risk premium. d. The market sensitivity index. e. a and b.

a & b

A security's return can be decomposed into the following two parts: a. Systematic return. b. Unsystematic return. c. Historical return. d. a and b only. e. b and c only.

a & b only

Capital market theory makes assumptions about: a. Investor behavior. b. Capital markets. c. Historical returns. d. a and b only. e. All of the above.

a & b only

The capital asset pricing model states that the expected return of a security is equal to the riskfree rate of return plus: a. Beta. b. A risk premium. c. The market risk premium. d. The market price of risk. e. None of the above.

a risk premium

The APT model postulates that a security's expected return is influenced by: a. A single market index. b. A variety of factors. c. Market and nonmarket risks. d. All of the above. e. None of the above.

a variety of factors

Assumptions about capital markets include: a. Perfectly competitive capital markets. b. The absence of frictions. c. Investors can borrow and lend at some riskfree rate. d. All of the above. e. a and b only.

all the above

In estimating beta, practical problems arise, which are a function of: a. The length of time over which the return is calculated. b. The market index selected. c. The specific time period used. d. The number of observations. e. All of the above.

all the above

Which of the following economic factors have been identified to explain security returns according to the APT? a. Unanticipated changes in industrial production. b. Unanticipated changes in inflation. c. Unanticipated changes in interest rates. d. Unanticipated changes in the shape of the yield curve. e. All of the above.

all the above

A statistical index of the sensitivity of an asset's price change to changes in the value of the overall market or of assets in general is the: a. Variance. b. Standard deviation. c. Correlation coefficient. d. Beta. e. None of the above.

beta

The capital market line represents: a. A combination of a various risky assets. b. A combination of a riskfree asset and the market portfolio. c. A combination of riskless assets. a. A combination common stock and corporate bonds. b. None of the above.

combination of a riskfree asset and the market portfolio.

Since diversification reduces unsystematic risk, the relevant measure of risk for an investor who holds a well-diversified portfolio is: a. Market risk. b. Company-specific risk. a. Total risk. b. Residual risk. c. None of the above.

market risk

The slope of the SML is measured by: a. Beta. b. The market risk premium. c. The risk premium. a. The riskfree rate. b. None of the above.

market risk premium

The risk-return relationship for individual securities is called: a. The capital market line. b. The security market line. c. The market model. a. The fitted line. b. None of the above.

the SML

The portfolio, which consists of all assets, is called: a. The efficient portfolio. b. The optimal portfolio. c. The market portfolio. a. The efficient frontier. b. None of the above.

the market portfolio