Fin 323 - Chapter 9

B. zero alphas.

According to the Capital Asset Pricing Model (CAPM), fairly priced securities have A. positive betas. B. zero alphas. C. negative betas. D. positive alphas.

C. negative alphas.

According to the Capital Asset Pricing Model (CAPM), overpriced securities have A. positive betas. B. zero alphas. C. negative alphas. D. positive alphas.

A. 13.8%.

As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4% and the expected market rate of return is 11%. Your company has a beta of 1.4 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be A. 13.8%. B. 7%. C. 15%. D. 4%. E. 1.4%.

C. A because it offers an expected excess return of 2.2%.

Given are the following two stocks A and B: Security A E(r)=.12 B=1.2 Security B E(r)=.14 B=1.8 If the expected market rate of return is 0.09 and the risk-free rate is 0.05, which security would be considered the better buy and why? Hint: Look into excess returns on these stocks. A. A because it offers an expected excess return of 1.2%. B. B because it offers an expected excess return of 1.8%. C. A because it offers an expected excess return of 2.2%. D. B because it offers an expected return of 14%. E. B because it has a higher beta.

C. unsystematic risk is negligible.

In a well-diversified portfolio A. market risk is negligible. B. systematic risk is negligible. C. unsystematic risk is negligible. D. nondiversifiable risk is negligible.

B. market.

In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A. unique risk. B. market. C. standard deviation of returns. D. variance of returns.

B. 1.

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

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

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.

D. 0.132%.

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%.

B. sell short the stock because it is overpriced.

The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should A. buy the stock because it is overpriced. B. sell short the stock because it is overpriced. C. sell the stock short because it is underpriced. D. buy the stock because it is underpriced. E. None of the options, as the stock is fairly priced

B. sell short the stock because it is overpriced.

The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should A. buy the stock because it is overpriced. B. sell short the stock because it is overpriced. C. sell the stock short because it is underpriced. D. buy the stock because it is underpriced. E. None of the options, as the stock is fairly priced

D. the line that represents the expected return-beta relationship.

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. All of the options

C. The CML is also called the security market line.

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.

D. It is the tangency point between the capital market line and the indifference curve.

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. All of the options are true.

E. I, II, and III

Which statement is true regarding the market portfolio? I) It includes all publicly traded financial assets. II) It lies on the efficient frontier. III) All securities in the market portfolio are held in proportion to their market values. IV) It is the tangency point between the capital market line and the indifference curve. A. I only B. II only C. III only D. IV only E. I, II, and III

D. 1.08.

You invest $600 in a security with a beta of 1.2 and $400 in another security with a beta of 0.90. The beta of the resulting portfolio is A. 1.40. B. 1.00. C. 0.36. D. 1.08. E. 0.80.

B. overpriced.

Your opinion is that Boeing has an expected rate of return of 0.08. It has a beta of 0.92. The risk-free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital Asset Pricing Model, this security is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.

C. fairly priced.

Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.