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.