Chapter 9
Testing of the CAPM suggests the trade-off between expected return and risk is an upward-sloping straight line
(T,
The APT is based on the law of one price, which states two identical assets cannot sell at different prices
(T,
The is a plot of
SML...individual securities and efficient portfolios
Select the INCORRECT statement regarding the CML
The CML is an equilibrium relationship for efficient portfolios and individual securities.
Which of the following is not one of the reasonable conclusions of the CAPM reached by a consensus of the empirical results?
The SML appears to be non-linear.
Which of the following might be used as a factor in an APT factor model?
Unanticipated deviations from expected inflation
Under the separation theorem, all investors should:
hold the same portfolio of risky assets and the same expected return but at different levels of risk
2.Using the separation theorem, it is necessary to match each investor's indifference curves with a particular efficient portfolio
(F,
Beta is a measure of systematic risk and relates one security's return to another security's return
(F,
Like the CAPM, the APT assumes a single-period investment horizorn
(F,
Most analysts use the Dow Jones Industrial Average as proxy for the market portfolio
(F,
A security that plots above the SML would be a good security to sell short
(F, difficult)
9.If the overall market is expected to rise, a portfolio manager should increase the beta of the portfolio.
(T,
Betas for defensive portfolios are generally less than one
(T,
Both the CAPM and the APT assume that markets are perfect .
(T,
The CML indicates the required return for each portfolio risk level.
(T,
The CML states that al investors should invest in the same portfolio of risky assets
(T,
Unlike the CAPM, the APT does not assume borrowing and lending at th<e risk-free rate.
(T,
With the APT, risk is defined in terms of a stock's sensitivity to basic economic factors
(T,
28.The arbitrage pricing theory (APT) and the CAPM both assume all except which of the following?
Borrowing and lending can be done at the rate rf
9.Which of the following statements about the difference between the SML and the CML is TRUE? The
CML consists of efficient portfolios, while the SML is concerned with all portfolios or securities
What does it mean when the CAPM is called "robust?"
Even if most of the assumptions of the CAPM are relaxed, most of the conclusions will still hold.
?? the CML can be downward sloping
Ex post
Risk factors in the APT must possess all of the following the characteristics except
Factors must be readily observable in risk/return space.
Which of the following regarding investors and the CMT is true?
Investors recognize that all of the CMT assumptions are not unrealistic.
A less restrictive form of the Single Index Model is the
Market Model.
Which of the following is an assumption of the CMT?
There is no inflation.
Which of the following is not one of the assumptions of the CMT?
There is no interest rate charged on borrowing.
The is typically taken to be the risk-free rate
Treasury bill
The SML can be used to analyze the relationship between risk and required return for
all assets
When markets are in equilibrium, the CML will be upward sloping
because the price of risk must always be positive.
Under the Market Model, the regression line that results when the return of a security is plotted against the market index returm is the
characteristic line.
The arbitrage pricing theory (APT)
considers more factors than the CAPM and is a broader model.
If markets are truly efficient and in equilibrium
equilibrium all securities would lie on the SML
Select the correct statement regarding the market portfolio. It:
is a risky portfolio.
Under the CMT, the relevant risk to consider with any security is
its covariance with the market portfolio
The APT is based on the:
law of one price.
The slope of the CML is the:
market price of risk for efficient portfolios.
The Capital Asset Pricing Model
measures relevant risk of a security and shows the relationship betweern risk and expected return.
Securities with betas less than 1 should have:
required returns lower than the market return.
Which of the following is the correct calculation for the required rate of return under the CAPM
risk-free rate + risk premium
The separation theorem states that:
the investment decision is separate from the financing decision.
Ifa certain stock has a beta greater than 1.0, it means that
the stock's return is more volatile than that of the market portfolio.
