ch09 - Chapter 9 ASSET PRICING MODELS Multiple Choice...

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Chapter 9 ASSET PRICING MODELS Multiple Choice Questions Capital Market Theory 1. The Capital Asset Pricing Model: a. has serious flaws because of its complexity. b. measures relevant risk of a security and shows the relationship between risk and expected return. c. was developed by Markowitz in the 1930s. d. discounts almost all of the Markowitz portfolio theory. (b, moderate) 2. Which of the following is not one of the assumptions of the CMT? a. All investors have the same one-period time horizon. b. There are no personal income taxes. c. There is no interest rate charged on borrowing. d. There are no transaction costs. (c, moderate) 3. Which of the following is an assumption of the CMT? a. Single investors can affect the market by their buying and selling decisions. b. There is no inflation. c. Investors prefer capital gains over dividends. d. Different investors have different probability distributions. . (b, moderate) 4. Which of the following regarding investors and the CMT is true? a. Investors recognize that all the assumptions of the CMT are unrealistic. b. Investors recognize that all of the CMT assumptions are not unrealistic. c. Investors are not aware of the assumptions of the CMT model. d. Investors recognize the CMT is useless for individual investors. (b, moderate) Chapter Nine Asset Pricing Models 105
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5. The _______ is typically taken to be the risk-free rate. a. savings account b. certificate of deposit c. Treasury bill d. Treasury bond (c, easy) 6. What does it mean when the CAPM is called "robust?" a. The CAPM requires no assumptions. b. Even if most of the assumptions of the CAPM are relaxed, most of the conclusions will still hold. c. The CAPM is based on realistic assumptions. d. No other model can represent stock returns better than the CAPM. (b, difficult) The Equilibrium Return-Risk Tradeoff 7. When markets are in equilibrium, the CML will be upward sloping a. because it shows the optimum combination of risky securities. b. because the price of risk must always be positive. c. because it contains all securities weighted by their market values. d. because the CML indicates the required return for each portfolio risk level. (b, moderate) 8. __________, the CML can be downward sloping. a. Ex post b. When investors are risk-lovers c. When the SML is upward sloping d. When the risk premium for the market is very high (a, difficult) Chapter Nine Asset Pricing Models 106
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9. Which of the following statements about the difference between the SML and the CML is TRUE? The a. intercept of the CML is the origin while the intercept of the SML is RF. b. CML consists of efficient portfolios, while the SML is concerned with all portfolios or securities.
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ch09 - Chapter 9 ASSET PRICING MODELS Multiple Choice...

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