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Unformatted text preview: Chapter 9 The Capital Asset Pricing Model Multiple Choice Questions 1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A) unique risk. B) beta. C) standard deviation of returns. D) variance of returns. E) none of the above. Answer: B Difficulty: Easy Rationale: Once, a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta. 2. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A) market risk B) unsystematic risk C) unique risk. D) reinvestment risk. E) none of the above. Answer: A Difficulty: Easy Rationale: With a diversified portfolio, the only risk remaining is market, or systematic, risk. This is the only risk that influences return according to the CAPM. 3. The market portfolio has a beta of A) 0. B) 1. C) 1. D) 0.5. E) none of the above Answer: B Difficulty: Easy Rationale: By definition, the beta of the market portfolio is 1. 1 Chapter 9 The Capital Asset Pricing Model 4. The riskfree 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 Answer: D Difficulty: Easy Rationale: E(R) = 6% + 1.2(12  6) = 13.2%. 5. The riskfree rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to A) 0.1225 B) 0.144. C) 0.153. D) 0.134 E) 0.117 Answer: A Difficulty: Easy Rationale: E(R) = 5.6% + 1.25(12.5  5.6) = 14.225%. 6. 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 above are true. Answer: D Difficulty: Moderate Rationale: The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor. 2 Chapter 9 The Capital Asset Pricing Model 7. Which statement is not true regarding the Capital Market Line (CML)? A) The CML is the line from the riskfree 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. Answer: C Difficulty: Moderate Rationale: Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus C is not true; the other statements are true)....
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This note was uploaded on 02/24/2010 for the course FINA 4310 taught by Professor Impson during the Spring '10 term at North Texas.
 Spring '10
 Impson
 Capital Asset Pricing Model, Valuation

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