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Chap009 - Chapter 9 The Capital Asset Pricing Model...

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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 3. The market portfolio has a beta of 1
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Chapter 9 The Capital Asset Pricing Model 4. 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 5. The risk-free 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? 2
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Chapter 9 The Capital Asset Pricing Model 7. Which statement is not true regarding the Capital Market Line (CML)?
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