# test7 - Chapter 7Risk Return and the Capital Asset Pricing...

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Chapter 7—Risk, Return, and the Capital Asset Pricing Model MULTIPLE CHOICE 1. Suppose Sarah can borrow and lend at the risk free-rate of 3%. Which of the following four risky port- folios should she hold in combination with a position in the risk-free asset? a. portfolio with a standard deviation of 15% and an expected return of 12% b. portfolio with a standard deviation of 19% and an expected return of 15% c. portfolio with a standard deviation of 25% and an expected return of 18% d. portfolio with a standard deviation of 12% and an expected return of 9% ANS: B To determine which portfolio is the best, draw a line from the risk-free rate to each dot in the figure and choose the line with the highest slope. DIF: H REF: 7.3 The Security Market Line and the CAPM 2. Suppose David can borrow and lend at the risk-free rate of 5%. Which of the following three risky portfolios should he hold in combination with a position in the risk-free asset? a. portfolio with a standard deviation of 16% and an expected return of 12% b. portfolio with a standard deviation of 20% and an expected return of 16% c. portfolio with a standard deviation of 30% and an expected return of 20% d. he should be indifferent in holding any of the three portfolios ANS: B

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To determine which portfolio is the best, draw a line from the risk-free rate to each dot in the figure and choose the line with the highest slope. DIF: H REF: 7.3 The Security Market Line and the CAPM 3. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return? a. 17% b. 12% c. 19.5% d. 24.5% ANS: A E(R) = 5% + 1.5(13%-5%) = 17% DIF: E REF: 7.3 The Security Market Line and the CAPM 4. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.0, what is its expected return? a. 8% b. 13% c. 5% d. none of the above ANS: B E(R) = 5% + 1.0(13%-5%) = 13% DIF: E REF: 7.3 The Security Market Line and the CAPM 5. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 0, what is its expected return? a. 0% b. 5% c. 13% d. none of the above ANS: B E(R) = 5% + 0(13%-5%) = 5%
DIF: E REF: 7.3 The Security Market Line and the CAPM 6. According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to a. zero b. the expected risk premium on the market portfolio c. the risk-free rate d. the expected return on the market portfolio ANS: C DIF: M REF: 7.3 The Security Market Line and the CAPM 7. According to the CAPM (capital asset pricing model), the security market line is a straight line. The slope of this line should be equal to a. zero b. the expected risk premium on the market portfolio c. the risk-free rate d. the expected return on the market portfolio ANS: B DIF: M REF: 7.3 The Security Market Line and the CAPM 8. According to the CAPM (capital asset pricing model), what is the single factor that explains differ-

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test7 - Chapter 7Risk Return and the Capital Asset Pricing...

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