tb21 - Kirt C. Butler, Multinational Finance, 3rd edition...

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Kirt C. Butler, Multinational Finance , 3 rd edition Chapter 21 International Asset Pricing True/False 1. The capital market line is specific to an individual person and lies between the riskfree asset and that individual’s portfolio of assets. ANS: False. The capital market line lies between the riskfree asset and the market portfolio. 2. Under the traditional capital asset pricing model, each investor will choose to invest 100 percent of their funds in a riskfree asset, if it is available. ANS: False. Each investor mixes the market portfolio with the riskfree asset. 3. The relevant risk of an individual asset to a well-diversified investor is the asset’s standard deviation of return. ANS: False. Systematic risk is more important. 4. Systematic risk depends on how asset returns covary with the market portfolio. ANS: True. 5. The security market line describes the relation between total risk and required return. ANS: False. The SML describes the relation between systematic risk and required return. 6. Financial transactions in informationally efficient markets have NPVs of zero. ANS: True. 7. According to the security market line, the required return on an individual asset is equal to the riskfree rate plus a risk premium. ANS: True. 8. The risk premium in the security market line depends on the riskfree rate of interest and an asset’s systematic risk or beta. ANS: False. The risk premium is the product of the market risk premium and the firm’s beta. 9. Systematic risks arise through asset-specific events such as a new product innovation. ANS: False. Systematic risks arise through market-wide events. 10. Beta is a correlation coefficient times a ratio of standard deviations. ANS: True. 11. Market model beta measures an asset’s sensitivity to changes in the market. ANS: True. 12. Unsystematic risks arise through market-wide events such as real economic growth or changing investor sentiment regarding asset values. ANS: False. Unsystematic risks are asset-specific (e.g., new products, changes in top management). 13. Country-specific political risk is diversifiable and hence does not affect required return. ANS: True. 14. Empirical tests often find no relation between mean returns and market model betas. ANS: True. 170
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Kirt C. Butler, Multinational Finance , 3 rd edition 15. Empirically, there is a strong cross-sectional relation between mean returns and betas. ANS: False. There is almost no relation. 16. If a mean-variance efficient market index is used as a performance benchmark, then the algebra of the capital asset pricing model requires that beta and only beta explains mean return. ANS: True. This is called “Roll’s critique” of the CAPM. 17. Market indices have no use because mean returns are unrelated to market model betas.
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This note was uploaded on 12/07/2011 for the course FINS 3616 taught by Professor Curry during the One '10 term at University of New South Wales.

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tb21 - Kirt C. Butler, Multinational Finance, 3rd edition...

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