Regular Quiz #2
FIN 4504 Equity and Capital Markets
Instructor: Cem Demiroglu
Due: December 2, Tuesday
Multiple Choice:
In this section there are 15 multiple choice questions. Each question is worth 3 points.
Please circle the right answer. You will receive zero credit if you choose more than one
answer. Also if you put a circle wide enough to cover more than one answer you will get
zero credit.
1) The reward/variability ratio is given by __________.
A) the slope of the capital allocation line
B) the second derivative of the capital allocation line
C) the point at which the second derivative of the investor's indifference curve
reaches zero
D) none of the above
2) The ______ average ignores compounding.
A) geometric
B) arithmetic
C) both a and b above
D) none of the above
3) If the simple CAPM is valid, which of the situations below are possible. Consider each
situation independently.
A)
E x p e c t e d
P o r t f o l i o
R
e t u r n
B
e t a
A
1 5 %
1 . 2
B
1 5 %
1 . 0
B)
E x p e c t e d
S t a n d a r d
P o r t f o l i o
R
e t u r n
D
e v i a t i o n
A
2 0 %
3 0 %
B
1 5 %
3 5 %
C)
Expected
Portfolio
Return
Beta
A
25%
1.5
B
5%
0.5
D) none of the above are possible
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View Full Document4) Security X has an expected rate of return of 13% and a beta of 1.15. The riskfree rate
is 5% and the market expected rate of return is 15%.
According to the capital asset
pricing model, security X is __________.
A) fairly priced
B) overpriced
C) underpriced
D) None of the above answers are correct
5) __________ is not a true statement regarding the market portfolio.
A) All securities in the market portfolio are held in proportion to their market
values
B) It includes all assets of the universe
C) It is the tangency point between the capital market line and the
indifference curve
D) It lies on the efficient frontier
6) According to the capital asset pricing model, __________.
A) all securities must lie on the capital market line
B) all securities must lie on the security market line
C) underpriced securities lie below the security market line
D) overpriced securities lie above the security market line
7) The market portfolio has an unsystematic risk of __________.
A) 1.0
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 Spring '11
 johnson
 Capital Asset Pricing Model, Modern portfolio theory, wA, Asset Pricing Model, capital allocation line

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