This preview shows pages 1–4. Sign up to view the full content.
Chapter 7—Risk, Return, and the Capital Asset Pricing Model
MULTIPLE CHOICE
1.
Suppose Sarah can borrow and lend at the risk freerate of 3%. Which of the following four risky port
folios should she hold in combination with a position in the riskfree 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 riskfree 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 riskfree rate of 5%. Which of the following three risky
portfolios should he hold in combination with a position in the riskfree 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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document To determine which portfolio is the best, draw a line from the riskfree 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 riskfree 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 riskfree 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 riskfree 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 riskfree 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 riskfree 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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 03/18/2012 for the course FINA 3383 taught by Professor Lovell during the Fall '10 term at Texas Pan American.
 Fall '10
 LOVELL
 Finance, Capital Asset Pricing Model

Click to edit the document details