EOL3
True/False
Indicate whether the statement is true or false.
__true__1. If you plotted the returns of Selleck & Company against those of the market and found that the slope of your
line was negative, the CAPM would indicate that the required rate of return on Selleck's stock should be less
than the riskfree rate for a welldiversified investor, assuming that the observed relationship is expected to
continue in the future.
__false__2. A stock with a beta equal to

1.0 has zero systematic (or market) risk.
___true_3. In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we
are interested in ex ante (future) data.
__true__4. If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock
whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation
is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the
low standard deviation stock.
__false__5. We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a
single security.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
6.
You have the following data on (1) the average annual returns of the market for the past 5 years and (2)
similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A
and B?
Years
Market
Stock A
Stock B
1
0.03
0.16
0.05
2

0.05
0.20
0.05
3
0.01
0.18
0.05
4

0.10
0.25
0.05
5
0.06
0.14
0.05
a.
b
A
>
0; b
B
=
1.
b.
b
A
> +1; b
B
=
0.
c.
b
A
=
0; b
B
=

1.
d.the correct answer
b
A
<
0; b
B
=
0.
e.
b
A
<

1; b
B
=
1.
____
7.
Which of the following statements is CORRECT?
a.
"Characteristic line" is another name for the
Security Market Line.
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View Full Documentb.
The characteristic line is the regression line
that results from plotting the returns on a
particular stock versus the returns on a stock
from a different industry.
c.
The slope of the characteristic line is the
stock's standard deviation.
d.
The distance of the plot points from the
characteristic line is a measure of the stock's
market risk.
e.
The distance of the plot points from the
characteristic line is a measure of the
stock's diversifiable risk.
____
8.
Which of the following statements is CORRECT?
a.
Tests have shown that the betas of
individual stocks are unstable over time,
but that the betas of large portfolios are
reasonably stable over time.
b.
Richard Roll has argued that it is possible to
test the CAPM to see if it is correct.
c.
Tests have shown that the risk/return
relationship appears to be linear, but the slope
of the relationship is greater than that
predicted by the CAPM.
d.
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 Spring '11
 Williams
 Capital Asset Pricing Model, CML, SML, Modern portfolio theory, Diff, Test Bank Humboldt State University

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