Question 1

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below are possible?
Consider each situation independently and assume the risk-free rate is 5%.

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option DE) A) and B)
F) None of the above

Question 2

In a simple CAPM world which of the following statements is/are correct?
I. All investors will choose to hold the market portfolio, which includes all risky assets in the world
II. Investors' complete portfolio will vary depending on their risk aversion
III. The return per unit of risk will be identical for all individual assets
IV. The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio

Accepted Answer

A)  I, II and III only
B)  II, III and IV only
C)  I, III and IV only
D)  I, II, III and IVE) A) and B)
F) None of the above

Question 3

One of the main problems with the arbitrage pricing theory is ________.

Accepted Answer

A)  its use of several factors instead of a single market index to explain the risk-return relationship
B)  the introduction of non-systematic risk as a key factor in the risk-return relationship
C)  that the APT requires an even larger number of unrealistic assumptions than the CAPM
D)  the model fails to identify the key macroeconomic variables in the risk-return relationshipE) A) and B)
F) C) and D)

Question 4

The graph of the relationship between expected return and beta in the CAPM context is called the ________.

Accepted Answer

A)  CML
B)  CAL
C)  SML
D)  SCLE) A) and B)
F) C) and D)

Question 5

According to the capital asset pricing model, ________.

Accepted Answer

A)  all securities' returns must lie on the capital market line
B)  all securities' returns must lie on the security market line
C)  the slope of the security market line must be less than the market risk premium
D)  any security with a beta of 1 must have an excess return of zeroE) A) and D)
F) B) and C)

Question 6

If enough investors decide to purchase shares they are likely to drive up share prices thereby causing ________ and ________.

Accepted Answer

A)  expected returns to fall; risk premiums to fall
B)  expected returns to rise; risk premiums to fall
C)  expected returns to rise; risk premiums to rise
D)  expected returns to fall; risk premiums to riseE) C) and D)
F) A) and C)

Question 7

Beta is a measure of ________.

Accepted Answer

A)  total risk
B)  relative systematic risk
C)  relative non-systematic risk
D)  relative business riskE) A) and D)
F) B) and D)

Question 8

Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bond rate was 5% and the market return during the period was 13%, which advisor was the better share picker?

Accepted Answer

A)  Advisor A was better because he generated a larger alpha
B)  Advisor B was better because he generated a larger alpha
C)  Advisor A was better because he generated a higher return
D)  Advisor B was better because he achieved a good return with a lower betaE) B) and C)
F) C) and D)

Question 9

Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the share is ________.

Accepted Answer

A)  -1.7%
B)  3.7%
C)  5.5%
D)  8.7%E) A) and B)
F) B) and D)

Question 10

The SML is valid for ________ and the CML is valid for ________.

Accepted Answer

A)  only individual assets; well diversified portfolios only
B)  only well diversified portfolios; only individual assets
C)  both well diversified portfolios and individual assets; both well diversified portfolios and individual assets
D)  both well diversified portfolios and individual assets; well diversified portfolios onlyE) B) and C)
F) A) and D)

Question 11

The measure of unsystematic risk can be found from an index model as ________.

Accepted Answer

A)  residual standard deviation
B)  R-square
C)  degrees of freedom
D)  sum of squares of the regressionE) A) and D)
F) A) and B)

Question 12

You consider buying a share at a price of $25. The share is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the share in one year for $28. The share's beta is 1.1, rf is 6% and E[rm] = 16%. What is the share's abnormal return?

Accepted Answer

A)  1%
B)  2%
C)  -1%
D)  -2%E) None of the above
F) B) and C)

Question 13

What is the expected return on a share with a beta of 0.8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

Accepted Answer

A)  3.8%
B)  13.1%
C)  15.6%
D)  19.1%E) All of the above
F) B) and C)

Question 14

The expected return on the market is the risk-free rate plus the ________.

Accepted Answer

A)  diversified returns
B)  equilibrium risk premium
C)  historical market return
D)  unsystematic returnE) A) and D)
F) None of the above

Question 15

The most significant conceptual difference between the arbitrage pricing theory (APT)  and the capital asset pricing model (CAPM)  is that the CAPM ________.

Accepted Answer

A)  places less emphasis on market risk
B)  recognises multiple unsystematic risk factors
C)  recognises only one systematic risk factor
D)  recognises multiple systematic risk factorsE) C) and D)
F) A) and D)

Question 16

According to the CAPM, investors are compensated for all but which of the following?

Accepted Answer

A)  Expected inflation
B)  Systematic risk
C)  Time value of money
D)  Residual riskE) B) and D)
F) B) and C)

Question 17

In his famous critique of the CAPM, Roll argued that the CAPM ________.

Accepted Answer

A)  is not testable because the true market portfolio can never be observed
B)  is of limited use because systematic risk can never be entirely eliminated
C)  should be replaced by the APT
D)  should be replaced by the Fama French 3 factor modelE) None of the above
F) A) and D)

Question 18

Liquidity is a risk factor that ________.

Accepted Answer

A)  has yet to be accurately measured and incorporated into portfolio management
B)  is unaffected by trading mechanisms on various stock exchanges
C)  has no effect on the market value of an asset
D)  affects bond prices but not share pricesE) A) and B)
F) C) and D)

Question 19

Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a share with an expected return of 17%?

Accepted Answer

A)  .5
B)  .7
C)  1
D)  1.2E) B) and D)
F) None of the above

Exam 7: Capital Pricing and Arbitrage Pricing Theory

According to the capital asset pricing model, ________.

Correct Answer
verified

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below are possible? Consider each situation independently and assume the risk-free rate is 5%.

Correct Answer
verified

The graph of the relationship between expected return and beta in the CAPM context is called the ________.

Correct Answer
verified

The expected return on the market is the risk-free rate plus the ________.

Correct Answer
verified

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM ________.

Correct Answer
verified

Beta is a measure of ________.

Correct Answer
verified

According to the CAPM, investors are compensated for all but which of the following?

Correct Answer
verified

The measure of unsystematic risk can be found from an index model as ________.

Correct Answer
verified

In his famous critique of the CAPM, Roll argued that the CAPM ________.

Correct Answer
verified

One of the main problems with the arbitrage pricing theory is ________.

Correct Answer
verified

Liquidity is a risk factor that ________.

Correct Answer
verified

If enough investors decide to purchase shares they are likely to drive up share prices thereby causing and .

Correct Answer
verified

Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bond rate was 5% and the market return during the period was 13%, which advisor was the better share picker?

Correct Answer
verified

Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the share is ________.

Correct Answer
verified

Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a share with an expected return of 17%?

Correct Answer
verified

You consider buying a share at a price of $25. The share is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the share in one year for $28. The share's beta is 1.1, rf is 6% and E[rm] = 16%. What is the share's abnormal return?

Correct Answer
verified

Correct Answer
verified

What is the expected return on a share with a beta of 0.8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

Correct Answer
verified

The SML is valid for and the CML is valid for .

Correct Answer
verified

Exam 7: Capital Pricing and Arbitrage Pricing Theory

According to the capital asset pricing model, ________.

Correct AnswerverifiedShow Answer

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below are possible? Consider each situation independently and assume the risk-free rate is 5%.

Correct AnswerverifiedShow Answer

The graph of the relationship between expected return and beta in the CAPM context is called the ________.

Correct AnswerverifiedShow Answer

The expected return on the market is the risk-free rate plus the ________.

Correct AnswerverifiedShow Answer

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM ________.

Correct AnswerverifiedShow Answer

Beta is a measure of ________.

Correct AnswerverifiedShow Answer

According to the CAPM, investors are compensated for all but which of the following?

Correct AnswerverifiedShow Answer

The measure of unsystematic risk can be found from an index model as ________.

Correct AnswerverifiedShow Answer

In his famous critique of the CAPM, Roll argued that the CAPM ________.

Correct AnswerverifiedShow Answer

One of the main problems with the arbitrage pricing theory is ________.

Correct AnswerverifiedShow Answer

Liquidity is a risk factor that ________.

Correct AnswerverifiedShow Answer

If enough investors decide to purchase shares they are likely to drive up share prices thereby causing ________ and ________.

Correct AnswerverifiedShow Answer

Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bond rate was 5% and the market return during the period was 13%, which advisor was the better share picker?

Correct AnswerverifiedShow Answer

Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the share is ________.

Correct AnswerverifiedShow Answer

Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a share with an expected return of 17%?

Correct AnswerverifiedShow Answer

You consider buying a share at a price of $25. The share is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the share in one year for $28. The share's beta is 1.1, rf is 6% and E[rm] = 16%. What is the share's abnormal return?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the expected return on a share with a beta of 0.8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

Correct AnswerverifiedShow Answer

The SML is valid for ________ and the CML is valid for ________.

Correct AnswerverifiedShow Answer

Correct Answer
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If enough investors decide to purchase shares they are likely to drive up share prices thereby causing and .

Correct Answer
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Correct Answer
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Correct Answer
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The SML is valid for and the CML is valid for .

Correct Answer
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