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Exam 9: The Capital Asset Pricing Model

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Question 31

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Security A has an expected rate of return of 0.10 and a beta of 1.3.The market expected rate of return is 0.10, and the risk-free rate is 0.04.The alpha of the stock is

A) 1.7%.
B) -1.8%.
C) 8.3%.
D) 5.5%.

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Question 32

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According to the Capital Asset Pricing Model (CAPM) , which one of the following statements is false?

A) The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate.
B) The expected rate of return on a security increases as its beta increases.
C) A fairly priced security has an alpha of zero.
D) In equilibrium, all securities lie on the security market line.

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Question 33

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As a financial analyst, you are tasked with evaluating a capital-budgeting project.You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate.The risk-free rate is 4%, and the expected market rate of return is 11%.Your company has a beta of 0.67, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be

Which statement is not true regarding the market portfolio?

The expected return-beta relationship

A security has an expected rate of return of 0.15 and a beta of 1.25.The market expected rate of return is 0.10, and the risk-free rate is 0.04.The alpha of the stock is

According to the Capital Asset Pricing Model (CAPM) , underpriced securities have

Your opinion is that security C has an expected rate of return of 0.106.It has a beta of 1.1.The risk-free rate is 0.04, and the market expected rate of return is 0.10.According to the Capital Asset Pricing Model, this security is

In the context of the Capital Asset Pricing Model (CAPM) , the relevant measure of risk is

According to the Capital Asset Pricing Model (CAPM) , a well diversified portfolio's rate of return is a function of

Fama and French documented the predictive power of

The expected return-beta relationship of the CAPM is graphically represented by

The risk-free rate is 7%.The expected market rate of return is 15%.If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should

The risk-free rate is 4%.The expected market rate of return is 12%.If you expect stock X with a beta of 1.0 to offer a rate of return of 10%, you should

The security market line (SML)

Fama and French documented

In the context of the Capital Asset Pricing Model (CAPM) , the relevant risk is

The security market line (SML) is

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect CAT with a beta of 1.0 to offer a rate of return of 13%, you should

As a financial analyst, you are tasked with evaluating a capital-budgeting project.You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate.The risk-free rate is 5%, and the expected market rate of return is 10%.Your company has a beta of 0.67, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past.According to CAPM, the appropriate hurdle rate would be