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Exam 9: The Capital Asset Pricing Model

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Question 21

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Given are the following two stocks A and B: $\begin{array}{lll}\text { Security } & \text { Expected Rate of return } & \text { Beta } \\\text { A } & 0.12 & 1.2 \\\text { B } & 0.14 & 1.8\end{array}$ If the expected market rate of return is 0.09, and the risk-free rate is 0.05, which security would be considered the better buy, and why?

A) A because it offers an expected abnormal return of 1.2%.
B) B because it offers an expected abnormal return of 1.8%.
C) A because it offers an expected abnormal return of 2.2%.
D) B because it offers an expected return of 14%.
E) B because it has a higher beta.

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Question 22

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According to the Capital Asset Pricing Model (CAPM) , fairly-priced securities have

A) positive betas.
B) zero alphas.
C) negative betas.
D) positive alphas.

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Question 23

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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

The market portfolio has a beta of

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

Which statement is not true regarding the capital market line (CML) ?

A stock generates a perpetual cash flow of $6 per share, per year. The market index has an expected return of 10% and the risk free rate is 4%. If the stock's listed beta is 1.0 and I believe the true beta is 1.2, how much is the stock overpriced?

The expected return-beta relationship

An overpriced security will plot

You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7. The beta of the resulting portfolio is

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

The market risk, beta, of a security is equal to

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

What is the expected return of a zero-beta security?

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 12%. Your company has a beta of 1.6, 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

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

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 3%, and the expected market rate of return is 11%. Your company has a beta of 1.3, 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

Your opinion is that Boeing has an expected rate of return of 0.08. It has a beta of 0.92. 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

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

Your opinion is that security A has an expected rate of return of 0.145. It has a beta of 1.5. The risk-free rate is 0.04, and the market expected rate of return is 0.11. According to the Capital Asset Pricing Model, this security is