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According to the Capital Asset Pricing Model (CAPM) ,the expected rate of return on any security is equal to


A) Rf+ β [E(RM) ].
B) Rf+ β [E(RM) - Rf].
C) β [E(RM) - Rf].
D) E(RM) + Rf.
E) none of the above.

Correct Answer

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Which of the following statements about the mutual fund theorem is true? I.It is similar to the separation property. II.It implies that a passive investment strategy can be efficient. III.It implies that efficient portfolios can be formed only through active strategies. IV.It means that professional managers have superior security selection strategies.


A) I and IV
B) I, II, and IV
C) I and II
D) III and IV
E) II and IV

Correct Answer

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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


A) underpriced.
B) overpriced.
C) fairly priced.
D) cannot be determined from data provided.
E) none of the above.

Correct Answer

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According to the Capital Asset Pricing Model (CAPM) ,


A) a security with a positive alpha is considered overpriced.
B) a security with a zero alpha is considered to be a good buy.
C) a security with a negative alpha is considered to be a good buy.
D) a security with a positive alpha is considered to be underpriced.
E) none of the above.

Correct Answer

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You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3.The beta of the resulting portfolio is


A) 1.40
B) 1.00
C) 0.52
D) 1.08
E) 0.80

Correct Answer

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Your personal opinion is that a security has an expected rate of return of 0.11.It has a beta of 1.5.The risk-free rate is 0.05 and the market expected rate of return is 0.09.According to the Capital Asset Pricing Model,this security is


A) underpriced.
B) overpriced.
C) fairly priced.
D) cannot be determined from data provided.
E) none of the above.

Correct Answer

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Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.

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The CAPM can be used to establish a hurd...

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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 percent and the expected market rate of return is 11 percent.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 ______%.


A) 4
B) 8.69
C) 15
D) 11
E) 0.75

Correct Answer

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A security has an expected rate of return of 0.13 and a beta of 2.1.The market expected rate of return is 0.09 and the risk-free rate is 0.045.The alpha of the stock is


A) -0.95%.
B) -1.7%.
C) 8.3%.
D) 5.5%.
E) none of the above.

Correct Answer

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Which statement is true regarding the market portfolio?


A) It includes all publicly traded financial assets.
B) It lies on the efficient frontier.
C) All securities in the market portfolio are held in proportion to their market values.
D) It is the tangency point between the capital market line and the indifference curve.
E) A,B,and C are true.

Correct Answer

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


A) buy CAT because it is overpriced.
B) sell short CAT because it is overpriced.
C) sell stock short CAT because it is underpriced.
D) buy CAT because it is underpriced.
E) none of the above,as CAT is fairly priced.

Correct Answer

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Which statement is not true regarding the Capital Market Line (CML) ?


A) The CML is the line from the risk-free rate through the market portfolio.
B) The CML is the best attainable capital allocation line.
C) The CML is also called the security market line.
D) The CML always has a positive slope.
E) The risk measure for the CML is standard deviation.

Correct Answer

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


A) have positive betas.
B) have zero alphas.
C) have negative alphas.
D) have positive alphas.
E) none of the above.

Correct Answer

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Which statement is not true regarding the market portfolio?


A) It includes all publicly traded financial assets.
B) It lies on the efficient frontier.
C) All securities in the market portfolio are held in proportion to their market values.
D) It is the tangency point between the capital market line and the indifference curve.
E) All of the above are true.

Correct Answer

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You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3.The beta of the resulting portfolio is


A) 1.40
B) 1.00
C) 0.52
D) 1.08
E) 0.80

Correct Answer

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An underpriced security will plot


A) on the Security Market Line.
B) below the Security Market Line.
C) above the Security Market Line.
D) either above or below the Security Market Line depending on its covariance with the market.
E) either above or below the Security Market Line depending on its standard deviation.

Correct Answer

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


A) buy CAT because it is overpriced.
B) sell short CAT because it is overpriced.
C) sell stock short CAT because it is underpriced.
D) buy CAT because it is underpriced.
E) none of the above,as CAT is fairly priced.

Correct Answer

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Your opinion is that CSCO has an expected rate of return of 0.15.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.According to the Capital Asset Pricing Model,this security is


A) underpriced.
B) overpriced.
C) fairly priced.
D) cannot be determined from data provided.
E) none of the above.

Correct Answer

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Discuss the differences between the capital market line and the security market line.

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The capital market line measures the exc...

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The Security Market Line (SML) is


A) the line that describes the expected return-beta relationship for well-diversified portfolios only.
B) also called the Capital Allocation Line.
C) the line that is tangent to the efficient frontier of all risky assets.
D) the line that represents the expected return-beta relationship.
E) all of the above.

Correct Answer

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