Chapter 9 The Capital Asset Pricing Model
Multiple Choice Questions
1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk
is A) unique risk. B) beta. C) standard deviation of returns. D) variance of returns. E) none of the above.
Answer: B Difficulty: Easy Rationale: Once, a portfolio is diversified, the only risk remaining is systematic risk,
which is measured by beta.
2. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate
of return is a function of A) market risk B) unsystematic risk C) unique risk. D) reinvestment risk. E) none of the above.
Answer: A Difficulty: Easy Rationale: With a diversified portfolio, the only risk remaining is market, or systematic,
risk. This is the only risk that influences return according to the CAPM.
3. The market portfolio has a beta of A) 0. B) 1. C) -1. D) 0.5. E) none of the above
Answer: B Difficulty: Easy Rationale: By definition, the beta of the market portfolio is 1.
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Chapter 9 The Capital Asset Pricing Model
4. The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to A) 0.06. B) 0.144. C) 0.12. D) 0.132 E) 0.18 Answer: D Difficulty: Easy
Rationale: E(R) = 6% + 1.2(12 - 6) = 13.2%.
5. The risk-free rate and the expected market rate of return are 0.056 and 0.125,
respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to A) 0.1225 B) 0.144. C) 0.153. D) 0.134 E) 0.117 Answer: A Difficulty: Easy
Rationale: E(R) = 5.6% + 1.25(12.5 - 5.6) = 14.225%.
6. 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. Answer: D Difficulty: Moderate
Rationale: The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.
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7. 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. Answer: C Difficulty: Moderate
Rationale: Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus C is not true; the other statements are true). 8. The market risk, beta, of a security is equal to
A) the covariance between the security's return and the market return divided by the
variance of the market's returns.
B) the covariance between the security and market returns divided by the standard
deviation of the market's returns.
C) the variance of the security's returns divided by the covariance between the security
and market returns.
D) the variance of the security's returns divided by the variance of the market's returns. E) none of the above. Answer: A Difficulty: Moderate
Rationale: Beta is a measure of how a security's return covaries with the market returns, normalized by the market variance.
9. 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. Answer: B Difficulty: Moderate
Rationale: The expected rate of return on any security is equal to the risk free rate plus the systematic risk of the security (beta) times the market risk premium, E(RM - Rf).
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10. 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) the line that represents the relationship between an individual security's return and
the market's return.
Answer: D Difficulty: Moderate Rationale: The SML is a measure of expected return per unit of risk, where risk is
defined as beta (systematic risk).
11. According to the Capital Asset Pricing Model (CAPM), fairly priced securities A) have positive betas. B) have zero alphas. C) have negative betas. D) have positive alphas. E) none of the above.
Answer: B Difficulty: Moderate Rationale: A zero alpha results when the security is in equilibrium (fairly priced for the
level of risk).
12. According to the Capital Asset Pricing Model (CAPM), under priced securities A) have positive betas. B) have zero alphas. C) have negative betas. D) have positive alphas. E) none of the above.
Answer: D Difficulty: Moderate
13. According to the Capital Asset Pricing Model (CAPM), over priced securities A) have positive betas. B) have zero alphas. C) have negative betas. D) have positive alphas. E) none of the above.
Answer: C Difficulty: Moderate Rationale: A zero alpha results when the security is in equilibrium (fairly priced for the
level of risk).
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Chapter 9 The Capital Asset Pricing Model
14. 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.
Answer: D Difficulty: Moderate Rationale: A security with a positive alpha is one that is expected to yield an abnormal
positive rate of return, based on the perceived risk of the security, and thus is underpriced.
15. 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 decreases 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. E) All of the above statements are true.
Answer: A Difficulty: Moderate Rationale: Statements B, C, and D are true, but statement A is false.
16. In a well diversified portfolio A) market risk is negligible. B) systematic risk is negligible. C) unsystematic risk is negligible. D) nondiversifiable risk is negligible. E) none of the above.
Answer: C Difficulty: Moderate Rationale: Market, or systematic, or nondiversifiable, risk is present in a diversified
portfolio; the unsystematic risk has been eliminated.
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[实用资料]投资学第7版Test Bank答案09.doc
