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Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

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Question 31

Multiple Choice

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Which of the following are assumptions of the simple CAPM model? I.Individual trades of investors do not affect a stock's price II.All investors plan for one identical holding period III.All investors analyze securities in the same way and share the same economic view of the world IV.All investors have the same level of risk aversion

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

E) All of the above
F) B) and C)

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Question 32

Multiple Choice

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

A) CML
B) CAL
C) SML
D) SCL

E) A) and B)
F) A) and C)

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Question 33

Multiple Choice

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The two factor model on a stock provides a risk premium for exposure to market risk of 12%,a risk premium for exposure to silver commodity prices of 3.5% and a risk free rate of 4.0%.What is the expected return on the stock?

Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I.Book to market ratio II.Unexpected change in industrial production III.Firm size

What is the alpha of a portfolio with a beta of 2 and actual return of 15%?

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%.

According to the CAPM,what is the market risk premium given an expected return on a security of 13.6%,a stock beta of 1.2,and a risk free interest rate of 4.0%?

Investors require a risk premium as compensation for bearing ______________.

In the context of the capital asset pricing model,the systematic measure of risk is captured by _________.

The capital asset pricing model was developed by _________.

An adjusted beta will be ______ than the unadjusted beta.

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

Consider the single factor APT.Portfolio A has a beta of 0.2 and an expected return of 13%.Portfolio B has a beta of 0.4 and an expected return of 15%.The risk-free rate of return is 10%.If you wanted to take advantage of an arbitrage opportunity,you should take a short position in portfolio __________ and a long position in portfolio _________.

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

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

Consider the following two stocks,A and B.Stock A has an expected return of 10% and a beta of 1.20.Stock B has an expected return of 14% and a beta of 1.80.The expected market rate of return is 9% and the risk-free rate is 5%.Security __________ would be considered a good buy because _________.

The expected return of the risky asset portfolio with minimum variance is _________.

Research has revealed that regardless of what the current estimate of a firm's beta is,it will tend to move closer to ______ over time.

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

A stock has a beta of 1.3.The unsystematic risk of this stock is ____________ the stock market as a whole.