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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

The Capital Asset Pricing Model

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of
		A)	unique risk
		B)	reinvestment risk
		C)	market risk.
		D)	unsystematic risk.
		E)	none of the above.


2	The market portfolio has a beta of
		A)	0.25
		B)	-1.
		C)	1.
		D)	0.5.
		E)	none of the above


3	Which statement is not true regarding the market portfolio?
		A)	It includes all publicly traded financial assets.
		B)	It is the tangency point between the capital market line and the indifference curve.
		C)	All securities in the market portfolio are held in proportion to their market values.
		D)	It lies on the efficient frontier.
		E)	none of the above are true.


4	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.


5	Which of the following is not an assumption of the CAPM?
		A)	All investors are rational mean-variance optimizers.
		B)	All investors have homogeneous expectations.
		C)	There are many investors.
		D)	There are no transactions costs.
		E)	The S&P/TSX market index portfolio is efficient.


6	According to the Capital Asset Pricing Model (CAPM), fairly priced securities
		A)	have positive betas.
		B)	have positive alphas.
		C)	have negative betas.
		D)	have zero alphas.
		E)	none of the above.


7	In a well diversified portfolio
		A)	market risk is negligible.
		B)	unsystematic risk is negligible.
		C)	systematic risk is negligible.
		D)	nondiversifiable risk is negligible.
		E)	none of the above.


8	What is the expected return of a zero-beta security?
		A)	The risk-free rate.
		B)	Zero rate of return.
		C)	A negative rate of return.
		D)	The market rate of return.
		E)	None of the above.


9	The market price of risk
		A)	is the market risk premium divided by the variance of the market returns.
		B)	is the variance of the market returns.
		C)	is the price of one share of Nortel.
		D)	is the price of an ETF.
		E)	none of the above.


10	In equilibrium, the marginal price of risk for a risky security must be
		A)	less than the marginal price of risk for the market portfolio.
		B)	greater than the marginal price of risk for the market portfolio.
		C)	equal to the marginal price of risk for the market portfolio.
		D)	adjusted by its degree of nonsystematic risk.
		E)	all of the above are true.

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