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| 1.
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According to the CAPM: |
| | A) | The expected return of a stock will be doubled if its beta increases from 1 to 2. |
| | B) | High-beta stocks should have higher risk premium to systematic risk ratios. |
| | C) | A stock's risk premium depends on its beta. |
| | D) | All of the above are correct. |
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| 2.
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If a stock's expected return plots under the Security Market Line, then the stock should have ______________. |
| | A) | a negative alpha |
| | B) | a positive alpha |
| | C) | a small beta |
| | D) | both market risk and company specific risk |
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| 3.
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According to the SML, a stock's return is expected to ______________ if the stock has a beta of 1.5 and the market return is expected to increase by 2%. |
| | A) | decline by 2% |
| | B) | rise by 2% |
| | C) | decline by 3% |
| | D) | rise by 3% |
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| 4.
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The Security Market Line represents the relationship between ______________. |
| | A) | the total risk and expected return on a security |
| | B) | the nonsystematic risk and expected return on a security |
| | C) | the systematic risk and expected return on a security |
| | D) | None of the above. |
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| 5.
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The expected return on a stock with a beta of 1.5 is 15%. If the expected risk-free rate of return is 3%, what should be the market risk premium? |
| | A) | 5% |
| | B) | 8% |
| | C) | 12% |
| | D) | 15% |
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| 6.
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If the CAPM is valid, is the following situation possible?
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| | A) | Possible. |
| | B) | Not possible. |
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| 7.
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The expected return on the market is 12%. The expected return on a stock with a beta of 1.5 is 17%. What is the risk-free rate of return according to the CAPM? |
| | A) | 2% |
| | B) | 4% |
| | C) | 5% |
| | D) | 8% |
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| 8.
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You invest $8,000 in stock A with a beta of 1.4 and $12,000 in stock B with a beta of 0.8. The beta of this formed portfolio is ______________. |
| | A) | 1.04 |
| | B) | 1.14 |
| | C) | 2.04 |
| | D) | 2.20 |
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| 9.
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A Stock has an estimated rate of return of 15.5% and a beta of 1.5. The market expected rate of return is 10% and the risk-free rate is 3%. The alpha of the stock is ______________. |
| | A) | -2% |
| | B) | 0% |
| | C) | 2% |
| | D) | 3% |
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| 10.
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The systematic risk is not included as a factor in a typical multifactor model of stock returns. |
| | A) | True |
| | B) | False |
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| 11.
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According to the CAPM, overvalued securities should have ______________. |
| | A) | large betas |
| | B) | positive alphas |
| | C) | zero alphas |
| | D) | negative alphas |
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| 12.
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The market portfolio is a portfolio that includes ______________. |
| | A) | all risky assets |
| | B) | risky assets with the highest returns |
| | C) | risky assets with the lowest risks |
| | D) | All of the above. |
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| 13.
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If the CAPM is valid, which of the following is correct regarding the ratio of risk premium to systematic risk?
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| | A) | X should have a higher ratio because its standard deviation is higher. |
| | B) | Y should have a higher ratio because its beta is higher. |
| | C) | X and Y should have the same ratio. |
| | D) | Can't be determined. |
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| 14.
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In Fama and French's three-factor model, ______________ and ______________ are added to the market index model to explain stock returns. |
| | A) | firm size; firm revenues |
| | B) | firm size; book value to market value ratio |
| | C) | firm sales; market value to book value ration |
| | D) | firm sales; firm cost of capital |
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| 15.
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The real world data always support the CAPM. |
| | A) | True |
| | B) | False |
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