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Multiple Choice Quiz
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1
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.
2
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
3
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%
4
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.
5
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%
6
The capital asset pricing model (CAPM) is useful in ____________.
A)evaluating investment performance because it can be used to calculate the holding period return for an investment portfolio
B)capital budgeting decisions because it can be used to calculate the internal rate of return for a project
C)utility rate-making cases because it can be used to establish the allowable rate of return for a regulated utility
D)All of the above are correct about the usefulness of the CAPM
7
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%
8
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
9
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%
10
In a regression of an individual stock's excess return against the excess return for a market index, systematic risk is approximated by the regression equation ____________ and nonsystematic risk is approximated by the regression equation ____________.
A)slope;residual variance
B)intercept;adjusted R-square
C)residual variance;intercept
D)slope;adjusted R-Square
11
According to the CAPM, overvalued securities should have ______________.
A)large betas
B)positive alphas
C)zero alphas
D)negative alphas
12
Which of the following is not a simplifying assumption in the development of the capital asset pricing model?
A)Investors have homogeneous expectations.
B)All investors choose to hold the market portfolio.
C)All investors form portfolios from a universe of publicly traded financial assets.
D)All investors plan for one identical holding period.
13
If the CAPM is valid, which of the following is correct regarding the ratio of risk premium to systematic risk?

Stock

Standard Deviation

Systematic Risk

X

30%

1.2

Y

28%

1.4

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.
14
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
15
The real world data always support the CAPM.
A)True
B)False





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