Po in You Essay

5231 Words Nov 21st, 2011 21 Pages
CH. 9: The Capital Asset Pricing Model

(Global Edition: CH. 9)

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. Feedback: B – In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is beta. ---------------------------------------------------------------------------------------------------------------------------------------------------2) 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
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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. Feedback: A – Beta is a measure of how a security's return covaries with the market returns, normalized by the market variance. ----------------------------------------------------------------------------------------------------------------------------------------------------

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5) The risk–free rate is 7 percent. The expected market rate of return is 15 percent. If you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent, you should: A) buy the stock because it is overpriced. B) sell short the stock because it is overpriced. C) sell the stock short because it is underpriced. D) buy the stock because it is underpriced. E) none of the above, as the stock is fairly priced. Feedback: B – 12.0% – [7% + 1.3(15% – 7%) = –5.4%; therefore, the security is overpriced. ---------------------------------------------------------------------------------------------------------------------------------------------------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. Feedback: D – According to the Capital Asset Pricing Model (CAPM),

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