CAPM

Question 1

In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is

Answer 1

Market risk
Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured
by beta.

Question 2

Which statement is true regarding the market portfolio?

Answer 2

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 their market values.
E. it lies on a line that represents the expected risk-return relationship.

Question 3

Which statement is not true regarding the market portfolio?

Answer 3

D. It is the tangency point between the capital market line and the indifference curve.
The tangency point between the capital market line and the indifference curve is the optimal
portfolio for a particular investor.

Question 4

What is the difference between CML and SML?

Answer 4

Both the Capital Market Line and the Security Market Line depict risk/return relationships.
However, the risk measure for the CML is standard deviation and the risk measure for the
SML is beta

Question 5

According to the Capital Asset Pricing Model (CAPM), overpriced securities

Answer 5

have negative alphas

Question 6

Empirical results regarding betas estimated from historical data indicate that

Answer 6

Betas vary over time, betas may be negative or less than one, betas are not always near zero;
however, betas do appear to regress toward one over time.

Question 7

A security has an expected rate of return of 0.10 and a beta of 1.1. The market expected
rate of return is 0.08 and the risk-free rate is 0.05. The alpha of the stock is
A. 1.7%.
B. -1.7%.
C. 8.3%.
D. 5.5%.
E. -5.5%.

Answer 7

10% - [5% + 1.1(8% - 5%)] = 1.7%.

Question 8

what is the excess return

Answer 8

left side of CAPM formula minus right side

Question 9

What is the difference between sd and Beta?

Answer 9

Standard deviation and beta both measure risk, but they are different in that beta measures
only systematic risk while standard deviation is a measure of total risk.

Question 10

The risk premium on the market portfolio will be proportional to

Answer 10

the average degree of risk aversion of the investor population and the risk of the market portfolio measured by its variance.

Question 11

In equilibrium, the marginal price of risk for a risky security must be

Answer 11

equal to the marginal price of risk for the market. If not, investors will buy or sell the security until they are equal.

Question 12

The capital asset pricing model assumes

Answer 12

all investors are price takers, all investors have the same holding period, and investors have homogeneous expectations.
The CAPM assumes that investors are price-takers with the same single holding period and
that there are no taxes or transaction costs.

Question 13

19. The capital asset pricing model assumes

Answer 13

all investors are fully informed, all investors are rational, and all investors are mean-variance optimizers.

Question 14

????

If investors do not know their investment horizons for certain

Answer 14

the implications of the CAPM are not violated as long as investors’ liquidity needs are not priced.

Question 15

One of the assumptions of the CAPM is that investors exhibit myopic behavior. What
does this mean?

Answer 15

They plan for one identical holding period

Myopic behavior is shortsighted, with no concern for medium-term or long-term implications.

Question 16

The CAPM applies to

Answer 16

all portfolios and individual securities. Each asset’s risk premium is a function of its beta coefficient and the risk premium on the market portfolio.