Chapter 12: CAPM

Question 1

Income derived from regular business activities

Answer 1

Ordinary income

Question 2

When a stock is sold at an increase in price and the investor does what to that gain and a payment of tax may be due

Answer 2

Realized capital gain

Question 3

If the stock price increases but the investor does not sell the stock, the gain is what and it is not taxed

Answer 3

Unrealized capital gain

Question 4

An asset held for one year or more

Answer 4

Long term capital gain

Question 5

An asset held for less than one year usually subject to taxes

Answer 5

Short term capital gain

Question 6

The rate of return an investor expects to receive on a risky asset over a period of time

Answer 6

Expected return on a risky asset

E(Ri)

Question 7

The expected rate of return on each risky asset in a portfolio, multiplied by its portfolio weight

Answer 7

Expected return on a portfolio of risky assets

Question 8

The rate of return an investor expects to receive on a diversified portfolio of common stock

Answer 8

Expected return on the market

E(Rm)

Question 9

The rate of return that an investor receives on a safe assets, one that is free from credit risk

Answer 9

Return on the risk-free asset

Rf

Question 10

The additional return that investors expect to receive if they buy a stock of average risk as opposed to a treasury bond

Answer 10

Market risk premium {E(Rm)-Rf}

Question 11

The chance that an investments actual return will be different than expected

Answer 11

Risk

Question 12

Risk includes the possibility of

Answer 12

Losing some or all of the original investment

Question 13

How is risk measured

Answer 13

It is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment

Question 14

Risk that affects a very small number of assets

Answer 14

Unsystematic risk (specific risk)

Question 15

The risk inherent to the entire market or entire market segment

Answer 15

Systematic risk

Question 16

Systematic risk is defined by

Answer 16

Beta

Question 17

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole

Answer 17

Beta (beta coefficient)

Question 18

The risk inherent in the market from economic forces

Answer 18

Market risk (unsystematic risk)

Question 19

A measure of the s dispersion of a set of data from its mean

Answer 19

Standard deviation of return

Question 20

The more spread apart the data is does what to standard deviation

Answer 20

The higher the deviation

Question 21

In finance, standard deviation is applied to what

Answer 21

The annual rate of return of an investment to measure the investment’s volatility (risk)

Question 22

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities

Answer 22

CAPM

Question 23

The general idea behind CAPM is that investors need to be compensated in what two ways

Answer 23

TVM and risk

Question 24

The time value of money is represented by the

Answer 24

Risk-free Rate in the formula and compensated the investors for placing money in any investment over a period of time

Question 25

The group of assets—such as stocks, bonds and mutual funds—held by an investor

Answer 25

Portfolio

Question 26

A portfolio including a number of securities, leads to lower risk

Answer 26

Well-diversified portfolio

Question 27

Evaluating the performance of stocks, bonds or portfolios of securities

Answer 27

Performance evaluation

Question 28

To properly evaluate investment performance, we must adjust for

Answer 28

The risk associated with the security portfolio

Question 29

An investor who performs above the CAPM line. The investor outperformed the returns expected under the CAPM benchmark

Answer 29

Positive alpha

Question 30

An investor who performs below the CAPM line. The investor underperformed the returns expected under the CAPM benchmark

Answer 30

Negative alpha