Chapter 09 The Capital Asset Pricing Model

Chapter 09 - The Capital Asset Pricing Model

47. Standard deviation and beta both measure risk, but they are different in that A. beta measures both systematic and unsystematic risk.

B. beta measures only systematic risk while standard deviation is a measure of total risk. C. beta measures only unsystematic risk while standard deviation is a measure of total risk. D. beta measures both systematic and unsystematic risk while standard deviation measures only systematic risk.

E. beta measures total risk while standard deviation measures only nonsystematic risk.

48. The expected return-beta relationship

A. is the most familiar expression of the CAPM to practitioners.

B. refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta.

C. assumes that investors hold well-diversified portfolios.

D. assumes that investors hold well-diversified portfolios, is the most familiar expression of the CAPM to practitioners, and refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta.

E. assumes that investors do not hold well-diversified portfolios.

49. The security market line (SML)

A. can be portrayed graphically as the expected return-beta relationship.

B. can be portrayed graphically as the expected return-standard deviation of market returns relationship.

C. provides a benchmark for evaluation of investment performance.

D. can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance.

E. can be portrayed graphically as the expected return-standard deviation of market returns relationship and provides a benchmark for evaluation of investment performance.

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Chapter 09 - The Capital Asset Pricing Model

50. Research by Jeremy Stein of MIT resolves the dispute over whether beta is a sufficient pricing factor by suggesting that managers should use beta to estimate A. long-term returns but not short-term returns. B. short-term returns but not long-term returns. C. both long- and short-term returns. D. book-to-market ratios.

E. Stein did not make any suggestion to managers regarding beta.

51. Studies of liquidity spreads in security markets have shown that A. liquid stocks earn higher returns than illiquid stocks. B. illiquid stocks earn higher returns than liquid stocks. C. both liquid and illiquid stocks earn the same returns.

D. illiquid stocks are good investments for frequent, short-term traders. E. only illiquid stocks should be held by most investors.

52. An underpriced security will plot A. on the Security Market Line. B. below the Security Market Line. C. above the Security Market Line.

D. either above or below the Security Market Line depending on its covariance with the market. E. either above or below the Security Market Line depending on its standard deviation.

53. An overpriced security will plot A. on the Security Market Line. B. below the Security Market Line. C. above the Security Market Line.

D. either above or below the Security Market Line depending on its covariance with the market. E. either above or below the Security Market Line depending on its standard deviation.

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Chapter 09 - The Capital Asset Pricing Model

54. The risk premium on the market portfolio will be proportional to A. the average degree of risk aversion of the investor population. B. the risk of the market portfolio as measured by its variance. C. the risk of the market portfolio as measured by its beta.

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

E. both the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its beta.

55. In equilibrium, the marginal price of risk for a risky security must be A. equal to the marginal price of risk for the market portfolio. B. greater than the marginal price of risk for the market portfolio. C. less than the marginal price of risk for the market portfolio. D. adjusted by its degree of nonsystematic risk.

E. unrelated to the marginal price of risk for the market portfolio.

56. The capital asset pricing model assumes A. all investors are price takers.

B. all investors have the same holding period. C. investors pay taxes on capital gains.

D. all investors are price takers and all investors have the same holding period.

E. all investors are price takers, all investors have the same holding period, and investors pay taxes on capital gains.

57. The capital asset pricing model assumes A. all investors are price takers.

B. all investors have the same holding period. C. investors have homogeneous expectations.

D. all investors are price takers and all investors have the same holding period.

E. all investors are price takers, all investors have the same holding period, and investors have homogeneous expectations.

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Chapter 09 - The Capital Asset Pricing Model

58. The capital asset pricing model assumes A. all investors are rational.

B. all investors have the same holding period. C. investors have heterogeneous expectations.

D. all investors are rational, and all investors have the same holding period.

E. all investors are rational, all investors have the same holding period, and investors have heterogeneous expectations.

59. The capital asset pricing model assumes A. all investors are fully informed. B. all investors are rational.

C. all investors are mean-variance optimizers. D. taxes are an important consideration.

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

60. If investors do not know their investment horizons for certain A. the CAPM is no longer valid.

B. the CAPM underlying assumptions are not violated.

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

D. the implications of the CAPM are no longer useful.

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

61. Assume that a security is fairly priced and has an expected rate of return of 0.17. The market expected rate of return is 0.11 and the risk-free rate is 0.04. The beta of the stock is ___. A. 1.25 B. 1.86 C. 1 D. 0.95 E. 2.04

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