Capital Asset Pricing Model and Standard Deviation
FINA3080Investment Analysis and Portfolio Analysis
Midterm Examination
Date: March 12, 2013
1. If all investors become more risk averse the SML will _______________ and stock prices will _______________. A. shift upward; riseB. shift downward; fallC. have the same intercept with a steeper slope; fallD. have the same intercept with a flatter slope; rise 2. According to the capital asset pricing model, a security with a _________. A. negative alpha is considered a good buyB. positive alpha is considered overpricedC. positive alpha is considered underpricedD. zero alpha is considered a good buy
3. The beta of a security is equal to _________. A. the covariance between the security and market returns divided by the variance of the market's returnsB. the covariance between the security and market returns divided by the standard deviation of the market's returnsC. the variance of the security's returns divided by the covariance between the security and market returnsD. the variance of the security's returns divided by the variance of the market's returns
4. Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy because _________. A. A, it offers an expected excess return of 0.2%B. A, it offers an expected excess return of 2.2%C. B, it offers an expected excess return of 1.8%D. B, it offers an expected return of 2.4%
5. In his famous critique of the CAPM, Roll argued that the CAPM ______________. A. is not testable because the true market portfolio can never be observedB. is of limited use because systematic risk can never be entirely eliminatedC. should be replaced by the APTD. should be replaced by the Fama French 3 factor model 6. The SML is valid for _______________ and the CML is valid for ______________. A. only
Midterm Examination
Date: March 12, 2013
1. If all investors become more risk averse the SML will _______________ and stock prices will _______________. A. shift upward; riseB. shift downward; fallC. have the same intercept with a steeper slope; fallD. have the same intercept with a flatter slope; rise 2. According to the capital asset pricing model, a security with a _________. A. negative alpha is considered a good buyB. positive alpha is considered overpricedC. positive alpha is considered underpricedD. zero alpha is considered a good buy
3. The beta of a security is equal to _________. A. the covariance between the security and market returns divided by the variance of the market's returnsB. the covariance between the security and market returns divided by the standard deviation of the market's returnsC. the variance of the security's returns divided by the covariance between the security and market returnsD. the variance of the security's returns divided by the variance of the market's returns
4. Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy because _________. A. A, it offers an expected excess return of 0.2%B. A, it offers an expected excess return of 2.2%C. B, it offers an expected excess return of 1.8%D. B, it offers an expected return of 2.4%
5. In his famous critique of the CAPM, Roll argued that the CAPM ______________. A. is not testable because the true market portfolio can never be observedB. is of limited use because systematic risk can never be entirely eliminatedC. should be replaced by the APTD. should be replaced by the Fama French 3 factor model 6. The SML is valid for _______________ and the CML is valid for ______________. A. only