Fins2624 Past Year Essay Example

Chapter 09
The Capital Asset Pricing Model

Multiple Choice Questions 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.

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

Difficulty: Easy

3. In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is
A. unique risk.
B. market risk
C. standard deviation of returns.
D. variance of returns.
E. none of the above.

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

Difficulty: Easy

4. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of
A. market risk
B. unsystematic risk
C. unique risk.
D. reinvestment risk.
E. none of the above.

With a diversified portfolio, the only risk remaining is market, or systematic, risk. This is the only risk that influences return according to the CAPM. Difficulty: Easy 5. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of
A. beta risk
B. unsystematic risk
C. unique risk.
D. reinvestment risk.
E. none of the above.
With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk that influences return according to the CAPM.

Difficulty: Easy

8. The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to
A. 0.06.
B. 0.144.
C. 0.12.
D. 0.132
E. 0.18

E(R) = 6% + 1.2(12 - 6) = 13.2%.

Difficulty: Easy 10. Which statement is not true regarding the market portfolio?
A. It includes all publicly