Capital Asset pricing Model

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

• unique risk.

• beta.

• standard deviation of returns.

• variance of returns.

The market portfolio has a beta of

• 0

• 1

• –1

• 0.5

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

• 0.06

• 0.144

• 0.12

• 0.132

The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to

• 0.142

• 0.144

• 0.153

• 0.134

Which statement is not true regarding the market portfolio?

• It includes all publicly-traded financial assets.

• It lies on the efficient frontier.

• It is the tangency point between the capital market line and the indifference curve.

• All securities in the market portfolio are held in proportion to their market values.

Which statement is true regarding the market portfolio?

I) It includes all publicly traded financial assets.

II) It lies on the efficient frontier.

III) All securities in the market portfolio are held in proportion to their market values.

IV) It is the tangency point between the capital market line and the indifference curve.

• I only

• II only

• III only

• I, II, and III

• IV only

Which statement is not true regarding the capital market line (CML)?

• The CML is the line from the risk-free rate through the market portfolio.

• The CML is the best attainable capital allocation line.

• The CML is also called the security market line.

• The CML always has a positive slope.

Which statement is true regarding the capital market line (CML)?

I) The CML is the line from the risk-free rate through the market portfolio.

II) The CML is the best attainable capital allocation line.

III) The CML is also called the security market line.

IV) The CML always has a positive slope.

• I only

• II only

• III only

• IV only

• I, II, and IV

According to the Capital Asset Pricing Model (CAPM), a security with a

• positive alpha is considered overpriced.

• zero alpha is considered to be a good buy.

• negative alpha is considered to be a good buy.

• positive alpha is considered to be underpriced.

Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is

• underpriced

• overpriced

• fairly priced

• Cannot be determined from data provided