The Capital Asset Model (CAPM)

The expected return on a security includes a reward for:

• market risk and specific risk

• specific risk

• diversification and portfolio risk

• time value of money and market risk

If a security plots below the security market line, it is:

• ignoring all of the security's specific risk

• underpriced, a situation that should be temporary

• offering too little return to justify its risk

• a defensive security, which expects to offer lower returns

A stock's beta measures the:

• average return on the stock

• sensitivity of the stock's returns to those of the market portfolio

• difference between the return on the stock and the return on the market portfolio

• market risk premium on the stock

The slope of the line fitted to a plot of a stock's returns versus the market's returns measures the:

• security market line

• beta of the stock

• market risk premium

• capital asset pricing model

What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73?

• 1.0

• 1.17

• 1.22

• 1.25

What is the beta of a U.S. Treasury bill?

• 1.0

• −1.0

• 0

• Unknown

A project has a beta of 1.24, the risk-free rate is 3.8%, and the market rate of return is 9.2%. What is the project's expected rate of return?

• 15.21%

• 11.41%

• 10.50%

• 14.61%

You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming year. The market is expected to return 11.4% and T-bills return 3.8%. According to CAPM, which one of these statements is correct given this information?

• The stock is currently underpriced

• The stock plots below the security market line

• The risk premium on the stock is too low given the stock's beta

• The stock plots to the left of the market on a security market line graph

A portfolio consists of an index mutual fund which represents the overall market and Treasury bills. The fund has a portfolio weight of 60%. The risk-free rate is 3.2% and the market risk premium is 7.6%. What is your best estimate of the portfolio expected rate of return?

• 8.39%

• 7.76%

• 10.80%

• 9.02%

Which one of these statements is correct?

• Betas can be measured exactly.

• If a stock has a very low beta, it is likely to have a high beta in the future

• The expected future risk premium is easy to accurately determine

• CAPM is widely used as a means of estimating expected returns