Capital Asset Pricing Model (CAPM) Quiz

How is the beta coefficient calculated in CAPM?

• Covariance between asset returns and market returns divided by market variance

• Correlation between asset returns and market returns

• Average of asset returns divided by market returns

• Standard deviation of asset returns divided by market returns

In a CAPM graph, what does the slope of the Security Market Line (SML) represent?

• Risk-free rate

• Market risk premium

• Beta coefficient

• Expected market return

According to CAPM, what is the relationship between risk and expected return?

• Positive

• Negative

• No relationship

• Inverse

If the risk-free rate is 4%, the market return is 10%, and the beta is 1.5, what is the expected return according to CAPM?

• 15%

• 14%

• 11%

• 9%

On a CAPM graph, what does the point where the Capital Market Line (CML) intersects the y-axis represent?

• Risk-free rate

• Market risk premium

• Expected market return

• Beta coefficient

What assumption does CAPM make about investor behavior?

• Risk aversion

• Risk neutrality

• Risk seeking

• No preference for risk

According to CAPM, what is the risk-free rate supposed to compensate investors for?

• Time value of money

• Inflation

• Default risk

• Opportunity cost of capital

If the beta of an asset is 0.8 and the market risk premium is 6%, what is the expected return of the asset according to CAPM?

• 4.8%

• 5.4%

• 6.8%

• 7.2%

On a CAPM graph, what does the slope of the Capital Market Line (CML) represent?

• Risk-free rate

• Market risk premium

• Expected market return

• Beta coefficient

According to CAPM, what is the market risk premium?

• Difference between the risk-free rate and the market return

• Difference between the expected return and the risk-free rate

• Difference between the market return and the risk-free rate

• Difference between the beta and the market return