CAPM Quiz

What does CAPM stand for?

• Capital Asset Pricing Model

• Cost Analysis and Project Management

• Corporate Asset Portfolio Management

• Certified Accounting Professional Management

Who developed the Capital Asset Pricing Model (CAPM)?

• Robert Merton, Eugene Fama, and Franco Modigliani

• Fischer Black, Myron Scholes, and Robert C. Merton

• William Sharpe, John Lintner, and Jan Mossin

• Harry Markowitz, Paul Samuelson, and Merton Miller

What is the formula for CAPM?

• E(Ri) = Rf - βi(E(Rm) + Rf)

• E(Ri) = Rf + βi(E(Rm) - Rf)

• E(Ri) = Rf + βi(E(Rm) + Rf)

• E(Ri) = Rf - βi(E(Rm) - Rf)

Explain the concept of risk-free rate in CAPM.

• The risk-free rate is the theoretical return on an investment with zero risk, typically measured by the yield on government bonds.

• The risk-free rate is the return on an investment with low risk

• The risk-free rate is the return on an investment with high risk

• The risk-free rate is the return on an investment with moderate risk

What is the market risk premium in CAPM?

• The average return on a stock

• The standard deviation of a stock

• The total risk of a security

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

How is beta calculated in CAPM?

• Covariance of stock's returns with market's returns divided by variance of market's returns

• Standard deviation of stock's returns divided by variance of market's returns

• Earnings per share divided by stock price

• Dividend yield divided by stock price

What are the limitations of CAPM?

• The limitations of CAPM are related to its complexity, lack of empirical evidence, and inability to account for market risk.

• Limitations of CAPM include unrealistic assumptions, market efficiency, and the inability to account for all risk factors.

• CAPM has no limitations and is a perfect model for all market conditions.

• The limitations of CAPM are its accuracy, flexibility, and ability to predict market trends.

Explain the relationship between CAPM and the Security Market Line (SML).

• CAPM measures the inflation rate, while SML measures the unemployment rate

• The CAPM model is used to calculate the expected return on an asset, while the Security Market Line (SML) represents the relationship between risk and return for individual securities.

• CAPM is used to calculate the stock price, while SML represents the relationship between supply and demand

• CAPM predicts the weather, while SML represents the relationship between interest rates and bond prices

How is the cost of equity calculated using CAPM?

• By multiplying the risk-free rate with the equity risk premium and then adding the stock's beta.

• By dividing the risk-free rate by the sum of the equity risk premium and the stock's beta.

• By subtracting the risk-free rate from the product of the equity risk premium and the stock's beta.

• By adding the risk-free rate to the product of the equity risk premium and the stock's beta.

Discuss the practical applications of CAPM in finance.

• CAPM is used to predict the weather patterns for agricultural investments

• CAPM can be used to calculate the expected return on an investment based on its risk and the market's overall risk.

• CAPM is used to calculate the price of real estate properties

• CAPM can be used to determine the best color for a company's logo