CAPM Quiz

What does CAPM stand for?

• Corporate Asset Performance Measure

• Capital Asset Pricing Model

• Certified Asset Pricing Method

• Costly Asset Pricing Model

Explain the concept of systematic risk in the context of CAPM.

• Systematic risk is the risk that is inherent in the overall market or economy and cannot be diversified away.

• Systematic risk is the risk that is completely unrelated to the overall market or economy.

• Systematic risk is the risk that is only present in the short term and does not impact long-term investments.

• Systematic risk is the risk that only affects individual companies and can be easily diversified away.

What is the formula for calculating the expected return using CAPM?

• Expected Return = Risk-Free Rate * Beta * (Market Return - Risk-Free Rate)

• Expected Return = Risk-Free Rate - Beta * (Market Return - Risk-Free Rate)

• Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

• Expected Return = Risk-Free Rate + Beta * (Market Return + Risk-Free Rate)

Discuss the assumptions of CAPM.

• Perfect capital markets, rational and risk-averse investors, diverse expectations, and high taxes and transaction costs

• Efficient capital markets, emotional and risk-seeking investors, diverse expectations, and high taxes and transaction costs

• Imperfect capital markets, irrational and risk-seeking investors, diverse expectations, and high taxes and transaction costs

• Perfect capital markets, rational and risk-averse investors, homogeneous expectations, and no taxes or transaction costs

How is beta calculated in CAPM?

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

• Beta is not calculated in CAPM

• Covariance of stock returns with risk-free rate divided by variance of market returns

• Standard deviation of stock returns divided by standard deviation of market returns

Explain the relationship between risk and return in CAPM.

• The relationship between risk and return in CAPM is that the expected return on an investment is only affected by the market risk premium.

• The relationship between risk and return in CAPM is that the expected return on an investment is not affected by its risk as measured by beta.

• The relationship between risk and return in CAPM is that the expected return on an investment is directly proportional to its risk as measured by beta.

• The relationship between risk and return in CAPM is that the expected return on an investment is inversely proportional to its risk as measured by beta.

What are the limitations of CAPM?

• Accurate prediction of stock returns

• Consideration of all risk factors

• Market efficiency, unrealistic assumptions, and inability to account for all risk factors.

• Realistic assumptions

Discuss the significance of the risk-free rate in CAPM.

• The risk-free rate is used as a baseline for comparing expected returns in CAPM.

• The risk-free rate has no significance in CAPM

• The risk-free rate is used to calculate the market risk premium in CAPM

• The risk-free rate is only relevant for short-term investments in CAPM

How is the market risk premium determined in CAPM?

• By dividing the risk-free rate by the expected market return.

• By subtracting the risk-free rate from the expected market return.

• By multiplying the risk-free rate with the expected market return.

• By adding the risk-free rate to the expected market return.

Explain the concept of the security market line in CAPM.

• The security market line in CAPM only applies to short-term investments.

• The security market line in CAPM represents the relationship between the expected return and the unsystematic risk of an investment.

• The security market line in CAPM is not related to the expected return and systematic risk of an investment.

• The security market line in CAPM shows the relationship between the expected return and the systematic risk of an investment.