Finance 2 - CAPM /Beta

What does beta measure in the context of the CAPM?

• • The total risk of a stock

• • The unsystematic risk of a stock

• • The sensitivity of a stock's returns to market returns

• • The risk-free rate

If a stock has a beta of 1.5, it means:

• • The stock has no risk

• • The stock is less volatile than the market

• • The stock is more volatile than the market

• • The stock has a higher risk-free rate

In the CAPM formula, what does (E(Rm) - Rf) represent?

• • The risk-free rate

• • The market return

• • The equity risk premium

• • The stock's beta

If an asset has a beta of 0, it implies:

• • The asset has no risk

• • The asset is risk-free

• • The asset has a higher risk-free rate

• • The asset's returns are not related to market returns

What is the expected beta of the market portfolio in the CAPM?

• 0

• 1

• Less than 1

• Greater than 1

A stock has a beta of 1.2, the risk-free rate is 3%, and the expected market return is 8%. If the stock's actual return based on market price is 10%, what can be concluded about the stock?

• It is undervalued because the actual return exceeds the CAPM-based return.

• It is overvalued because the actual return exceeds the CAPM-based return.

• It is fairly valued because the actual return equals the CAPM-based return.

• It is overvalued because the CAPM-based return exceeds the actual return.

What does a stock's position above the SML indicate?

• The stock offers a return lower than required for its risk level.

• The stock offers a return higher than required for its risk level.

• The stock is fairly priced in the market.

• The stock's risk-free rate is too high.