CAPM

What does CAPM stand for, and what is its primary purpose?

• Capital Asset Pricing Model; to predict company profits

• Capital Asset Pricing Model; to determine expected return based on risk

• Capital Allocation Portfolio Method; to optimize portfolio allocation

• Capital Analysis Profit Model; to analyze profitability

What does the beta (β) in CAPM measure?

• Total risk of an asset

• Sensitivity of an asset’s returns to market returns

• Diversifiable risk of an asset

• Expected return of the asset

The risk-free rate is typically represented by which of the following

• Corporate bond yields

• S&P 500 returns

• U.S. Treasury bond yields

• Stock dividend yields

If an asset has a beta of 0, what will its expected return be?

• Equal to the market return

• Equal to the risk-free rate

• Negative

• Cannot be determined

Which of the following risks can CAPM account for?

• Systematic risk only

• Unsystematic risk only

• Both systematic and unsystematic risk

• Neither systematic nor unsystematic risk

What does a negative beta indicate?

• The asset moves with the market

• The asset moves inversely to the market

• The asset has no risk

• The asset has both systematic and unsystematic risk

The difference between the expected market return and the risk-free rate is called the_______.

• Alpha

• Market risk premium

• Beta

• Standard deviation

The __________ rate is considered the return on a theoretically risk-free investment.

• Risk-free

• Expected market

• Return on equity

• Return on equity

Which of the following scenarios would result in the highest expected return according to CAPM?

• High beta and low market risk premium

• Low beta and high market risk premium

• High beta and high market risk premium

• Low beta and low market risk premium

What happens to the expected return of an asset if the risk-free rate increases, assuming all other variables remain constant?

• Expected return decreases.

• Expected return increases.

• Expected return remains the same.

• Cannot be determined.