Financial Models and Market Efficiency Quiz

What is the purpose of the capital asset pricing model (CAPM)?

• To explain and apply the concept of risk premiums.

• To compute forward-looking expected return and risk.

• To explain and apply the capital asset pricing model (CAPM).

• To differentiate among the different levels of market efficiency.

What does beta measure in financial terms?

• A measure of market risk.

• A measure of market efficiency.

• A measure of expected return.

• A measure of risk premiums.

Which model is used to compute required return using constant growth?

• Capital asset pricing model (CAPM).

• Constant-growth model.

• Market efficiency model.

• Risk premium model.

What is one of the learning goals related to market efficiency?

• Understand risk premiums.

• Differentiate among the different levels of market efficiency and their implications.

• Calculate and apply beta, a measure of market risk.

• Use the constant-growth model to compute required return.

What must financial managers and investors base their investment decisions on?

• Historical data

• Expectations about future risk and return

• Current market trends

• Past performance of stocks

Why do managers need to know the return their shareholders require?

• To increase company profits

• To decide how to meet those expectations

• To reduce operational costs

• To expand into new markets

What can investors easily diversify away according to the last chapter?

• Market risk

• Firm-specific risk

• Economic risk

• Political risk

What is the focus of measuring in stock ownership according to the text?

• Total risk

• Market risk portion

• Economic risk

• Political risk

What is the definition of probability?

• The likelihood of occurrence

• The average of possible returns

• The sum of all returns

• The variance of returns

How is the expected return calculated?

• By adding all possible returns

• By multiplying each possible return by its probability and summing them

• By dividing the total return by the number of returns

• By subtracting the lowest return from the highest return