WorksheetsThe Capital Asset Model (CAPM)
Total questions: 17
Worksheet time: 10mins
The expected return on a security includes a reward for:
market risk and specific risk
specific risk
diversification and portfolio risk
time value of money and market risk
If a security plots below the security market line, it is:
ignoring all of the security's specific risk
underpriced, a situation that should be temporary
offering too little return to justify its risk
a defensive security, which expects to offer lower returns
A stock's beta measures the:
average return on the stock
sensitivity of the stock's returns to those of the market portfolio
difference between the return on the stock and the return on the market portfolio
market risk premium on the stock
The slope of the line fitted to a plot of a stock's returns versus the market's returns measures the:
security market line
beta of the stock
market risk premium
capital asset pricing model
What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73?
1.0
1.17
1.22
1.25
What is the beta of a U.S. Treasury bill?
1.0
−1.0
0
Unknown
A project has a beta of 1.24, the risk-free rate is 3.8%, and the market rate of return is 9.2%. What is the project's expected rate of return?
15.21%
11.41%
10.50%
14.61%
You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming year. The market is expected to return 11.4% and T-bills return 3.8%. According to CAPM, which one of these statements is correct given this information?
The stock is currently underpriced
The stock plots below the security market line
The risk premium on the stock is too low given the stock's beta
The stock plots to the left of the market on a security market line graph
A portfolio consists of an index mutual fund which represents the overall market and Treasury bills. The fund has a portfolio weight of 60%. The risk-free rate is 3.2% and the market risk premium is 7.6%. What is your best estimate of the portfolio expected rate of return?
8.39%
7.76%
10.80%
9.02%
Which one of these statements is correct?
Betas can be measured exactly.
If a stock has a very low beta, it is likely to have a high beta in the future
The expected future risk premium is easy to accurately determine
CAPM is widely used as a means of estimating expected returns
What would you recommend to an investor who is considering an investment that plots below the security market line?
Invest; The expected return is high relative to the risk
Don't invest; The risk is high relative to the expected return
Invest; All stocks revert to the SML over time
Don't invest; All stocks below the SML are low-growth stocks
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
unique risk.
beta.
standard deviation of returns.
variance of returns.
The market portfolio has a beta of
0
1
–1
0.5
The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to
0.06
0.144
0.12
0.132
According to the Capital Asset Pricing Model (CAPM), a security with a
positive alpha is considered overpriced.
zero alpha is considered to be a good buy.
negative alpha is considered to be a good buy.
positive alpha is considered to be underpriced.
Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is
underpriced
overpriced
fairly priced
Cannot be determined from data provided
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 10%, you should
buy CAT because it is overpriced.
sell short CAT because it is overpriced.
buy CAT because it is underpriced.
None of the options, as CAT is fairly priced.
