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Multiple Choice Quiz
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1
In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is
A)unique risk.
B)beta.
C)standard deviation of returns.
D)variance of returns.
E)none of the above
2
Which statement is not true regarding the market portfolio?
A)It includes all publicly traded financial assets.
B)It lies on the efficient frontier.
C)All securities in the market portfolio are held in proportion to their market values.
D)It must be the tangency point between the capital market line and the indifference curve.
E)All of the above are true.
3
According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to
A)Rf + β [E(RM)].
B) Rf + β [E(RM) - Rf].
C)β [E(RM) - Rf].
D)E(RM) + Rf.
E)none of the above
4
The market risk (beta) of a security is equal to
A)the covariance between the security's return and the market return divided by the variance of the market's returns.
B)the covariance between the security and market returns divided by the standard deviation of the market's returns.
C)the variance of the security's returns divided by the covariance between the security and market returns.
D)the variance of the security's returns divided by the variance of the market's returns.
E)none of the above
5
The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent, you should
A)buy the stock because it is overpriced.
B)sell short the stock because it is overpriced.
C)sell the stock short because it is underpriced.
D)buy the stock because it is underpriced.
E)none of the above, as the stock is fairly priced.
6
According to the Capital Asset Pricing Model (CAPM), fairly priced securities
A)have positive betas.
B)have positive alphas.
C)have negative betas.
D)have zero alphas.
E)none of the above
7
In a well diversified portfolio
A)market risk is negligible.
B)unsystematic risk is negligible.
C)systematic risk is negligible.
D)nondiversifiable risk is negligible.
E)none of the above
8
What is the expected return of a zero-beta security?
A)The risk-free rate.
B)Zero rate of return.
C)A negative rate of return.
D)The market rate of return.
E)None of the above are true.
9
Assume that a security is fairly priced and has an expected rate of return of 0.13. The market expected rate of return is 0.13 and the risk-free rate is 0.04. The beta of the stock is
A)1.25.
B)1.7.
C)1.
D)0.95.
E)none of the above
10
You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7. The beta of the resulting portfolio is
A)1.40.
B)1.15.
C)0.36.
D)1.08.
E)0.80.





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