Quiznetik

Security Analysis and Investment Management | Set 4

1. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of

A. market risk

B. unsystematic risk

C. unique risk.

D. reinvestment risk.

Correct : A. market risk

2. 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

A. 0.06.

B. 0.144.

C. 0.12.

D. 0.132

Correct : D. 0.132

3. The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to

A. 0.142

B. 0.144.

C. 0.153.

D. 0.134

Correct : A. 0.142

4. Which statement is not true regarding the Capital Market Line (CML)?

A. The CML is the line from the risk-free rate through the market portfolio.

B. The CML is the best attainable capital allocation line.

C. The CML is also called the security market line.

D. The CML always has a positive slope.

Correct : C. The CML is also called the security market line.

5. Which statement is true regarding the Capital Market Line (CML)?

A. The CML is the line from the risk-free rate through the market portfolio.

B. The CML is the best attainable capital allocation line.

C. The CML always has a positive slope.

D. A, B, and C are true.

Correct : D. A, B, and C are true.

6. 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.

Correct : B. Rf + β [E(RM) - Rf].

7. According to the Capital Asset Pricing Model (CAPM), fairly priced securities

A. have positive betas.

B. have zero alphas.

C. have negative betas.

D. have positive alphas.

Correct : B. have zero alphas.

8. In a well diversified portfolio

A. market risk is negligible.

B. systematic risk is negligible.

C. unsystematic risk is negligible.

D. Non diversifiable risk is negligible.

Correct : C. unsystematic risk is negligible.

9. You invest 55% of your money in security A with a beta of 1.4 and the rest of your money in security B with a beta of 0.9. The beta of the resulting portfolio is

A. 1.466

B. 1.157

C. 0.968

D. 1.175

Correct : D. 1.175