Section 3

The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant?

Market risk ________.   a. is equal to the rate of return generated by a risk-free asset b. cannot be eliminated, as it is non-diversifiable c. is synonymous with diversifiable risk d. is synonymous with financial risk

Please answer both QUESTION 7 According to the capital asset pricing model (CAPM), fairly priced securities should have A. A non-zero alpha. в.A fair return based on the level of systematic risk. C. A fair return based on the level of unsystematic risk. D.A beta of 1. QUESTION 8 Diversification can increase fair return. True False

The difference between the market rate and the risk-free rate is the Blank______. Multiple choice question. premium on risk-free rate risk-free return market risk premium market risk return

Which one of the following statements is correct concerning unsystematic risk? An investor is rewarded for assuming unsystematic risk. Beta measures the level of unsystematic risk inherent in an individual security. Eliminating unsystematic risk is the responsibility of the individual investor. Standard deviation is a measure of unsystematic risk. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. оо O O

Which of the statements about the Arbitrage Pricing Theory MUST BE TRUE. I. There is only one systematic risk, the market risk. II. The market risk factor must be one of many systematic risk factors. III. Individual assets may have a positive or negative alpha A. I only B. II only C. III only D. None of the above

identify the assumptions underlying the interest coverage ratio appropriate measure for analyzing long-term solvency risk?  Alternatively, can you identify the assumptions underlying the interest coverage ratio appropriate measure for analyzing short-term solvency risk?

in broad terms, why are some risks diversifiable? Why are some risks non- diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk? Substantiate your answer with real world examples

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A3) Finance Which one is a financial risk? Select one: a. Uncertainty about demand b. uncertainty about cost d. None of the above

Indicate why you agree or disagree with justifications to the following statements: (i) “As a percentage of the total risk, the unsystematic risk of a diversified portfolio is greater than that of an individual asset.”

1.What is the relationship between an investment’s risk and its return? Please provide examples if possible. 2. Difference between Institutional Investors and Individual Investors.

6. Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? A) Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. B) Investors have homogeneous risk-averse preferences toward taking on risk. C) Investors hold only efficient portfolios of traded securities, that is portfolios that yield the maximum expected return for the given level of volatility. D) Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate.

7. When you use a historical risk premium as your expected future risk premium, what are the assumptions that you are making about investors and markets? Under what conditions would a historical risk premium give you too high a number (to use as an expected premium)?

The Fama-French 3-factor model is a multi-factor models that includes two additional risk factors beyond the market risk factor in the CAPM model. These additional factors account for__________. A) Firm-specific risk that the CAPM does not measure. B) Sensitivities of an asset’s return related to its size and its ratio of book-to-market value. C) A and B are both correct