21

i. What are the assumptions underlying the CAPM? ii. What is meant by the market portfolio?iii. Sketch the capital market line and the efficient frontier when borrowing and lending rates are equal. Label the axes and important points of your sketch. iv. Do the same for the Security Market Line v. Would you expect firms with high operating leverage to have higher betas?Explain! Step by step correct answer

When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for rRF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs.   a. true   b. false

Which one of the following is the hypothesis that securities markets are efficient?   Multiple Choice A  Geometric market hypothesis B  Standard deviation hypothesis C  Efficient markets hypothesis D  Capital market hypothesis E  Financial markets hypothesis

i. What are the assumptions underlying the CAPM? ii. What is meant by the market portfolio?iii. Sketch the capital market line and the efficient frontier when borrowing and lending rates are equal. Label the axes and important points of your sketch. iv. Do the same for the Security Market Line v. Would you expect firms with high operating leverage to have higher betas?Explain!

Which of the following is correct with regards to Theories of Term Structure?   When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.

Which of the following statements is true?   A.   Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares.   B.   All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases.   C.   Security market line (SML) plots return against total risk which is measured by the standard deviation of returns.   D.   Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.

How does the Arbitrage Pricing Theory (APT) differ from and complement the Capital Asset Pricing Model (CAPM)? The Arbitrage Pricing Theory, developed by Stephen Ross, proposes that an asset's returns can be predicted using the linear relationship between the asset's expected return and a number of macroeconomic factors. Unlike CAPM, which uses a single factor (market risk), APT allows for multiple factors to explain asset returns, potentially providing a more comprehensive risk-return framework. These factors might include inflation, GDP growth, interest rates, or market indices. APT is based on the principle that arbitrage opportunities will be eliminated in efficient markets, leading to a pricing equilibrium. While more flexible than CAPM, APT faces challenges in identifying and measuring relevant factors. The theory has important implications for portfolio management, asset valuation, and our understanding of risk premiums in financial markets.

2. The Multi-factor Arbitrage Pricing Theory Model (APT) may be valid at the same time as the Capital Asset Pricing Model (CAPM) and for the same market... [choose the answer which best completes the sentence] A. depending on whether information other than market prices is considered B. never C. only if Arbitrage is possible D. always

Duration is important in understanding a fixed income portfolio because A. it is used in the capital asset pricing model B. it measures the interest rate sensitivity of a bonds value C. It measures the correlation with a bank's stock price D. It causes contagion

1. How can investors make decisions about financial instruments that involve future payoffs? a) There is no uncertainty in market economies. b) This can be done only when the future payoffs are certain. c) Prices are determined by supply and demand which is always certain. d) Investors can use probabilities and risk measurement procedures to account for all possibilities.

Question 2:                                                     State whether the following statements are true or false.     Efficient Market Hypothesis means Securities are normally in equilibrium and are “fairly priced. The market is IN equilibrium when the required rate of return larger than the dividend growth rate.

Please financial accounting expert need your help

Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?

An efficient capital market is best defined as a market in which security prices reflect which one of the following?   Multiple Choice A  Current inflation B  A risk premium C  All available information D  The historical arithmetic rate of return E  The historical geometric rate of return

How is the arbitrage pricing theory (APT) similar to the capital asset pricing model? Group of answer choices Both theories assume that undiversifiable risk is priced. Both theories assume that diversifiable risk is priced Both theories assume investors will hold a well-diversified portfolio Both the first and second responses are true. Both the first and third responses are true.

In contrast to the capital asset pricing model, arbitrage pricing theory:a. Requires that markets be in equilibrium.b. Uses risk premiums based on micro variables.c. Specifies the number and identifies specific factors that determine expected returns.d. Does not require the restrictive assumptions concerning the market portfolio.

According to the capital asset pricing model (CAPM), fairly priced securities should have __________.    Select one: a. A fair return based on the level of systematic risk. b. A beta of 1. c. A return equal to the market return. d. A fair return based on the level of unsystematic risk.

Assess the following statements: I. If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve. II. The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. III. Based on the expectations theoly of the term structure of interest rates, a flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near future. IV. The forward rate is commonly used to represent the market's forecast of the future interest rate. All statements are correct. Only one statement is correct. Two statements are correct. OOnly one statement is incorrect.