Practice Quiz Capital Asset Pricing

According to Capital Asset Pricing theory (CAPM), in a competitive marketplace: Group of answer choices   A. only systematic risk is rewarded. B. only diversifiable risk is rewarded. C. all types of risks are rewarded. D. no risk is rewarded.

What does beta measure?

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.

Whether the following statement is true or wrong. Briefly explain your answer. "It is impossible to have an asset that is risk-free for all investors.” [Hint: Consider the relationship between the investment period of investors and asset maturity, inflation and other factors.)

When a firm invests in money market instruments, it is taking _______ and should expect __________.   Question 6 options:   1)  high risk, high returns   2)  high risk, low returns   3)  low risk, low returns   4)  low risk, high returns

1) Please indicate whether the following statements are true or false. In case of a false statement, briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.

In your view, what is the most important prediction of the Capital Asset Pricing Model? Among the assumptions made in the CAPM, which one do you think is the most unrealistic, and why?

Which of the following is NOT true?     In risk-neutral valuation the risk-free rate is used to discount expected cash flows     Options can be valued based on the assumption that investors are risk neutral     Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral     In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate

What does the capital asset pricing model (CAPM) calculate?   a. The expected rate of return on an individual stock with respect to the risk-free rate of return b. The expected rate of return of an individual stock based on its overall risk c. The expected rate of return of an individual stock with respect to its market risk only d. The expected rate of return of an individual stock reflecting its financial risk Clear my choice

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

In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________.   the level of the security market line   the slope of the security market line   the difference between the beta and the risk-free rate   the risk-free rate

Why a risk taker (likes to take risk) type of investor prefer equities over fixed income?

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.

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?

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.

The value of an investment can be defined in numerous ways. Which is FALSE?  a. It is the value determined by demand and supply.  b. It is an objective estimate wherein the risk preference of the investor is considered.  c. It is the present value of the cashflows on the investment  d. It is dependent on the perceptions of the investor.

The general arbitrage pricing theory (APT) differs from thesingle-factor capital asset pricing model (CAPM) because theAPT: A. Places more emphasis on market risk.B. Minimizes the importance of diversification.C. Recognizes multiple unsystematic risk factors.D. Recognizes multiple systematic risk factors.