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- In the capital asset pricing model, the expected return on an asset with a beta equal to zero would be equal to the risk-free rate the expected return on the market portfolio the risk premium on the market portfolio zeroAccording to the capital asset pricing model, all investors will hold the market portfolio. If this is true, then the expected return on a security will be affected by all of the following except the: Market risk premium Risk-free rate Market rate of return Security's standard deviation Security's betaAn 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
- What does beta measure?Which of the following is the correct equation of the capital asset pricing model (CAPM)? (E(Ri) denotes the expected return on a security, Rf denotes the risk-free rate, [E(RM) − Rf] denotes the market risk premium, and βi denotes the amount of systematic risk present in the security.) Multiple choice question. E(Ri) = Rf + [E(RM) – Rf] × βi E(Ri) = Rf – [E(RM) + Rf] × βi E(Ri) = Rf – [E(RM) – Rf] × βi E(Ri) = Rf + [Rf− E(RM)] × βiIn 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
- Based on the capital asset pricing model (CAPM), there is generally Blank______. Multiple choice question. a negative relationship between beta and the expected return on a security no relationship between beta and the expected return on a security a positive relationship between beta and the expected return on a securityWhat is the Capital Asset Pricing Model (CAPM)? Derive the risk premium when beta is between 0 and 1. Interpret your result.What is the equation for the Security Market Line? Define each term. If an asset has a beta of 2.0, what type of return should it realize compared to the market portfolio?
- Expected returnRegarding the Security Market Line (SML) and the Capital Asset Pricing Model (CAPM): If the expected return is less than the required return estimated with the CAPM, the expected return will plot below the SML and the asset is considered to be overpriced If the expected return is greater than the required return estimated with the CAPM, the expected return will plot above the SML and the asset is considered to be underpriced If the expected return is greater than the required return estimated with the CAPM, the expected return will plot below the SML and the asset is considered to be overpriced If the expected return is less than the required return estimated with the CAPM, the expected return will plot above the SML and the asset is considered to be underpricedSuppose you observe the following situation:Security Beta Expected ReturnDiamond Co 1.3 0.2Spade Co 0.8 0.14 (a) According to the above information, could we figure out the market return and risk-free rate? Explain your answer. (b) Discuss the possibility of including zero beta or negative beta assets in your portfolio. Explain the pros and cons of including these types of assets.