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Models for the Pricing of Assets

1. The Capital Asset Pricing Model:
a. has serious flaws because of its complexity.
b. measures relevant risk of a security and shows the relationship between risk and expected return.
c. was developed by Markowitz in the 1930s.
d. discounts almost all of the Markowitz portfolio theory.

2. When markets are in equilibrium, the CML will be upward sloping
a. because it shows the optimum combination of risky securities.
b. because the price of risk must always be positive.
c. because it contains all securities weighted by their market values.
d. because the CML indicates the required return for each portfolio risk level.

3. __________, the CML can be downward sloping.
a. Ex post b. When investors are risk-lovers
c. When the SML is upward sloping d. When the risk premium for the market is very high

4. Which of the following statements about the difference between the SML and the
CML is TRUE? The
a. intercept of the CML is the origin while the intercept of the SML is RF.
b. CML consists of efficient portfolios, while the SML is concerned with all portfolios or securities.
c. CML could be downward sloping while that is impossible for the SML.
d. CML and the SML are essentially the same except in terms of the securities represented.

5. The separation theorem states that:
a. systematic risk is separate from unsystematic risk.
b. individual security risk is separate from portfolio risk.
c. the investment decision is separate from the financing decision.
d. borrowing portfolio is separate from the lending portfolio.

6. The APT is based on the:
a. law of averages. b. law of attraction. c. law of accelerating return. d. law of one price.

7. The expected return on the market for next period is 16 percent. The risk free rate is
7 percent, and Alpha Company has a beta of 1.1. The market risk premium is
a. 9.9 percent. b. 9 percent. c. 16 percent. d. 16.9 percent.

8. The expected market return is 16 percent. The risk-free rate of return is 7 percent,
and BC Co. has a beta of 1.1. Their required rate of return is
a. 17.6 percent. b. 16.0 percent. c. 16.9 percent. d. 23.0 percent.

9. If markets are truly efficient and in equilibrium
a. all securities would lie on the SML.
b. any security that plots below the SML would be considered undervalued.
c. any security that lies above the SML would be considered overvalued.
d. no security would lie on the SML..

10. If a certain stock has a beta greater than 1.0, it means that
a. the stock's return is more volatile than that of the market portfolio.
b. an investor can eliminate the risk by combining it with another stock that has a negative beta.
c. an investor will earn a higher return on his stock than that on the market portfolio.
d. the stock is less risky than the market portfolio.