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18 terms

In the context of the capital asset pricing model, the systematic measure of risk is captured by ________.

beta

If enough investors decide to purchase stocks they are likely to drive up stock prices thereby causing expected returns to __________ and risk premiums to _________.

fall, fall

In a well diversified portfolio, _________ risk is negligible.

unsystematic

When all investors analyze securities in the same way and share the same economic view of the world we say they have _____.

homogeneous expectations

In a simple CAPM world which of the following statements is/are correct?

I. All investors will choose to hold the market portfolio, which includes all risky assets in the world

II. Investors' complete portfolio will vary depending on their risk aversion

III. The return per unit of risk will be identical for all individual assets

IV. The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio

I. All investors will choose to hold the market portfolio, which includes all risky assets in the world

II. Investors' complete portfolio will vary depending on their risk aversion

III. The return per unit of risk will be identical for all individual assets

IV. The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio

I, II, III, and IV are all true

Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

21.6%

Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%

1.2

According to the capital asset pricing model, a fairly priced security will plot ____.

along the security market line

You have $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1.0, and 0.8 respectively. What is your portfolio beta?

1.048

The graph of the relationship between expected return and beta in the CAPM context is called the _______.

SML

According to the capital asset pricing model, _____.

all securities' returns must lie on the security market line

Consider the multi-factor APT with 2 factors. Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively. The risk-free rate of return is 7%. The expected return on portfolio A is ______ if no arbitrage opportunities exist.

16.25%

Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately ______.

.1152

Security X has an expected rate of return of 13% and a beta of 1.15. the risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is __________.

overpriced

The possibility of arbitrage arises when _______.

mis-pricing among securities creates opportunities for riskless profits

In his famous critique of the CAPM, Roll argued that the CAPM _____.

is not testable because the true market portfolio can never be observed.

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM __________.

recognizes only one systematic risk factor

The measure of unsystematic risk can be found from an index model as _______.

residual standard deviation