If the slope of the line measuring a stock's historic returns against the market's historic returns is positive, then the stock
Has a positive Beta
Investment projects that plot above the security market line would be considered to have
A positive NPV; Underpriced so buy
Investment projects that plot below the security market line would be considered to have
A negative NPV; Overpriced so don't buy
Investment projects that plot on the security market line would be considered to have
An NPV of 0; Indifferent to buying/not buying
The difference between beta and standard deviation is best described as
Beta measures the risk investors are compensated for, while standard deviation measures both systematic and unsystematic risk.
A typical measure for the risk-free rate of return is the
U.S. Treasury Bill rate
The Market Risk Premium is equal to the slope of the Shows the projected changes in expected return, due to changes in the Beta coefficient Is a graph of the CAPM equation
Security Market Line (SML)
A typical measure of the expected return on the market is
Stock returns can be explained by the stock's _________ and the stock's __________
Stock returns can be explained by the stock's BETA and the stock's UNIQUE RISK
What would you recommend to an investor who is considering an investment which, according to its beta, plots below the security market line (SML)?
Don't invest; risk is high relative to return
What would you recommend to an investor who is considering an investment which, according to its beta, plots above the security market line (SML)?
Invest; return is high relative to risk
A U.S. Treasury bill has a beta of _____ while the overall market has a beta of _____.
US Treasury bill beta=0 Overall market beta=1
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset (or the market in general) Measures non-diversifiable risk relative to the risk of the Market Portfolio Number of units of undiversifiable risk
What portfolio has the least amount of systematic risk?
A Portfolio consisting of various U.S. Treasury bills
If the slope of the line measuring a stock's historic returns against the market's historic returns is negative, then the stock
Has a negative Beta
If Ri>Rm then
Beta>1 and the stock is affected by changes in the market more than the average stock; asset is riskier than the market
If Ri<Rm then
Beta<1 and the stock is affected by changes in the market less than the average stock; asset is less risky than the market
if Ri=Rm then
Beta=1 and the company has average stock; asset is as risky as market
The collective behavior of security market participants is characterized by
Additional expected but uncertain rate of return demanded by investors (Rm-Rf)*Beta
Expected or Actual return on asset IRR - CAPM required rate of return
Alpha of stock (negative Alpha not good)
Calculates required returns on assets r= Rf + (Rm-Rf)Beta
Capital Asset Pricing Model
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