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79 views3 pages

CAPM_quiz-with-answer

Uploaded by

Bebegyn Aguilo
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1. The risk-free rate is 6 percent. Stock A has a beta of 1.

0, while Stock B has a beta of


2.0. The market risk premium (k M – kRF) is positive. Which of the following statements
is most correct?

a. Stock B’s required rate of return is twice that of Stock A.


b. If Stock A’s required return is 11 percent, the market risk premium is 5 percent.
c. If the risk-free rate increases (but the market risk premium stays unchanged),
Stock B’s required return will increase by more than Stock A’s.
d. Statements b and c are correct.
e. All of the statements above are correct

2. Which of the following statements best describes what would be expected to happen
as you randomly add stocks to your portfolio?

a. Adding more stocks to your portfolio reduces the portfolio’s company-specific risk.
b. Adding more stocks to your portfolio reduces the beta of your portfolio.
c. Adding more stocks to your portfolio increases the portfolio’s expected return.
d. Statements a and c are correct.
e. All of the statements above are correct.

3. In general, which of the following will tend to occur if you randomly add additional
stocks to your portfolio, which currently consists of only three stocks?

a. The expected return of your portfolio will usually decline.


b. The company-specific risk of your portfolio will usually decline, but the market risk
will tend to remain the same.
c. Both the company-specific risk and the market risk of your portfolio will decline.
d. The market risk and expected return of the portfolio will decline.
e. The company-specific risk will remain the same, but the market risk will tend to
decline.

4. Assume that the risk-free rate is 5 percent. Which of the following statements is most
correct?

a. If a stock’s beta doubles, the stock’s required return will also double.
b. If a stock’s beta is less than 1.0, the stock’s required return is less than 5 percent.
c. If a stock has a negative beta, the stock’s required return is less than 5 percent.
d. All of the statements above are correct.
e. None of the statements above is correct.

5. Assume that the risk-free rate remains constant, but that the market risk premium
declines. Which of the following is likely to occur?

a. The required return on a stock with a beta = 1.0 will remain the same.
b. The required return on a stock with a beta < 1.0 will decline.
c. The required return on a stock with a beta > 1.0 will increase.
d. Statements b and c are correct.
e. All of the statements above are correct.

6. A stock with an actual return that lies above the security market line has:
a. more systematic risk than the overall market.
b. more risk than that warranted by CAPM.
c. a higher return than expected for the level of risk assumed.
d. less systematic risk than the overall market.
e. a return equivalent to the level of risk assumed.

7. You have developed the following data on three stocks:


Stock Standard Deviation Beta
A 0.15 0.79
B 0.25 0.61
C 0.20 1.29

If you are a risk minimizer, you should choose Stock if it is to be held in isolation
and Stock if it is to be held as part of a well-diversified portfolio.

a. A; A
b. A; B
c. B; A
d. C; A
e. C; B

8. In a portfolio of three different stocks, which of the following could not be true?

a. The riskiness of the portfolio is less than the riskiness of each of the stocks if
each were held in isolation.
b. The riskiness of the portfolio is greater than the riskiness of one or two of the
stocks.
c. The beta of the portfolio is less than the beta of each of the individual stocks.
d. The beta of the portfolio is greater than the beta of one or two of the individual
stocks’ betas.
e. None of the above (that is, they all could be true, but not necessarily at the
same time).

9. Which one of the following is an example of systematic risk?


A. investors panic causing security prices around the globe to fall precipitously
B. a flood washes away a firm's warehouse
C. a city imposes an additional one percent sales tax on all products
D. a toymaker has to recall its top-selling toy
E. corn prices increase due to increased demand for alternative fuels

10. Inflation, recession, and high interest rates are economic events that are
characterized as

a. Company-specific risk that can be diversified away.


b. Market risk.
c. Systematic risk that can be diversified away.
d. Diversifiable risk.
e. Unsystematic risk that can be diversified away.

11. The risk-free rate of interest, kRF, is 6 percent. The overall stock market has an
expected return of 12 percent. Hazlett, Inc. has a beta of 1.2. What is the required
return of Hazlett, Inc. stock?
a. 12.0%
b. 12.2%
c. 12.8%
d. 13.2%
e. 13.5%

12. A stock has an expected return of 12.25 percent. The beta of the stock is 1.15 and
the risk-free rate is 5 percent. What is the market risk premium?
a. 1.30%
b. 6.50%
c. 15.00%
d. 6.30%
e. 7.25%
13. Assume that the risk-free rate is 5 percent and that the market risk premium is 7
percent. If a stock has a required rate of return of 13.75 percent, what is its beta?

a. 1.25
b. 1.35
c. 1.37
d. 1.60
e. 1.96

14. An investor is forming a portfolio by investing $50,000 in stock A that has a beta of
1.50, and $25,000 in stock B that has a beta of 0.90. The return on the market is
equal to 6 percent and Treasury bonds have a yield of 4 percent. What is the required
rate of return on the investor’s portfolio?

a. 6.6%
b. 6.8%
c. 5.8%
d. 7.0%
e. 7.5%

15. You hold a diversified portfolio consisting of a $10,000 investment in each of 20


different common stocks (that is, your total investment is $200,000). The portfolio
beta is equal to 1.2. You have decided to sell one of your stocks that has a beta equal
to 0.7 for $10,000. You plan to use the proceeds to purchase another stock that has a
beta equal to 1.4. What will be the beta of the new portfolio?

a. 1.165
b. 1.235
c. 1.250
d. 1.284
e. 1.333

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