1. According to the CAPM:
a. The expected return of a stock will be doubled if its beta increases from 1 to 2.
b. High-beta stocks should have higher risk premium to systematic risk ratios.
c. A stock’s risk premium depends on its beta.
d. All of the above are correct.
2. If a stock’s expected return plots under the Security Market Line, then the stock should have
______________.
a. a negative alpha
b. a positive alpha
c. a small beta
d. both market risk and company specific risk
3. According to the SML, a stock’s return is expected to ______________ if the stock has a beta
of 1.5 and the market return is expected to increase by 2%.
a. decline by 2%
b. rise by 2%
c. decline by 3%
d. rise by 3%
4. The Security Market Line represents the relationship between ______________.
a. the total risk and expected return on a security
b. the nonsystematic risk and expected return on a security
c. the systematic risk and expected return on a security
d. None of the above.
5. The expected return on a stock with a beta of 1.5 is 15%. If the expected risk-free rate of
return is 3%, what should be the market risk premium?
a. 5%
b. 8%
c. 12%
d. 15%
6. If the CAPM is valid, is the following situation possible?
a. Possible.
b. Not possible.
7. The expected return on the market is 12%. The expected return on a stock with a beta of 1.5
is 17%. What is the risk-free rate of return according to the CAPM?
a. 2%
b. 4%
c. 5%
d. 8%
8. You invest $8,000 in stock A with a beta of 1.4 and $12,000 in stock B with a beta of 0.8.
The beta of this formed portfolio is ______________.
a. 1.04
b. 1.14
c. 2.04
d. 2.20
9. A Stock has an estimated (forecasted) rate of return of 15.5% and a beta of 1.5. The market
expected rate of return is 10% and the risk-free rate is 3%. The alpha of the stock is
______________.
a. -2%
b. 0%
c. 2%
d. 3%
10. According to the CAPM, overvalued securities should have ______________.
a. large betas
b. positive alphas
c. zero alphas
d. negative alphas
11. In Fama and French’s three-factor model, ______________ and ______________ are added
