TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 9
RISK AND RETURN THEORIES: II
MULTIPLE CHOICE
1. Capital market theory assumes that:
[M]
2. Assumptions about capital markets include:
[M]
3. Capital market theory makes assumptions about:
[M]
4. The capital market line represents:
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5. The portfolio, which consists of all assets, is called:
[M]
6. Since diversification reduces unsystematic risk, the relevant measure of risk for an
investor who holds a well-diversified portfolio is:
[D]
7. A security’s return can be decomposed into the following two parts:
[M]
8. In graphically depicting the model for security returns usually referred to as the market
model, the slope of the line can be thought of as the:
[M]
9. A statistical index of the sensitivity of an asset’s price change to changes in the value of
the overall market or of assets in general is the:
10. The risk-return relationship for individual securities is called:
[M]
11. The capital asset pricing model assumes that the expected return of a security is
determined by:
[M]
12. In estimating beta, practical problems arise, which are a function of:
[M]
13. The security market line (SML) is a graphical depiction of:
[M]
14. The slope of the SML is measured by:
15. The capital asset pricing model states that the expected return of a security is equal to the
riskfree rate of return plus:
[M]
16. The difference between the expected return in the market and the riskfree rate is called:
[D]
17. The multifactor CAPM is attractive because:
[M]
18. The APT model postulates that a security’s expected return is influenced by:
[M]
19. An appealing feature of the APT model is that:
20. Which of the following economic factors have been identified to explain security returns
according to the APT?
TRUE/FALSE
1. Asset pricing models are equilibrium models.
[E]
2. The slope of the capital market line (CML) is also referred to as the market price of risk.
[M]
3. Beta measures how sensitive the security return is to changes in the market level.
[M]
4. The higher the beta, the higher the expected return.
[E]
5. The CAPM has strong theoretical and empirical support.
ESSAY QUESTIONS
1. State the assumptions, which underlie the capital market theory distinguishing between
assumptions about investor behavior and assumptions about capital markets.
Key Issues:
2. Compare and contrast the SML, CML and market model.
Key Issues:
3. What is beta and how can it be estimated?
Key Issues: