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1. The capital asset pricing model (CAPM) assumes that the stock market is dominated by
well-diversified investors who are concerned only with market risk.
2. The CAPM states that the expected risk premium on any security equals its beta times the
market risk premium.
3. The security market line displays the relationship between expected return and beta.
4. The security market line sets a standard for other investments—investors will be willing to
hold other investments only if they offer equally good prospects as shown by the points on the
line.
5. The required risk premium for any given investment is defined by the security market line.
6. Empirical evidence suggests that over a long period of time returns are directly related to
beta.
7. There is little doubt that the CAPM captures everything that is going on in the market.
8. Beta measures the total risk of an individual security.
9. The security market line provides a standard that can be used to make project
acceptance/rejection decisions.
10. If a low-risk company invests in a high-risk project, those cash flows should be discounted
at a high cost of capital.
11. The project cost of capital depends on the risk of the company undertaking the project.
12. Beta measures a stock's sensitivity to market risks.
13. The project cost of capital depends on how the capital is used.
14. Investors expect aggressive stocks to outperform the market in periods of strong economic
activity.
15. Defensive stocks typically provide better returns during periods of economic downturn
since they are not very sensitive to market fluctuations.
16. Diversification decreases the variability of both unique and market risk.
17. Market risk premium is defined as the difference between the market rate of return and
the return on risk-free Treasury bills.
19. The CAPM is a theory of the relationship between risk and return that states that the
expected risk premium on any security equals its beta times the market return.
20. The stock of Newmont Mining, the world's largest gold producer, has above-average
21. According to the capital asset pricing model, the expected rates of return for all securities
and all portfolios lie on the capital market line.
22. As a project's beta increases, the project's opportunity cost of capital increases.
23. A project should be accepted if its return plots below the security market line.
24. The security market line shows how the expected rate of return depends on beta.
25. The required risk premium for any investment is given by the security market line.
26. Project cost of capital and company cost of capital are synonymous terms.
27. The project cost of capital depends on the use to which that capital is put. Therefore, it
depends on both the risk of the project and also on the risk of the company.
28. If a company with a low credit rating invests in a low-risk project, it should discount the
cash flows at a relatively high cost of capital.
29. Changing the discount rate is equivalent to adjusting the expected cash flows as a method
of accounting for risk.
30. The return on a security includes premiums for:
31. If a security plots below the security market line, it is:
32. Macro events only are reflected in the performance of the market portfolio because:
33. In practice, the market portfolio is often represented by:
34. A stock's beta measures the:
35. In theory, the "market portfolio" should contain:
36. When the overall market is up by 10%, investors with portfolios of defensive stocks will
probably have:
37. When the overall market experiences a decline of 8%, investors with portfolios of
aggressive stocks will probably experience portfolio:
38. A stock with a beta greater than 1.0 would be termed:
39. The average of the beta values for all individual stocks is:
40. The line plotted to fit observations of a stock's returns versus the market's returns
determines the:
41. If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up)
by 1.2%, then its beta equals:
42. If the slope of the line measuring a stock's historic returns against the market's historic
returns is positive, then the stock:
43. If the line measuring a stock's historic returns against the market's historic returns has a
slope greater than 1.0, then the:
45. If a stock's beta is 0.8 during a period when the market portfolio was down by 10%, then,
a priori
, we could expect this individual stock to:
46. Stock returns can be explained by the stock's _________ and the stock's __________.
47. Estimate a stock's beta based on the following information: Month 1 = Stock +1.5%,
Market +1.1%; Month 2 = Stock +2.0%, Market +1.4%; Month 3 = Stock -2.5%, Market -2.0%.
48. If you were willing to bet that the overall stock market was heading up on a sustained
basis, it would be logical to invest in:
49. What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90, 40%
of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73?
