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1. An adjusted beta will be ______ than the unadjusted beta.
2. Fama and French claim that after controlling for firm size and the ratio of the firm's book
value to market value, beta is:
I. Highly significant in predicting future stock returns
II. Relatively useless in predicting future stock returns
III. A good predictor of the firm's specific risk
3. Which of the following are assumptions of the simple CAPM model?
I. Individual trades of investors do not affect a stock's price.
II. All investors plan for one identical holding period.
III. All investors analyze securities in the same way and share the same economic view of the
world.
IV. All investors have the same level of risk aversion.
4. When all investors analyze securities in the same way and share the same economic view
of the world, we say they have ____________________.
5. In a simple CAPM world which of the following statements is (are) correct?
I. All investors will choose to hold the market portfolio, which includes all risky assets in the world.
II. Investors' complete portfolio will vary depending on their risk aversion.
III. The return per unit of risk will be identical for all individual assets.
IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio.
6. Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is
18%. What is the expected return on a stock with a beta of 1.3?
7. Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is
15%. What is the beta on a stock with an expected return of 17%?
s
s
8. Consider the CAPM. The expected return on the market is 18%. The expected return on a
stock with a beta of 1.2 is 20%. What is the risk-free rate?
9. The arbitrage pricing theory was developed by _________.
10. In the context of the capital asset pricing model, the systematic measure of risk is
captured by _________.
11. Empirical results estimated from historical data indicate that betas _________.
12. If enough investors decide to purchase stocks, they are likely to drive up stock prices,
thereby causing _____________ and ___________.
13. The market portfolio has a beta of _________.
14. In a well-diversified portfolio, __________ risk is negligible.
15. The capital asset pricing model was developed by _________.
16. If all investors become more risk averse, the SML will _______________ and stock prices
will _______________.
17. According to the capital asset pricing model, a security with a _________.
18. Arbitrage is based on the idea that _________.
19. Investors require a risk premium as compensation for bearing ______________.
20. According to the capital asset pricing model, a fairly priced security will plot _________.
21. According to the capital asset pricing model, fairly priced securities have _________.
22. You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in
Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1,
and .8, respectively. What is your portfolio beta?
23. The graph of the relationship between expected return and beta in the CAPM context is
called the _________.
24. Research has revealed that regardless of what the current estimate of a firm's beta is,
beta will tend to move closer to ______ over time.
25. The beta of a security is equal to _________.
26. According to the capital asset pricing model, in equilibrium _________.
27. According to the CAPM, which of the following is
not
a true statement regarding the
market portfolio.
28. In a world where the CAPM holds, which one of the following is
not
a true statement
regarding the capital market line?
29. Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of
21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%.
If you wanted to take advantage of an arbitrage opportunity, you should take a short position in
portfolio __________ and a long position in portfolio _________.
30. Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%.
Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If
you wanted to take advantage of an arbitrage opportunity, you should take a short position in
portfolio __________ and a long position in portfolio _________.
31. Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and
a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%,
respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if
no arbitrage opportunities exist.
32. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The
beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-
diversified portfolio is approximately _________.
33. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is
5%, and the market expected rate of return is 15%. According to the capital asset pricing model,
security X is _________.
34. The possibility of arbitrage arises when ____________.
35. Building a zero-investment portfolio will always involve _____________.
36. An important characteristic of market equilibrium is _______________.
37. Consider the capital asset pricing model. The market degree of risk aversion,
A,
is 3. The
variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the
expected return on the market portfolio is _________.
38. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.
The beta of this portfolio is _________.
39. In a single-factor market model the beta of a stock ________.
40. Security A has an expected rate of return of 12% and a beta of 1.1. The market expected
rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________.
41. The variance of the return on the market portfolio is .04 and the expected return on the
market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion,
A,
is _________.
42. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X
with a beta of .8 to offer a rate of return of 12%, then you should _________.
43. Consider the one-factor APT. The standard deviation of return on a well-diversified
portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-
diversified portfolio is approximately _________.
