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Empirical results regarding betas estimated from historical data indicate that


A) betas are constant over time.
B) betas of all securities are always greater than one.
C) betas are always near zero.
D) betas appear to regress toward one over time.
E) betas are always positive.

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One of the assumptions of the CAPM is that investors exhibit myopic behavior.What does this mean?


A) They plan for one identical holding period.
B) The are price-takers who can't affect market prices through their trades.
C) They are mean-variance optimizers.
D) They have the same economic view of the world.
E) They pay no taxes or transactions costs.

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Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.

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The CAPM can be used to establish a hurd...

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What is the expected return of a zero-beta security?


A) The market rate of return.
B) Zero rate of return.
C) A negative rate of return.
D) The risk-free rate.
E) None of these.

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Discuss the mutual fund theorem.

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The mutual fund theorem is based on the ...

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The expected return-beta relationship


A) is the most familiar expression of the CAPM to practitioners.
B) refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio,which is beta.
C) assumes that investors hold well-diversified portfolios
D) all of these are true.
E) none of these are true.

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The capital asset pricing model assumes


A) all investors are price takers.
B) all investors have the same holding period.
C) investors pay taxes on capital gains.
D) both a and b are true.
E) a,b and c are all true.

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For the CAPM that examines illiquidity premiums,if there is correlation among assets due to common systematic risk factors,the illiquidity premium on asset i is a function of


A) the market's volatility.
B) asset i's volatility.
C) the trading costs of security i.
D) the risk-free rate.
E) the money supply.

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The risk-free rate is 7 percent.The expected market rate of return is 15 percent.If you expect stock X with a beta of 1.3 to offer a rate of return of 12 percent,you should


A) buy stock X because it is overpriced.
B) sell short stock X because it is overpriced.
C) sell stock short X because it is underpriced.
D) buy stock X because it is underpriced.
E) none of these,as the stock is fairly priced.

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According to the Capital Asset Pricing Model (CAPM) ,


A) a security with a positive alpha is considered overpriced.
B) a security with a zero alpha is considered to be a good buy.
C) a security with a negative alpha is considered to be a good buy.
D) a security with a positive alpha is considered to be underpriced.
E) none of these.

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The risk-free rate and the expected market rate of return are 0.06 and 0.12,respectively.According to the capital asset pricing model (CAPM) ,the expected rate of return on security X with a beta of 1.2 is equal to


A) 0.06.
B) 0.144.
C) 0.12.
D) 0.132
E) 0.18

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List and discuss two of the assumptions of the CAPM.

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Assumptions are 1)there are many investo...

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Security A has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08 and the risk-free rate is 0.05.The alpha of the stock is


A) 1.7%.
B) -1.7%.
C) 8.3%.
D) 5.5%.
E) none of these.

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Your opinion is that CSCO has an expected rate of return of 0.1375.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.According to the Capital Asset Pricing Model,this security is


A) underpriced by 10%.
B) overpriced.
C) fairly priced.
D) cannot be determined from data provided.
E) underpriced by 5%.

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Which of the following statements about the mutual fund theorem is true? I.It is similar to the separation property. II.It implies that a passive investment strategy can be efficient. III.It implies that efficient portfolios can be formed only through active strategies. IV.It means that professional managers have superior security selection strategies.


A) I and IV
B) I,II,and IV
C) I and II
D) III and IV
E) II and IV

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In equilibrium,the marginal price of risk for a risky security must be


A) equal to the marginal price of risk for the market portfolio.
B) greater than the marginal price of risk for the market portfolio.
C) less than the marginal price of risk for the market portfolio.
D) adjusted by its degree of nonsystematic risk.
E) none of these are true.

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You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7.The beta of the resulting portfolio is


A) 1.40.
B) 1.15.
C) 0.36.
D) 1.08.
E) 0.80.

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The market risk,beta,of a security is equal to


A) the covariance between the security's return and the market return divided by the variance of the market's returns.
B) the covariance between the security and market returns divided by the standard deviation of the market's returns.
C) the variance of the security's returns divided by the covariance between the security and market returns.
D) the variance of the security's returns divided by the variance of the market's returns.
E) none of these.

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The CAPM applies to


A) portfolios of securities only.
B) individual securities only.
C) efficient portfolios of securities only.
D) efficient portfolios and efficient individual securities only.
E) all portfolios and individual securities.

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Assume that a security is fairly priced and has an expected rate of return of 0.13.The market expected rate of return is 0.13 and the risk-free rate is 0.04.The beta of the stock is


A) 1.25.
B) 1.7.
C) 1.
D) 0.95.
E) none of these

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