Multiple Choice Questions
1. An adjusted beta will be ______ than the unadjusted beta.
A. lower
B. higher
C. closer to 1
D. closer to 0
Answer: C. closer to 1
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
A. I only
B. II only
C. I and III only
D. I, II, and III
Answer: B. II only
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.
A. I, II, and IV only
B. I, II, and III only
C. II, III, and IV only
D. I, II, III, and IV
Answer: B. I, II, and III only
4. When all investors analyze securities in the same way and share the same economic view of
the world, we say they have ____________________.
A. heterogeneous expectations
B. equal risk aversion
C. asymmetric information
D. homogeneous expectations
Answer: D. homogeneous expectations
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.
A. I, II, and III only
B. II, III, and IV only
C. I, III, and IV only
D. I, II, III, and IV
Answer: D. I, II, III, and IV
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?
A. 6%
B. 15.6%
C. 18%
D. 21.6%
Answer: D. 21.6%
E[rs] = 6% + [18% - 6%](1.3) = 21.6%
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%?
A. .5
B. .7
C. 1
D. 1.2
Answer: D. 1.2
17% = 5% + [15% - 5%]βs; βs = 1.2
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?
A. 2%
B. 6%
C. 8%
D. 12%
Answer: C. 8%
20% = rF + (18 - rF)(1.2); rF = 8%
9. The arbitrage pricing theory was developed by _________.
A. Henry Markowitz
B. Stephen Ross
C. William Sharpe
D. Eugene Fama
Answer: B. Stephen Ross
10. In the context of the capital asset pricing model, the systematic measure of risk is captured
by _________.
A. unique risk
B. beta
C. the standard deviation of returns
D. the variance of returns
Answer: B. beta
11. Empirical results estimated from historical data indicate that betas _________.
A. are always close to zero
B. are constant over time
C. of all securities are always between zero and 1
D. seem to regress toward 1 over time
Answer: D. seem to regress toward 1 over time
12. If enough investors decide to purchase stocks, they are likely to drive up stock prices,
thereby causing _____________ and ___________.
A. expected returns to fall; risk premiums to fall
B. expected returns to rise; risk premiums to fall
C. expected returns to rise; risk premiums to rise
D. expected returns to fall; risk premiums to rise
Answer: A. expected returns to fall; risk premiums to fall
13. The market portfolio has a beta of _________.
A. -1
B. 0
C. .5
D. 1
Answer: D. 1
14. In a well-diversified portfolio, __________ risk is negligible.
A. nondiversifiable
B. market
C. systematic
D. unsystematic
Answer: D. unsystematic
15. The capital asset pricing model was developed by _________.
A. Kenneth French
B. Stephen Ross
C. William Sharpe
D. Eugene Fama
Answer: C. William Sharpe
16. If all investors become more risk averse, the SML will _______________ and stock prices
will _______________.
A. shift upward; rise
B. shift downward; fall
C. have the same intercept with a steeper slope; fall
D. have the same intercept with a flatter slope; rise
Answer: C. have the same intercept with a steeper slope; fall
17. According to the capital asset pricing model, a security with a _________.
A. negative alpha is considered a good buy
B. positive alpha is considered overpriced
C. positive alpha is considered underpriced
D. zero alpha is considered a good buy
Answer: C. positive alpha is considered underpriced
18. Arbitrage is based on the idea that _________.
A. assets with identical risks must have the same expected rate of return
B. securities with similar risk should sell at different prices
C. the expected returns from equally risky assets are different
D. markets are perfectly efficient
Answer: A. assets with identical risks must have the same expected rate of return
19. Investors require a risk premium as compensation for bearing ______________.
A. unsystematic risk
B. alpha risk
C. residual risk
D. systematic risk
Answer: D. systematic risk
20. According to the capital asset pricing model, a fairly priced security will plot _________.
A. above the security market line
B. along the security market line
C. below the security market line
D. at no relation to the security market line
Answer: B. along the security market line
21. According to the capital asset pricing model, fairly priced securities have _________.
A. negative betas
B. positive alphas
C. positive betas
D. zero alphas
Answer: D. zero alphas
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?
A. 1.048
B. 1.033
C. 1
D. 1.037
Answer: A. 1.048
23. The graph of the relationship between expected return and beta in the CAPM context is
called the _________.
A. CML
B. CAL
C. SML
D. SCL
Answer: C. SML
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.
A. 1
B. 0
C. -1
D. .5
Answer: A. 1
25. The beta of a security is equal to _________.
A. the covariance between the security and market returns 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
Answer: A. the covariance between the security and market returns divided by the variance of
the market's returns
26. According to the capital asset pricing model, in equilibrium _________.
A. all securities' returns must lie below the capital market line
B. all securities' returns must lie on the security market line
C. the slope of the security market line must be less than the market risk premium
D. any security with a beta of 1 must have an excess return of zero
Answer: B. all securities' returns must lie on the security market line
27. According to the CAPM, which of the following is not a true statement regarding the
market portfolio.
A. All securities in the market portfolio are held in proportion to their market values.
B. It includes all risky assets in the world, including human capital.
C. It is always the minimum-variance portfolio on the efficient frontier.
D. It lies on the efficient frontier.
Answer: C. It is always the minimum-variance portfolio on the efficient frontier.
28. In a world where the CAPM holds, which one of the following is not a true statement
regarding the capital market line?
A. The capital market line always has a positive slope.
B. The capital market line is also called the security market line.
C. The capital market line is the best-attainable capital allocation line.
D. The capital market line is the line from the risk-free rate through the market portfolio.
Answer: B. The capital market line is also called the security 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 _________.
A. A; A
B. A; B
C. B; A
D. B; B
Answer: B. A; B
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 _________.
A. A; A
B. A; B
C. B; A
D. B; B
Answer: C. B; A
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.
A. 13.5%
B. 15%
C. 16.25%
D. 23%
Answer: C. 16.25%
E(rA) = 7 + 0.5(1) + 1.25(7) = 16.25%
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 welldiversified portfolio is approximately _________.
A. .1152
B. .1270
C. .1521
D. .1342
Answer: A. .1152
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 _________.
A. fairly priced
B. overpriced
C. underpriced
D. none of these answers
Answer: B. overpriced
In equilibrium, E(rX) = 5% + 1.15(15% - 5%) = 16.5%.
34. The possibility of arbitrage arises when ____________.
A. there is no consensus among investors regarding the future direction of the market, and
thus trades are made arbitrarily
B. mispricing among securities creates opportunities for riskless profits
C. two identically risky securities carry the same expected returns
D. investors do not diversify
Answer: B. mispricing among securities creates opportunities for riskless profits
35. Building a zero-investment portfolio will always involve _____________.
A. an unknown mixture of short and long positions
B. only short positions
C. only long positions
D. equal investments in a short and a long position
Answer: D. equal investments in a short and a long position
36. An important characteristic of market equilibrium is _______________.
A. the presence of many opportunities for creating zero-investment portfolios
B. all investors exhibit the same degree of risk aversion
C. the absence of arbitrage opportunities
D. the lack of liquidity in the market
Answer: C. the absence of arbitrage opportunities
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 _________.
A. 6.75%
B. 9%
C. 10.75%
D. 12%
Answer: C. 10.75%
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 _________.
A. 1.14
B. 1.2
C. 1.26
D. 1.5
Answer: C. 1.26
39. In a single-factor market model the beta of a stock ________.
A. measures the stock's contribution to the standard deviation of the market portfolio
B. measures the stock's unsystematic risk
C. changes with the variance of the residuals
D. measures the stock's contribution to the standard deviation of the stock
Answer: A. measures the stock's contribution to the standard deviation of the market portfolio
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 _________.
A. -1.7%
B. 3.7%
C. 5.5%
D. 8.7%
Answer: B. 3.7%
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 _________.
A. .5
B. 2.5
C. 3.5
D. 5
Answer: B. 2.5
A = (.20 - .10)/.04 = 2.5
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 _________.
A. buy stock X because it is overpriced
B. buy stock X because it is underpriced
C. sell short stock X because it is overpriced
D. sell short stock X because it is underpriced
Answer: B. buy stock X because it is underpriced
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 welldiversified portfolio is approximately _________.
A. .60
B. 1
C. 1.67
D. 3.20
Answer: C. 1.67
44. The risk-free rate and the expected market rate of return are 6% and 16%, respectively.
According to the capital asset pricing model, the expected rate of return on security X with a
beta of 1.2 is equal to _________.
A. 12%
B. 17%
C. 18%
D. 23%
Answer: C. 18%
45. Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2.
Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is
9% and the risk-free rate is 5%. Security __________ would be considered the better buy
because _________.
A. A; it offers an expected excess return of .2%
B. A; it offers an expected excess return of 2.2%
C. B; it offers an expected excess return of 1.8%
D. B; it offers an expected return of 2.4%
Answer: C. B; it offers an expected excess return of 1.8%
46. According to the CAPM, the risk premium an investor expects to receive on any stock or
portfolio is _______________.
A. directly related to the risk aversion of the particular investor
B. inversely related to the risk aversion of the particular investor
C. directly related to the beta of the stock
D. inversely related to the alpha of the stock
Answer: C. directly related to the beta of the stock
47. In his famous critique of the CAPM, Roll argued that the CAPM ______________.
A. is not testable because the true market portfolio can never be observed
B. is of limited use because systematic risk can never be entirely eliminated
C. should be replaced by the APT
D. should be replaced by the Fama-French three-factor model
Answer: A. is not testable because the true market portfolio can never be observed
48. Which of the following variables do Fama and French claim do a better job explaining
stock returns than beta?
I. Book-to-market ratio
II. Unexpected change in industrial production
III. Firm size
A. I only
B. I and II only
C. I and III only
D. I, II, and III
Answer: C. I and III only
49. In a study conducted by Jagannathan and Wang, it was found that the performance of beta
in explaining security returns could be considerably enhanced by:
I. Including the unsystematic risk of a stock
II. Including human capital in the market portfolio
III. Allowing for changes in beta over time
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
Answer: B. II and III only
50. The SML is valid for _______________, and the CML is valid for ______________.
A. only individual assets; well-diversified portfolios only
B. only well-diversified portfolios; only individual assets
C. both well-diversified portfolios and individual assets; both well-diversified portfolios and
individual assets
D. both well-diversified portfolios and individual assets; well-diversified portfolios only
Answer: D. both well-diversified portfolios and individual assets; well-diversified portfolios
only
51. Liquidity is a risk factor that __________.
A. has yet to be accurately measured and incorporated into portfolio management
B. is unaffected by trading mechanisms on various stock exchanges
C. has no effect on the market value of an asset
D. affects bond prices but not stock prices
Answer: A. has yet to be accurately measured and incorporated into portfolio management
52. Beta is a measure of ______________.
A. total risk
B. relative systematic risk
C. relative nonsystematic risk
D. relative business risk
Answer: B. relative systematic risk
53. According to capital asset pricing theory, the key determinant of portfolio returns is
_________.
A. the degree of diversification
B. the systematic risk of the portfolio
C. the firm-specific risk of the portfolio
D. economic factors
Answer: B. the systematic risk of the portfolio
54. The expected return of the risky-asset portfolio with minimum variance is _________.
A. the market rate of return
B. zero
C. the risk-free rate
D. The answer cannot be determined from the information given.
Answer: D. The answer cannot be determined from the information given.
55. According to the CAPM, investors are compensated for all but which of the following?
A. Expected inflation
B. Systematic risk
C. Time value of money
D. Residual risk
Answer: D. Residual risk
56. The most significant conceptual difference between the arbitrage pricing theory (APT)
and the capital asset pricing model (CAPM) is that the CAPM _____________.
A. places less emphasis on market risk
B. recognizes multiple unsystematic risk factors
C. recognizes only one systematic risk factor
D. recognizes multiple systematic risk factors
Answer: C. recognizes only one systematic risk factor
57. Arbitrage is __________________________.
A. an example of the law of one price
B. the creation of riskless profits made possible by relative mispricing among securities
C. a common opportunity in modern markets
D. an example of a risky trading strategy based on market forecasting
Answer: B. the creation of riskless profits made possible by relative mispricing among
securities
58. A stock's alpha measures the stock's ____________________.
A. expected return
B. abnormal return
C. excess return
D. residual return
Answer: B. abnormal return
59. The measure of unsystematic risk can be found from an index model as _________.
A. residual standard deviation
B. R-square
C. degrees of freedom
D. sum of squares of the regression
Answer: A. residual standard deviation
60. Standard deviation of portfolio returns is a measure of ___________.
A. total risk
B. relative systematic risk
C. relative nonsystematic risk
D. relative business risk
Answer: A. total risk
61. One of the main problems with the arbitrage pricing theory is __________.
A. its use of several factors instead of a single market index to explain the risk-return
relationship
B. the introduction of nonsystematic risk as a key factor in the risk-return relationship
C. that the APT requires an even larger number of unrealistic assumptions than does the
CAPM
D. the model fails to identify the key macroeconomic variables in the risk-return relationship
Answer: D. the model fails to identify the key macroeconomic variables in the risk-return
relationship
62. You run a regression of a stock's returns versus a market index and find the following:
Based on the data, you know that the stock _____.
A. earned a positive alpha that is statistically significantly different from zero
B. has a beta precisely equal to .890
C. has a beta that is likely to be anything between .6541 and 1.465 inclusive
D. has no systematic risk
Answer: C. has a beta that is likely to be anything between .6541 and 1.465 inclusive
63. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected
return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25.
Within the context of the capital asset pricing model, _________.
A. SDA Corp. stock is underpriced
B. SDA Corp. stock is fairly priced
C. SDA Corp. stock's alpha is -.75%
D. SDA Corp. stock alpha is .75%
Answer: C. SDA Corp. stock's alpha is -.75%
64. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.
Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return
of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y
_________.
A. are in equilibrium
B. offer an arbitrage opportunity
C. are both underpriced
D. are both fairly priced
Answer: A. are in equilibrium
Thus, there are no arbitrage opportunities, and X and Y are in equilibrium.
65.
What is the expected return on the market?
A. 0%
B. 5%
C. 10%
D. 15%
Answer: C. 10%
66.
What is the beta for a portfolio with an expected return of 12.5%?
A. 0
B. 1
C. 1.5
D. 2
Answer: C. 1.5
Since rf = 5% and E(rM) = 10%, from the CAPM we know that 12.5% = 5% + beta(10% 5%), and therefore beta = 1.5.
67.
What is the expected return for a portfolio with a beta of .5?
A. 5%
B. 7.5%
C. 12.5%
D. 15%
Answer: B. 7.5%
68.
What is the alpha of a portfolio with a beta of 2 and actual return of 15%?
A. 0%
B. 13%
C. 15%
D. 17%
Answer: A. 0%
CAPM E(ri) = 5% + 2(10% - 5%) = 15%; Alpha = Actual return - Expected return = 15% 15% = 0%
A portfolio with a return of 15% and a beta of 2 lies on the SML and therefore has an alpha of
zero.
69. If the simple CAPM is valid and all portfolios are priced correctly, which of the situations
below is possible? Consider each situation independently, and assume the risk-free rate is 5%.
A. Option A
B. Option B
C. Option C
D. Option D
Answer: D. Option D
A) Not possible—two portfolios with different betas cannot have the same expected return.
B) Not possible—under CAPM market portfolio must yield highest CAL.
C) Not possible—portfolio A and the market have different excess returns per unit of risk.
D) Possible 30 – 5/2.5 = 15 – 5/1.0
70. Two investment advisers are comparing performance. Adviser A averaged a 20% return
with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2.
If the T-bill rate was 5% and the market return during the period was 13%, which adviser was
the better stock picker?
A. Advisor A was better because he generated a larger alpha.
B. Advisor B was better because she generated a larger alpha.
C. Advisor A was better because he generated a higher return.
D. Advisor B was better because she achieved a good return with a lower beta.
Answer: A. Advisor A was better because he generated a larger alpha.
Required return A = 5% + (13% - 5%)(1.5) = 17%
Required return B = 5% + (13% - 5%)(1.2) = 14.6%
αA = Actual return A - Required return A = 20% - 17% = 3%
αB = Actual return B - Required return B = 15% - 14.6% = .4%
71. The expected return on the market is the risk-free rate plus the _____________.
A. diversified returns
B. equilibrium risk premium
C. historical market return
D. unsystematic return
Answer: B. equilibrium risk premium
72. You consider buying a share of stock at a price of $25. The stock is expected to pay a
dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the
stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's
abnormal return?
A. 1%
B. 2%
C. -1%
D. -2%
Answer: A. 1%
Required return = 6% + (16% - 6%)(1.1) = 17%
Abnormal return = 18% - 17% = 1%
73. If the beta of the market index is 1 and the standard deviation of the market index
increases from 12% to 18%, what is the new beta of the market index?
A. .8
B. 1
C. 1.2
D. 1.5
Answer: B. 1
Market beta always equals 1 regardless of market volatility.
74. According to the CAPM, what is the market risk premium given an expected return on a
security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%?
A. 4%
B. 4.8%
C. 6.6%
D. 8%
Answer: D. 8%
13.6 = 4 + 1.2 × (MRP); MRP = 8%
75. According to the CAPM, what is the expected market return given an expected return on a
security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?
A. 5%
B. 9%
C. 13%
D. 14%
Answer: D. 14%
15.8 = 5 + 1.2 × (MRP); MRP = 9%; Expected market return = 5 + 9 = 14%
76. What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and
an expected market return of 15.5%?
A. 3.8%
B. 13.1%
C. 15.6%
D. 19.1%
Answer: B. 13.1%
Expected return = 3.5 + (.8)(15.5 - 3.5) = 13.1%
77. Research has identified two systematic factors that affect U.S. stock returns. The factors
are growth in industrial production and changes in long-term interest rates. Industrial
production growth is expected to be 3%, and long-term interest rates are expected to increase
by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and
.5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial
production actually grows 5% and interest rates drop 2%, what is your best guess of the
stock's return?
A. 15.9%
B. 12.9%
C. 13.2%
D. 12%
Answer: B. 12.9%
E[rnew] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(.5) = 12.9%
78. A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock
market as a whole.
A. higher than
B. lower than
C. equal to
D. indeterminable compared to
Answer: A. higher than
79. There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all
stocks have independent firm-specific components with a standard deviation of 25%.
Portfolios A and B are well diversified. Given the data below, which equation provides the
correct pricing model?
A. E(rP) = 5 + 1.12βP1 + 11.86βP2
B. E(rP) = 5 + 4.96βP1 + 13.26βP2
C. E(rP) = 5 + 3.23βP1 + 8.46βP2
D. E(rP) = 5 + 8.71βP1 + 9.68βP2
Answer: D. E(rP) = 5 + 8.71βP1 + 9.68βP2
80. Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is
10%. What is the residual given an actual return of 15%?
A. .0%
B. 1%
C. 2%
D. 3%
Answer: B. 1%
Residual = 15 - (3 + 1.1 × 10) = 1%
81. The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a
beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP
changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what
is the expected return on this stock?
A. 10%
B. 11.5%
C. 13.6%
D. 14%
Answer: C. 13.6%
Return = .04 + .6(.04) + 1.2(.06) = .136
82. The two-factor model on a stock provides a risk premium for exposure to market risk of
9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%.
The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also
1. What is the expected return on the stock?
A. 8.7%
B. 11.2%
C. 13.8%
D. 15.2%
Answer: B. 11.2%
Return = 3.5 + 9 - 1.3 = 11.2%
83. The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to
exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and
the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected
return on this stock?
A. .2%
B. 1.5%
C. 3.6%
D. 4%
Answer: A. .2%
Return = .03 + .4(.05) + .8(-.06) = .002
84. The two-factor model on a stock provides a risk premium for exposure to market risk of
12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of
4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices
is also 1. What is the expected return on the stock?
A. 11.6%
B. 13%
C. 15.3%
D. 19.5%
Answer: D. 19.5%
Return = 3.5 + 4 + 12 = 19.5%
85. The measure of risk used in the capital asset pricing model is ___________.
A. specific risk
B. the standard deviation of returns
C. reinvestment risk
D. beta
Answer: D. beta
Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422
