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1. The capital asset pricing model (CAPM) states that:

a. The expected risk premium on an investment is proportional to its beta

b. The expected rate of return on an investment is proportional to its beta

c. The expected rate of return on an investment depends on the risk-free rate and the market rate of return

d. The expected rate of return on an investment is dependent on the risk-free rate

2. The graphical representation of CAPM (Capital Asset Pricing Model) is called:

a. Capital Market Line

b. Characteristic Line

c. Security Market Line

d. None of the above

3. Beta measure indicates:

a. The ability to diversify risk

b. The change in the rate of return on an investment for a given change in the market return

c. The actual return on an asset

d. A and C

4. The security market line (SML) is the graph of:

a. Expected rate on investment (Y-axis) vs. variance of return

b. Expected return on investment vs. standard deviation of return

c. Expected rate of return on investment vs. beta

d. A and B

5. If the beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is 8%,

calculate the expected return for Microsoft.

a. 12.04%

b. 15.66%

c. 13.94%

d. 8.65%

6. If the beta of Amazon.com is 2.2, risk-free rate is 5.5% and the market risk premium is 8%, calculate the expected rate of return for Amazon.com stock:

a. 15.8%

b. 14.3%

c. 35.2%

d. 23.1%

7. If the beta of Exxon Mobil is 0.65, risk-free rate is 4% and the market rate of return is 14%, calculate the expected rate of return from Exxon:

a. 12.6%

b. 10.5%

c. 13.1%

d. 6.5%

8. A stock with a beta of zero would be expected to:

a. Have a rate of return equal to zero

b. Have a rate of return equal to the market risk premium

c. Have a rate of return equal to the risk-free rate

d. Have a rate of return equal to the market rate of return

9. A stock with a beta of 1. 25 would be expected to:

a. Increase in returns 25% faster than the market in up markets

b. Increase in returns 25% faster than the market in down markets

c. Increase in returns 125% faster than the market in up markets

d. Increase in returns 125% faster than the market in down markets

10. If the market risk premium is (rm – rf) is 8%, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be:

a. Less than 12%

b. 12%

c. Greater than 12%

d. Cannot be determined

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