According to the Capital Asset Pricing Model (CAPM), an asset with negative beta: a. Cannot exist b. Is expected to earn a negative return c. Should be short sold d. Will not be included in the market portfolio e. None of the above
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According to the
| a. |
Cannot exist |
|
| b. |
Is expected to earn a negative return |
|
| c. |
Should be short sold |
|
| d. |
Will not be included in the market portfolio |
|
| e. |
None of the above |
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- The Arbitrage Pricing Theorem states that:a)If arbitrage opportunities do not exist then the returns of all assets are driven by a set of common factors.b)Arbitrage portfolios are impossible.c)The expected return of any arbitrage portfolio is zero.d)The common constant factor is the risk-free assetWhat does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumedTrue or False. and briefly explain. a. Under the Capital Asset Pricing Model (CAPM), if a stock has a zero beta, then it must be identical to the riskfree asset. b. For Value at Risk (VaR) to be useful, the returns have to be normally distributed. c.If the borrowing rate is higher than the lending rate, a particular risk-averse investor can achieve a maximized utility score of UC* by choosing optimally. Now if the borrowing rate is equal to the lending rate, this investor must be able to achieve a utility score higher than UC*
- According to the capital asset pricing model (CAPM), which of the following statements is true (only of them is): (a) A share with more total risk should provide a higher return than one with less total risk. (b) A share with more idiosyncratic risk should provide a higher return than one with less idiosyncratic risk. (c) A share with more systematic risk should provide a higher return than one with less systematic risk. (d) Only a share with no risk (either systematic or idiosyncratic) should pay the risk free rate. (e) The expected market return is the appropriate discount rate of risky projects.In your view, what is the most important prediction of the Capital Asset Pricing Model? Among the assumptions made in the CAPM, which one do you think is the most unrealistic, and why?In contrast to the capital asset pricing model, arbitrage pricing theory:a. Requires that markets be in equilibrium.b. Uses risk premiums based on micro variables.c. Specifies the number and identifies specific factors that determine expected returns.d. Does not require the restrictive assumptions concerning the market portfolio.
- Both the capital asset pricing model and the arbitrage pricing theory rely on the proposition that a no-risk, no-wealth investment should earn, on average, no return. Explain why this should be the case, being sure to describe briefly the similarities and differences between the CAPM and the APT. Also, using either of these theories, explain how superior investment performance can be established.What happens if someone is not given the Beta for a stock that they are analyzing? Will they still be able to find the required rate of return using the capital asset pricing model?A zero-investment portfolio with a positive alpha could arise if:a. The expected return of the portfolio equals zero.b. The capital market line is tangent to the opportunity set.c. The Law of One Price remains unviolated.d. A risk-free arbitrage opportunity exists.
- Determine whether each of the statements (a)–(c) is True or False. A) Underestimation of the market risk premium results in the underestimation of the cost of capital for a project and in turn increases the likelihood that a negative NPV project is falsely accepted. B) The CAPM beta of a security measures the variability of the return of the security in isolation. C) If an investor holds a well-diversified portfolio, the type of risk left in such a portfolio is primarily the idiosyncratic risk. Answer: a) b) c)According to Capital Asset Pricing theory (CAPM), in a competitive marketplace: Group of answer choices A. only systematic risk is rewarded. B. only diversifiable risk is rewarded. C. all types of risks are rewarded. D. no risk is rewarded.According to the capital asset pricing model, a security with a _________. A. negative alpha is considered a good buyB. positive alpha is considered overpricedC. positive alpha is considered underpricedD. zero alpha is considered a good buy