CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
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Chapter 12, Problem 6CQ
APT In contrast to the
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The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant?
Market risk ________.
a.
is equal to the rate of return generated by a risk-free asset
b.
cannot be eliminated, as it is non-diversifiable
c.
is synonymous with diversifiable risk
d.
is synonymous with financial risk
According to the CAPM, the main factor that explains the performance of an asset is given by the... Asset-specific idiosyncratic risk Systemic Risk of the asset, expressed through its BETA against the Broad Market Absolute Risk of the asset expressed by its Volatility (Standard Deviation of the Returns) None of the above
Chapter 12 Solutions
CORPORATE FINANCE-ACCESS >CUSTOM<
Ch. 12 - Prob. 1CQCh. 12 - Prob. 2CQCh. 12 - Prob. 3CQCh. 12 - Prob. 4CQCh. 12 - Market Model versus APT What are the differences...Ch. 12 - APT In contrast to the CAPM, the APT does not...Ch. 12 - CAPM versus APT What is the relationship between...Ch. 12 - Prob. 8CQCh. 12 - Data Mining What is data mining? Why might it...Ch. 12 - Prob. 10CQ
Ch. 12 - Prob. 1QPCh. 12 - Factor Models Suppose a three-factor model is...Ch. 12 - Prob. 3QPCh. 12 - Multifactor Models Suppose stock returns can be...Ch. 12 - Prob. 5QPCh. 12 - Market Model The following three stocks are...Ch. 12 - Prob. 7QPCh. 12 - Prob. 8QPCh. 12 - APT Assume that the following market model...Ch. 12 - Prob. 10QP
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- The systematic risk principle states that the expected return on a risky asset depends only on which one of the following? Unsystematic risk Market risk Diversifiable riskarrow_forwardBeta is defined as the: a. Amount of systematic risk in a risky asset relative to that in an average asset. b. Ratio of unsystematic risk in a risky asset relative to the systematic risk in the overall market. c. Amount of systematic risk in a risky asset relative to that of a risk-free asset. d. Ratio of the total risk in a risky asset relative to the systematic risk in the overall market. e. Slope of the security market line.arrow_forwardWhat 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 assumedarrow_forward
- The Fama-French 3-factor model is a multi-factor models that includes two additional risk factors beyond the market risk factor in the CAPM model. These additional factors account for__________. A) Firm-specific risk that the CAPM does not measure. B) Sensitivities of an asset’s return related to its size and its ratio of book-to-market value. C) A and B are both correctarrow_forwardExplore the implications of short-selling and the inclusion of a risk-free asset.arrow_forwardCapital Asset Pricing Model is based on certain assumptions, which have been criticized after empirical testing of the model. Discuss the critique of the model in the context of those assumption. Also discuss the empirical findings of the CAPM. What sort of models have been presented to overcome the drawbacks of CAPM?arrow_forward
- 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.arrow_forwardTrue or false: The CAPM states that expected returns depend on an asset’s loading on market risk. Thus, any asset with a standard deviation greater than the standard deviation of the market portfolio must have an expected return greater than the market portfolio, since it is riskier than the market. If this were not the case, no investor would be willing to hold the risky asset in their portfolio, so markets could not clear.arrow_forwardSomeone who is risk neutral A. does not care about an asset's risk B. places a value on an asset equal to its expected expected value OC. is indifferent between a risk-free asset and a risky asset with the same expect value OD. all of the above OE. none of the abovearrow_forward
- Suppose the financial institution is trying to minimise their exposure to changes in the underlying asset price. Explain why the financial institution may want to keep their portfolio both Delta and Gamma neutralarrow_forwardWhich of the following is NOT true? In risk-neutral valuation the risk-free rate is used to discount expected cash flows Options can be valued based on the assumption that investors are risk neutral Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free ratearrow_forwardThe value of an investment can be defined in numerous ways. Which is FALSE? a. It is the value determined by demand and supply. b. It is an objective estimate wherein the risk preference of the investor is considered. c. It is the present value of the cashflows on the investment d. It is dependent on the perceptions of the investor.arrow_forward
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