Question

1) The beta of a financial asset is equal to __________.

A. the covariance between the security and market returns divided by the variance of the market's returns

B. one, if the standard deviation of returns matches the market standard deviation

C. both (A) and (B) are true

D. none of the above

2) 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

3) In the context of the capital asset pricing model, the systematic measure of risk is __________.

A. unique risk

B. beta

C. standard deviation of returns

D. variance of returns

4) An underpriced stock provides an expected return which is _______________ the required return based on the capital asset pricing model (CAPM).

A. less than

B. equal to

C. greater than

D. greater than or equal to

5) Take a look at the regression output below:

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	0.016976	0.00812	2.090513	0.040549	0.000753	0.033199
X Variable 1	0.893179	0.215104	4.152322	9.93E-05	0.463461	1.322898

A. beta is approximately 1.7

B. the 95% confidence range for beta includes a beta that matches the market

C. both (A) and (B) are true

D. none of the above

6) Take a look at the regression output below:

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	0.016976	0.00812	2.090513	0.040549	0.000753	0.033199
X Variable 1	0.432694	0.215104	4.152322	9.93E-05	0.113765	0.732376

A. beta is approximately 0.43

B. the 95% confidence range for beta includes a beta that matches the market

C. both (A) and (B) are true

D. none of the above

7) The CAPM equation for expected return on an investment:

A. contains a risk-free component and a risk premium

B. includes measures of systematic risk and idiosyncratic risk

C. only uses betas between -1 and 1

D. restricts expected return on investment to be between the risk-free rate and the market return.

Answer 1

1-	Option is A	the covariance between the security and market returns divided by the variance of the market's returns	beta = covariance between security return and market return / variance of market return
2-	Option is C	directly related to the beta of the stock	risk premium = required retrun-risk free rate or market risk premium*beta
3-	option is B	beta	beta is a measure of market risk or systematic risk and it measures the degree of sensitivity of security return's to market return
4-	option is c	greater than the required return	because it expected return is greater than the required return than stock would be undervalued because cash inflow would be discounted at a higher rate than the discount rate and which will results is less value than the value which we will obtain by discounting the cash flows at required return
5-	Option is B	the 95% confidence range for beta includes a beta that matches the market	coefficient of X variable 1 + 2*standard error	1.323
			coefficient of X variable 1 - 2*standard error	0.463
6-	Option is A	beta is approximately .43
	B point is not valid		coefficient of X variable 1 + 2*standard error	0.862
			coefficient of X variable 1 - 2*standard error	0.002
7-	Option is A	A. contains a risk-free component and a risk premium	because required return comprise of risk free return and risk premium for maket risk