Capital asset pricing model FiniteQuest

Capital asset pricing model

1 / 10

In CAPM, what would happen to the expected return of a stock if the risk-free rate increases while the stock’s beta remains unchanged?

The expected return will decrease.

The expected return will increase.

The expected return will stay the same.

The expected return will become negative.

2 / 10

Which of the following is true about a stock with a beta of 1, according to CAPM?

The stock is more volatile than the market.

The stock’s returns are uncorrelated with the market.

The stock moves in tandem with the market, and its expected return equals the market return.

The stock has a higher return than the market.

3 / 10

What is the main limitation of the CAPM model?

It accounts for all forms of market risk.

It assumes investors have different levels of risk aversion.

It relies heavily on historical beta, which may not accurately predict future risk.

It does not take into account the time value of money.

4 / 10

Which of the following assumptions is not made by the CAPM?

Investors can borrow and lend at the risk-free rate.

Investors are rational and risk-averse.

There are no taxes or transaction costs.

Asset prices always reflect their intrinsic value.

5 / 10

What is the “security market line” (SML) in the context of CAPM?

A graphical representation of a stock’s historical price movement.

A line showing the relationship between risk (beta) and expected return for assets.

The trend line of a company’s earnings over time.

A line representing the volatility of the entire stock market.

6 / 10

If a stock has a beta greater than 1, CAPM suggests that:

The stock is less volatile than the market.

The stock has no correlation with market risk.

The stock is more volatile than the market and will have higher expected returns.

The stock’s expected return will be lower than the risk-free rate.

7 / 10

In the CAPM formula, what does the “market risk premium” represent?

The difference between the risk-free rate and the stock’s beta.

The difference between the market return and the risk-free rate

The return on a risk-free asset.

The return on the company’s own stock.

8 / 10

The formula for the Capital Asset Pricing Model (CAPM) is:

Expected Return=Risk-Free Rate+β×(Market Return−Risk-Free Rate)

Expected Return=Risk-Free Rate+(Market Return−β)

Expected Return=Risk-Free Rate×β+(Market Return−1)

Expected Return=(β×Risk-Free Rate)+(Market Return−Risk-Free Rate)

9 / 10

Which of the following best defines “beta” in the CAPM model?

The overall market risk premium.

The volatility of an individual asset relative to the market

The total return on a risk-free asset.

The correlation between a company’s stock price and its earnings.

10 / 10

What does the Capital Asset Pricing Model (CAPM) primarily calculate?

The future price of a stock.

The expected return of an asset based on its risk.

The market value of a company.

The dividend payout ratio.

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