Asset pricing theory

What is the y-variable the output of the Security Market Line SML

E) The expected return of the investment

Which term describes a stock sensitivity to macroeconomic conditions

E) Beta

What is the expected market return in the context of CAPM

B) The average return that investors expect to receive from the market portfolio

What is the difference between modern portfolio theory and asset pricing theory

A) Modern portfolio theory deals with the trade-off between risk and return when making a portfolio, while asset pricing theory deals with estimating expected returns based on risk.

In the CAPM equation what does the term beta represent

E) Sensitivity to systematic risk

Why is beta considered a measure of systematic risk rather than total risk

E) Because it measures sensitivity to market movements

According to the CAPM what does the expected return of an investment depend on

E) Its sensitivity to systematic risk

In the CAPM equation what does the term lambda represent

A) Market risk premium

What is the difference between the capital asset pricing model CAPM and the security market line SML

D) CAPM is a mathematical formula for estimating expected returns, while the SML is a graphical version of the CAPM depicting the relationship between risk and return.

How is the market risk premium calculated

A) The difference between the expected market return and the risk-free rate

What is the difference between a required return and an expected return

C) Required return is the return needed to justify the investment's risk, while expected return is the return anticipated based on current market conditions.

What is the main purpose of the Capital Asset Pricing Model CAPM

B) To estimate the expected return of an investment given its risk

Which component of the CAPM equation compensates investors for delayed consumption

D) Risk-free rate

According to the CAPM what is the primary factor used to estimate the expected return of an investment

E) Beta

In the CAPM equation what does the term Rf represent

B) Risk-free rate

In the CAPM equation what does the term E RMKT - Rf represent

A) Market risk premium

What does a beta less than 1 signify about a stock

B) The stock’s return is less volatile than the market portfolio’s return

What is the x-variable the input of the Security Market Line SML

D) The beta of the portfolio

What do you call the line that graphically represents the CAPM equation

C) Security Market Line

How does CAPM help in determining whether an investment is overvalued or undervalued

D) By comparing the investment's expected return to the required return

What does the market risk premium represent

E) The additional return required to invest in the market portfolio over a risk-free asset

What does a beta equal to 1 signify about a stock

C) The stock’s return has the same volatility as the market portfolio’s return

What does the Security Market Line SML depict

A) The relationship between beta and expected return

Which term describes the average return that an investor expects to receive from the market portfolio above the risk free rate

C) Lambda

What is the slope of the Security Market Line SML

B) The market risk premium

What does a beta greater than 1 signify about a stock

A) The stock’s return is more volatile than the market portfolio’s return

Which of the following is a true statement about beta

D) It measures the sensitivity of a stock’s return to changes in market conditions

Why does CAPM only take into account exposure to systematic risk

B) Because unsystematic risk can be eliminated through proper diversification

Which of the following is true if a stock's return is below the Security Market Line

A) The stock is overvalued

What is the difference between the expected market return and the market risk premium

E) Expected market return is the return expected from the market portfolio, while market risk premium is the excess return expected above the risk-free rate.

What is the intercept of the Security Market Line SML

A) The risk-free rate

How does the CAPM account for the risk associated with an investment

C) By measuring the investment's exposure to systematic risk