Question #1 of 92 Question ID: 1573227

Which of the following terms refer to the same type of risk?

A) Systematic risk and firm-specific risk.

B) Total risk and the variance of returns.
C) Undiversifiable risk and unsystematic risk.

Question #2 of 92 Question ID: 1573251

Portfolios that plot on the security market line in equilibrium:

A) must be well diversified.

B) may be concentrated in only a few stocks.
C) have only systematic (beta) risk.

Question #3 of 92 Question ID: 1573207

Portfolios on the capital market line:

A) include some positive allocation to the risk-free asset.

B) each contain different risky assets.
C) are perfectly positively correlated with each other.

Question #4 of 92 Question ID: 1573242

The slope of the characteristic line is used to estimate:

A) risk aversion.
B) a risk premium.
C) beta.

Question #5 of 92 Question ID: 1573203

James Franklin, CFA, has high risk tolerance and seeks high returns. Based on capital market
theory, Franklin would most appropriately hold:

a high-beta portfolio of risky assets financed in part by borrowing at the risk-free

A)
rate.
B) a high risk biotech stock, as it will have high expected returns in equilibrium.
C) the market portfolio as his only risky asset.

Question #6 of 92 Question ID: 1573238

The expected rate of return is twice the 12% expected rate of return from the market. What
is the beta if the risk-free rate is 6%?

A) 2.
B) 3.
C) 4.

Question #7 of 92 Question ID: 1573214

What is the risk measure associated with the CML?

A) Beta.
B) Market risk.
C) Standard deviation.

Question #8 of 92 Question ID: 1573225

Which type of risk is positively related to expected excess returns according to the CAPM?

A) Systematic.
B) Unique.
C) Diversifiable.

Question #9 of 92 Question ID: 1573213

In the context of the CML, the market portfolio includes:

A) 12-18 stocks needed to provide maximum diversification.

B) all existing risky assets.
C) the risk-free asset.

Question #10 of 92 Question ID: 1573222

Which of the following statements about risk is NOT correct?

A) The market portfolio has only systematic risk.

B) Total risk = systematic risk - unsystematic risk.
C) Unsystematic risk is diversifiable risk.

Question #11 of 92 Question ID: 1573277

An investor believes Stock M will rise from a current price of $20 per share to a price of $26
per share over the next year. The company is not expected to pay a dividend. The following
information pertains:

RF = 8%
ERM = 16%
Beta = 1.7

Should the investor purchase the stock?

A) No, because it is overvalued.
B) No, because it is undervalued.
C) Yes, because it is undervalued.

Question #12 of 92 Question ID: 1573211

Portfolios that represent combinations of the risk-free asset and the market portfolio are
plotted on the:

A) utility curve.
B) capital asset pricing line.
C) capital market line.

Question #13 of 92 Question ID: 1573286

Which of the following statements regarding the Sharpe ratio is most accurate? The Sharpe
ratio measures:

A) excess return per unit of risk.

B) peakedness of a return distribution.
C) total return per unit of risk.

Question #14 of 92 Question ID: 1573241

The expected rate of return is 1.5 times the 16% expected rate of return from the market.
What is the beta if the risk free rate is 8%?

A) 2.
B) 3.
C) 4.
Question #15 of 92 Question ID: 1573201

A plot of the expected returns and standard deviations of each possible portfolio that
combines a risky asset and a risk-free asset will be:

A) a curve that approaches an upper limit.

B) convex to the origin.
C) a straight line.

Question #16 of 92 Question ID: 1573250

One of the assumptions underlying the capital asset pricing model is that:

A) there are no transactions costs or taxes.

B) only whole shares or whole bonds are available.
C) each investor has a unique time horizon.

Question #17 of 92 Question ID: 1573274

The stock of Mia Shoes is currently trading at $15 per share, and the stock of Video Systems
is currently trading at $18 per share. An analyst expects the prices of both stocks to increase
by $2 over the next year and neither company pays dividends. Mia Shoes has a beta of 0.9
and Video Systems has a beta of (-0.3). If the expected market return is 15% and the risk-free
rate is 8%, which trading strategy does the CAPM indicate for these two stocks?

Mia Shoes Video Systems

A) Buy Buy

B) Buy Sell

C) Sell Buy
Question #18 of 92 Question ID: 1573267

Which of the following statements about the security market line (SML) is least accurate?

The independent variable in the SML equation is the standard deviation of the
A)
market portfolio.
B) Securities plotting above the SML are undervalued.
The SML measures risk using the standardized covariance of the stock with the
C)
market.

Question #19 of 92 Question ID: 1573289

Over a sample period, an investor gathers the following data about three mutual funds.

Mutual Fund Portfolio Return Portfolio Standard Deviation Portfolio Beta

P 13% 18% 1.2

Q 15% 20% 1.4

R 18% 24% 1.8

The risk-free rate is 5%. Based solely on the Sharpe measure, an investor would prefer:

A) Fund P.
B) Fund R.
C) Fund Q.

Question #20 of 92 Question ID: 1573290

An investor's wealth is approximately 50% in bonds and broad-based equities and 50% in
shares of a company she founded. Which of the following measures of risk-adjusted returns
is least appropriate for this investor's portfolio?

A) M-squared.
B) Sharpe ratio.
C) Jensen’s alpha.
Question #21 of 92 Question ID: 1573265

Given the following information, what is the required rate of return on Bin Co?

inflation premium = 3%
real risk-free rate = 2%
Bin Co. beta = 1.3
market risk premium = 4%

A) 10.2%.
B) 16.7%.
C) 7.6%.

Question #22 of 92 Question ID: 1573262

What is the expected rate of return on a stock that has a beta of 1.4 if the market risk
premium is 9% and the risk-free rate is 4%?

A) 13.0%.
B) 16.6%.
C) 11.0%.

Question #23 of 92 Question ID: 1573275

Consider the following graph of the Security Market Line (SML). The letters X, Y, and Z
represent risky asset portfolios and an analyst's forecast for their returns over the next
period. The SML crosses the y-axis at 0.07.

The expected market return is 13.0%.

Using the graph above and the information provided, the analyst most likely believes that:

A) Portfolio X's required return is greater than its forecast return.

B) Portfolio Y is undervalued.
C) the expected return for Portfolio Z is 14.8%.

Question #24 of 92 Question ID: 1573202

When a risk-free asset is combined with a portfolio of risky assets, which of the following is
least accurate?

The expected return for the newly created portfolio is the weighted average of the
A)
return on the risk-free asset and the expected return on the risky asset portfolio.
The standard deviation of the return for the newly created portfolio is the standard
B)
deviation of the returns of the risky asset portfolio multiplied by its portfolio weight.
The variance of the resulting portfolio is a weighted average of the returns variances
C)
of the risk-free asset and of the portfolio of risky assets.

Question #25 of 92 Question ID: 1573268

The following information is available for the stock of Park Street Holdings:

The price today (P0) equals $45.00.

The expected price in one year (P1) is $55.00.
The stock's beta is 2.31.
The firm typically pays no dividend.
The 3-month Treasury bill is yielding 4.25%.
The historical average S&P 500 return is 12.5%.

Park Street Holdings stock is:

A) undervalued by 1.1%.
B) undervalued by 3.7%.
C) overvalued by 1.1%.

Question #26 of 92 Question ID: 1573264

Given a beta of 1.25 and a risk-free rate of 6%, what is the expected rate of return assuming
a 12% market return?

A) 31%.
B) 10%.
C) 13.5%.

Question #27 of 92 Question ID: 1573288

A higher Sharpe ratio indicates:

A) a higher excess return per unit of risk.

B) a lower risk per unit of return.
C) lower volatility of returns.

Question #28 of 92 Question ID: 1573246

Which of the following is an assumption of capital market theory? All investors:

A) have multiple-period time horizons.

B) see the same risk/return distribution for a given stock.
select portfolios that lie above the efficient frontier to optimize the risk-return
C)
relationship.

Question #29 of 92 Question ID: 1573252

According to the capital asset pricing model (CAPM):

an investor who is risk averse should hold at least some of the risk-free asset in his
A)
portfolio.
a stock with high risk, measured as standard deviation of returns, will have high
B)
expected returns in equilibrium.
C) all investors who take on risk will hold the same risky-asset portfolio.

Question #30 of 92 Question ID: 1573269

A stock that plots below the Security Market Line most likely:

A) is overvalued.
B) has a beta less than one.
C) is below the efficient frontier.

Question #31 of 92 Question ID: 1573260

The beta of Stock A is 1.3. If the expected return of the market is 12%, and the risk-free rate
of return is 6%, what is the expected return of Stock A?

A) 14.2%.
B) 15.6%.
C) 13.8%.
Question #32 of 92 Question ID: 1573209

Which of the following is the most accurate description of the market portfolio in Capital
Market Theory? The market portfolio consists of all:

A) equity securities in existence.

B) risky and risk-free assets in existence.
C) risky assets in existence.

Question #33 of 92 Question ID: 1573199

An equally weighted portfolio of a risky asset and a risk-free asset will exhibit:

A) half the returns standard deviation of the risky asset.

B) less than half the returns standard deviation of the risky asset.
C) more than half the returns standard deviation of the risky asset.

Question #34 of 92 Question ID: 1573276

Charlie Smith holds two portfolios, Portfolio X and Portfolio Y. They are both liquid, well-
diversified portfolios with approximately equal market values. He expects Portfolio X to
return 13% and Portfolio Y to return 14% over the upcoming year. Because of an unexpected
need for cash, Smith is forced to sell at least one of the portfolios. He uses the security
market line to determine whether his portfolios are undervalued or overvalued. Portfolio X's
beta is 0.9 and Portfolio Y's beta is 1.1. The expected return on the market is 12% and the
risk-free rate is 5%. Smith should sell:

A) portfolio Y only.
B) both portfolios X and Y because they are both overvalued.
C) either portfolio X or Y because they are both properly valued.
Question #35 of 92 Question ID: 1573273

An analyst wants to determine whether Dover Holdings is overvalued or undervalued, and

by how much (expressed as percentage return). The analyst gathers the following
information on the stock:

Market standard deviation = 0.70

Covariance of Dover with the market = 0.85
Dover's current stock price (P0) = $35.00
The expected price in one year (P1) is $39.00
Expected annual dividend = $1.50
3-month Treasury bill yield = 4.50%.
Historical average S&P 500 return = 12.0%.

Dover Holdings stock is:

A) undervalued by approximately 2.1%.

B) overvalued by approximately 1.8%.
C) undervalued by approximately 1.8%.

Question #36 of 92 Question ID: 1573284

A portfolio's excess return per unit of systematic risk is known as its:

A) Jensen’s alpha.
B) Sharpe ratio.
C) Treynor measure.

Question #37 of 92 Question ID: 1573217

All portfolios that lie on the capital market line:

A) have some unsystematic risk unless only the risk-free asset is held.
B) contain at least some positive allocation to the risk-free asset.
C) contain the same mix of risky assets unless only the risk-free asset is held.
Question #38 of 92 Question ID: 1573248

Which of the following statements regarding the Capital Asset Pricing Model is least
accurate?

A) It is useful for determining an appropriate discount rate.

B) It is when the security market line (SML) and capital market line (CML) converge.
C) Its accuracy depends upon the accuracy of the beta estimates.

Question #39 of 92 Question ID: 1573220

In the context of the capital market line (CML), which of the following statements is
CORRECT?

A) Firm-specific risk can be reduced through diversification.

B) Market risk can be reduced through diversification.
C) The two classes of risk are market risk and systematic risk.

Question #40 of 92 Question ID: 1573287

A portfolio of options had a return of 22% with a standard deviation of 20%. If the risk-free
rate is 7.5%, what is the Sharpe ratio for the portfolio?

A) 0.147.
B) 0.568.
C) 0.725.

Question #41 of 92 Question ID: 1573229

The market model of the expected return on a risky security is best described as a(n):
A) single-factor model.
B) two-factor model.
C) arbitrage-based model.

Question #42 of 92 Question ID: 1573235

An analyst has developed the following data for two companies, PNS Manufacturing (PNS)
and InCharge Travel (InCharge). PNS has an expected return of 15% and a standard
deviation of 18%. InCharge has an expected return of 11% and a standard deviation of 17%.
PNS's correlation with the market is 75%, while InCharge's correlation with the market is
85%. If the market standard deviation is 22%, which of the following are the betas for PNS
and InCharge?

Beta of PNS Beta of InCharge

A) 0.61 0.66

B) 0.66 0.61

C) 0.92 1.10

Question #43 of 92 Question ID: 1573263

If the risk-free rate of return is 3.5%, the expected market return is 9.5%, and the beta of a
stock is 1.3, what is the required return on the stock according to the capital asset pricing
model?

A) 11.3%.
B) 12.4%.
C) 7.8%.

Question #44 of 92 Question ID: 1573226

A portfolio manager is constructing a new equity portfolio consisting of a large number of
randomly chosen domestic stocks. As the number of stocks in the portfolio increases, what
happens to the expected levels of systematic and unsystematic risk?

Systematic risk Unsystematic risk

A) Remains the same Decreases

B) Decreases Increases

C) Increases Remains the same

Question #45 of 92 Question ID: 1573258

The expected market premium is 8%, with the risk-free rate at 7%. What is the expected rate
of return on a stock with a beta of 1.3?

A) 10.4%.
B) 16.3%.
C) 17.4%.

Question #46 of 92 Question ID: 1573259

What is the required rate of return for a stock with a beta of 1.2, when the risk-free rate is
6% and the market risk premium is 12%?

A) 13.2%.
B) 15.4%.
C) 20.4%.

Question #47 of 92 Question ID: 1573224

In equilibrium, investors should only expect to be compensated for bearing systematic risk
because:
A) individual securities in equilibrium only have systematic risk.
B) nonsystematic risk can be eliminated by diversification.
C) systematic risk is specific to the securities the investor selects.

Question #48 of 92 Question ID: 1573208

The market portfolio in Capital Market Theory is determined by:

A) a line tangent to the efficient frontier, drawn from the risk-free rate of return.
B) the intersection of the efficient frontier and the investor's highest utility curve.
a line tangent to the efficient frontier, drawn from any point on the expected return
C)
axis.

Question #49 of 92 Question ID: 1573255

Which of the following is an assumption of the Capital Asset Pricing Model (CAPM)?

A) Investors with shorter time horizons exhibit greater risk aversion.

B) There are no margin transactions or short sales.
C) No investor is large enough to influence market prices.

Question #50 of 92 Question ID: 1573279

An analyst estimated the following for three possible investments.

Security Current Price Forecast Price in One Year Annual Dividend Beta

Alpha Inc. 25.00 31.00 2.00 1.6

Lambda Inc. 10.00 10.80 0 0.5

Omega Inc. 105.00 110.00 1.00 1.2

Given an expected return on the market of 12% and a risk-free rate of 4%, which of the three
securities is correctly priced based on the analyst's estimates?

A) Omega.
B) Alpha.
C) Lambda.

Question #51 of 92 Question ID: 1573253

When comparing portfolios that plot on the security market line (SML) to those that plot on
the capital market line (CML), a financial analyst would most accurately state that portfolios
that lie on the SML:

are not necessarily priced at their equilibrium values, while portfolios on the CML
A)
are priced at their equilibrium values.
B) are not necessarily well diversified, while portfolios on the CML are well diversified.
have only systematic risk, while portfolios on the CML have both systematic and
C)
unsystematic risk.

Question #52 of 92 Question ID: 1573205

Which of the following is the vertical axis intercept for the Capital Market Line (CML)?

A) Expected return on the portfolio.

B) Risk-free rate.
C) Expected return on the market.
Question #53 of 92 Question ID: 1573218

Which of the following is the risk that disappears in the portfolio construction process?

A) Unsystematic risk.
B) Interest rate risk.
C) Systematic risk.

Question #54 of 92 Question ID: 1573256

Which of the following is least likely an assumption underlying the capital asset pricing
model?

A) Investors are rational.

B) Tax rates are constant over the investment horizon.
C) All investors have the same expectations of return and risk for each security.

Question #55 of 92 Question ID: 1573232

In extending the 3-factor model of Fama and French, the additional factor suggested by
Carhart that is often used is:

A) price momentum.
B) GDP growth.
C) market-to-book value.

Question #56 of 92 Question ID: 1573270

Mason Snow, CFA, is considering two stocks: Bahre (with an expected return of 10% and a
beta of 1.4) and Cubb (with an expected return of 15% and a beta of 2.0). Snow uses a risk-
free of 7% and estimates that the market risk premium is 4%. Based on capital market
theory, Snow should conclude that:
A) only Cubb is underpriced.
B) neither security is underpriced.
C) only Bahre is underpriced.

Question #57 of 92 Question ID: 1573257

For a security with a beta of 1.10 when the risk-free rate is 5%, and the expected market risk
premium is 5%, what is the expected rate of return on the security according to the CAPM?

A) 5.5%.
B) 10.5%.
C) 15.5%.

Question #58 of 92 Question ID: 1573249

When the market is in equilibrium, all:

A) assets plot on the CML.

B) assets plot on the SML.
C) investors hold the market portfolio.

Question #59 of 92 Question ID: 1573216

Bruce Johansen, CFA, is fully invested in the market portfolio. Johansen desires to increase
the expected return from his portfolio. According to capital market theory, Johansen can
meet his return objective by:

A) owning the risky market portfolio and lending at the risk-free rate.
B) allocating a higher proportion of the portfolio to higher risk assets.
C) borrowing at the risk-free rate to invest in the risky market portfolio.
Question #60 of 92 Question ID: 1573212

For an investor to move further up the Capital Market Line than the market portfolio, the
investor must:

A) reduce the portfolio's risk below that of the market.

B) borrow and invest in the market portfolio.
C) diversify the portfolio even more.

Question #61 of 92 Question ID: 1573261

The beta of stock D is -0.5. If the expected return of Stock D is 8%, and the risk-free rate of
return is 5%, what is the expected return of the market?

A) -1.0%.
B) +3.5%.
C) +3.0%.

Question #62 of 92 Question ID: 1573281

An analyst determines that three stocks have the following characteristics:

Stock Beta Estimated Return

X 1.0 10%

Y 1.6 16%

Z 2.0 16%

If the risk-free rate is 4% and the expected return on the market is 10%, which of the
following statements is most accurate?

A) Stock X is undervalued.
B) Stock Y is overvalued.
C) Stock Z is properly valued.
Question #63 of 92 Question ID: 1573283

Which of the following measures produces the same portfolio rankings as the Sharpe ratio
but is stated in percentage terms?

A) M-squared.
B) Jensen’s alpha.
C) Treynor measure.

Question #64 of 92 Question ID: 1573243

If a stock's beta is equal to 1.2, its standard deviation of returns is 28%, and the standard
deviation of the returns on the market portfolio is 14%, the covariance of the stock's returns
with the returns on the market portfolio is closest to:

A) 0.600.
B) 0.024.
C) 0.168.

Question #65 of 92 Question ID: 1573231

In the market model, beta measures the sensitivity of an asset's rate of return to the
market's:

A) rate of return.
B) risk-adjusted return.
C) excess return.

Question #66 of 92 Question ID: 1573223

Which of the following statements about portfolio management is most accurate?

 As an investor diversifies away the unsystematic portion of risk, the correlation
A)
between his portfolio return and that of the market approaches negative one.
Combining the capital market line (CML) (risk-free rate and efficient frontier) with an
B) investor's indifference curve map separates out the decision to invest from the
decision of what to invest in.
The security market line (SML) measures systematic and unsystematic risk versus
C)
expected return; the CML measures total risk.

Question #67 of 92 Question ID: 1573237

An analyst has estimated the following:

Correlation of Bahr Industries returns with market returns = 0.8

Variance of the market returns = 0.0441
Variance of Bahr returns = 0.0225

The beta of Bahr Industries stock is closest to:

A) 0.77.
B) 0.57.
C) 0.67.

Question #68 of 92 Question ID: 1573244

Which of the following statements about the security market line (SML) and capital market
line (CML) is most accurate?

A) The SML involves the concept of a risk-free asset, but the CML does not.
B) The SML uses beta, but the CML uses standard deviation as the risk measure.
C) Both the SML and CML can be used to explain a stock’s expected return.

Question #69 of 92 Question ID: 1573239

Given the following data, what is the correlation coefficient between the two stocks and the
Beta of stock A?

standard deviation of returns of Stock A is 10.04%

standard deviation of returns of Stock B is 2.05%
standard deviation of the market is 3.01%
covariance between the two stocks is 0.00109
covariance between the market and stock A is 0.002

Correlation Coefficient Beta (stock A)

A) 0.6556 2.20

B) 0.5296 0.06

C) 0.5296 2.20

Question #70 of 92 Question ID: 1573230

In Fama and French's multifactor model, the expected return on a stock is explained by:

A) excess return on the market portfolio, book-to-market ratio, and price momentum.
B) firm size, book-to-market ratio, and excess return on the market portfolio.
C) firm size, book-to-market ratio, and price momentum.

Question #71 of 92 Question ID: 1573221

Which of the following is least likely considered a source of systematic risk for bonds?

A) Market risk.
B) Purchasing power risk.
C) Default risk.
Question #72 of 92 Question ID: 1573271

Level I CFA candidate Adeline Bass is a member of an investment club. At the next meeting,
she is to recommend whether or not the club should purchase the stocks of CS Industries
and MG Consolidated. The risk-free rate is at 6% and the expected return on the market is
15%. Prior to the meeting, Bass gathers the following information on the two stocks:

CS Industries MG Consolidated

Current Market Value $25 $50

Expected Market Value in One Year $30 $55

Expected Dividend $1 $1

Beta 1.2 0.80

Bass should recommend that the club:

A) purchase both stocks.

B) purchase CS only.
C) purchase MG only.

Question #73 of 92 Question ID: 1573219

Which of the following statements about systematic and unsystematic risk is most accurate?

As an investor increases the number of stocks in a portfolio, the systematic risk will
A)
remain constant.
The unsystematic risk for a specific firm is similar to the unsystematic risk for other
B)
firms.
C) Total risk equals market risk plus firm-specific risk.

Question #74 of 92 Question ID: 1573254

In equilibrium, an inefficient portfolio will plot:

A) below the CML and on the SML.

B) below the CML and below the SML.
C) on the CML and below the SML.

Question #75 of 92 Question ID: 1573266

A stock has a beta of 1.55 and an expected return of 17.3%. If the risk-free rate is 8%, the
expected market risk premium is:

A) 12.0%.
B) 14.0%.
C) 6.0%.

Question #76 of 92 Question ID: 1573206

According to capital market theory, which of the following represents the risky portfolio that
should be held by all investors who desire to hold risky assets?

The point of tangency between the capital market line (CML) and the efficient
A)
frontier.
Any point on the efficient frontier and to the right of the point of tangency between
B)
the CML and the efficient frontier.
Any point on the efficient frontier and to the left of the point of tangency between
C)
the CML and the efficient frontier.

Question #77 of 92 Question ID: 1573285

An active manager will most likely short a security with an expected Jensen's alpha that is:

A) negative.
B) positive.
C) zero.
Question #78 of 92 Question ID: 1573247

Which is NOT an assumption of capital market theory?

A) There are no taxes or transaction costs.

B) There is no inflation.
C) Investments are not divisible.

Question #79 of 92 Question ID: 1573210

A portfolio to the right of the market portfolio on the capital market line (CML) is created by:

A) holding both the risk-free asset and the market portfolio.

B) holding more than 100% of the risky asset.
C) fully diversifying.

Question #80 of 92 Question ID: 1573234

Beta is least accurately described as:

A) a standardized measure of the total risk of a security.

the covariance of a security’s returns with the market return, divided by the variance
B)
of market returns.
C) a measure of the sensitivity of a security’s return to the market return.

Question #81 of 92 Question ID: 1573278

A stock's abnormal rate of return is defined as the:

A) actual rate of return less the expected risk-adjusted rate of return.

B) rate of return during abnormal price movements.
C) expected risk-adjusted rate of return minus the market rate of return.
Question #82 of 92 Question ID: 1573240

The expected rate of return is 2.5 times the 12% expected rate of return from the market.
What is the beta if the risk-free rate is 6%?

A) 4.
B) 5.
C) 3.

Question #83 of 92 Question ID: 1573200

The correlation of returns on the risk-free asset with returns on a portfolio of risky assets is:

A) negative.
B) positive.
C) zero.

Question #84 of 92 Question ID: 1573228

A model that estimates expected excess return on a security based on the ratio of the firm's
book value to its market value is best described as a:

A) market model.
B) multifactor model.
C) single-factor model.

Question #85 of 92 Question ID: 1573204

The slope of the capital market line (CML) is a measure of the level of:

A) excess return per unit of risk.

B) expected return over the level of inflation.
C) risk over the level of excess return.

Question #86 of 92 Question ID: 1573272

Consider a stock selling for $23 that is expected to increase in price to $27 by the end of the
year and pay a $0.50 dividend. If the risk-free rate is 4%, the expected return on the market
is 8.5%, and the stock's beta is 1.9, what is the current valuation of the stock? The stock:

A) is correctly valued.
B) is overvalued.
C) is undervalued.

Question #87 of 92 Question ID: 1573215

Based on Capital Market Theory, an investor should choose the:

A) market portfolio on the Capital Market Line.

B) portfolio that maximizes his utility on the Capital Market Line.
C) portfolio with the highest return on the Capital Market Line.

Question #88 of 92 Question ID: 1573280

An analyst collected the following data for three possible investments. Alpha Corporation
has a beta of 1.6, Omega Company has a beta of 1.2, and Lambda, Inc. has a beta of 0.5.

The expected return on the market is –3% and the risk-free rate is 4%. Assuming that capital
markets are in equilibrium, which stock has the highest expected return?

A) Alpha.
B) Omega.
C) Lambda.
Question #89 of 92 Question ID: 1573233

Beta is a measure of:

A) total risk.
B) company-specific risk.
C) systematic risk.

Question #90 of 92 Question ID: 1573245

Which of the following is NOT an assumption of capital market theory?

A) Investors can lend at the risk-free rate, but borrow at a higher rate.
B) All assets are infinitely divisible.
C) The capital markets are in equilibrium.

Question #91 of 92 Question ID: 1573282

The risk-free rate is 5% and the expected market return is 15%. A portfolio manager is
estimating a return of 20% on a stock with a beta of 1.5. Based on the SML and the analyst's
estimate, this stock is:

A) properly valued.
B) overvalued.
C) undervalued.

Question #92 of 92 Question ID: 1573236

If the standard deviation of the market's returns is 5.8%, the standard deviation of a stock's
returns is 8.2%, and the covariance of the market's returns with the stock's returns is 0.003,
what is the beta of the stock?
A) 0.05.
B) 0.89.
C) 1.07.