Chapter Thirteen Capital Market Equilibrium This chapter contains 43 multiple choice questions,19 short problems,and 9 longer problems. Multiple Choice 1.If one holds a diversified portfolio in which securities are held in the same relative proportions as in a broad market index,this is referred to as (a)eliminating (b)discounting risk (c)indexing (d)capitalizing Answer:(c) 2.The CAPM provides a way of estimating for use in a variety of financial applications. (a)actual rates of return (b)expected rates of return (c)expected standard deviation (d)actual standard deviation Answer:(b) 3.The CAPM may be used to provide (a)inputs to DCF valuation model for stocks (b)inputs to DCF valuation model for bonds (c)estimation of a"fair"rate of return on invested capital (d)both (a)and (c) Answer:(d) 13-1
13-1 Chapter Thirteen Capital Market Equilibrium This chapter contains 43 multiple choice questions, 19 short problems, and 9 longer problems. Multiple Choice 1. If one holds a diversified portfolio in which securities are held in the same relative proportions as in a broad market index, this is referred to as ________. (a) eliminating (b) discounting risk (c) indexing (d) capitalizing Answer: (c) 2. The CAPM provides a way of estimating ________ for use in a variety of financial applications. (a) actual rates of return (b) expected rates of return (c) expected standard deviation (d) actual standard deviation Answer: (b) 3. The CAPM may be used to provide ________. (a) inputs to DCF valuation model for stocks (b) inputs to DCF valuation model for bonds (c) estimation of a “fair” rate of return on invested capital (d) both (a) and (c) Answer: (d)
4.A(n)_ is a portfolio that holds all assets in proportion to their observed market values. (a)market portfolio (b)riskless portfolio (c)efficient riskless portfolio (d)both (b)and (c) Answer:(a) 5. Suppose there are three assets:BB stock,REM stock,and a risk-free asset.The total market values of each at current prices are $40 million of BB stock,$80 million of REM stock,and $10 million of the risk-free asset.The composition of the market portfolio is (a)61.5%BB stock;7.7%REM stock;30.8%risk-free asset (b)33.33%BB stock;66.67%REM stock;0 risk-free asset (c)30.8%BB stock;61.5%REM stock;7.7%risk-free asset (d)30.8%BB stock;66.67%REM stock;7.7%risk-free asset Answer:(c) 6.Suppose there are three assets:BB stock,REM stock,and a risk-free asset.The total market value of each at current prices are $40 million of BB stock,$80 million of REM stock,and $10 million of the risk-free asset.The composition of the risky part of any investor's portfolio will be (a)30.8%BB stock;61.5%REM stock (b)33.33%BB stock;66.67%REM stock (c)30.8%BB stock;66.67%REM stock (d)66.67%BB stock;33.33%REM stock Answer:(b) 7.Suppose there are four securities:BB stock,REM stock,ACX stock,and a risk-free asset.The total market values of each at current prices are $50 million of BB stock,$40 million of REM stock,$80 million of ACX stock,and $30 million of the risk-free asset.The composition of the market portfolio (a)25%BB stock:20%REM stock:40%ACX stock:30%risk-free asset (b)25%BB stock:40%REM stock: 40%ACX stock:15%risk-free asset (c)25%BB stock;20%REM stock:40%ACX stock: 15%risk-free asset (d)50%BB stock;40%REM stock;80%ACX stock;30%risk-free asset Answer:(c) 13-2
13-2 4. A(n) ________ is a portfolio that holds all assets in proportion to their observed market values. (a) market portfolio (b) riskless portfolio (c) efficient riskless portfolio (d) both (b) and (c) Answer: (a) 5. Suppose there are three assets: BB stock, REM stock, and a risk-free asset. The total market values of each at current prices are $40 million of BB stock, $80 million of REM stock, and $10 million of the risk-free asset. The composition of the market portfolio is ________. (a) 61.5% BB stock; 7.7% REM stock; 30.8% risk-free asset (b) 33.33% BB stock; 66.67% REM stock; 0 risk-free asset (c) 30.8% BB stock; 61.5% REM stock; 7.7% risk-free asset (d) 30.8% BB stock; 66.67% REM stock; 7.7% risk-free asset Answer: (c) 6. Suppose there are three assets: BB stock, REM stock, and a risk-free asset. The total market value of each at current prices are $40 million of BB stock, $80 million of REM stock, and $10 million of the risk-free asset. The composition of the risky part of any investor's portfolio will be ________ (a) 30.8% BB stock; 61.5% REM stock (b) 33.33% BB stock; 66.67% REM stock (c) 30.8% BB stock; 66.67% REM stock (d) 66.67% BB stock; 33.33% REM stock Answer: (b) 7. Suppose there are four securities: BB stock, REM stock, ACX stock, and a risk-free asset. The total market values of each at current prices are $50 million of BB stock, $40 million of REM stock, $80 million of ACX stock, and $30 million of the risk-free asset. The composition of the market portfolio is ________. (a) 25% BB stock; 20% REM stock; 40% ACX stock; 30% risk-free asset (b) 25% BB stock; 40% REM stock; 40% ACX stock; 15% risk-free asset (c) 25% BB stock; 20% REM stock; 40% ACX stock; 15% risk-free asset (d) 50% BB stock; 40% REM stock; 80% ACX stock; 30% risk-free asset Answer: (c)
8.Suppose there are four securities:BB stock,REM stock,ACX stock,and a risk-free asset.The total market values of each at current prices are $50 million of BB stock,$40 million of REM stock,$80 million of ACX stock,and $30 million of the risk-free asset.Determine the holdings of the three risky assets of a trader who invests $60,000 of a $300,000 portfolio in the riskless security. (a)$70,000 in BB stock,$50,000 in REM stock,$120,000 in ACX stock (b)$60,000 in BB stock,$48,000 in REM stock,$96,00 in ACX stock (c)$70,588 in BB stock,$56,471 in REM stock,$112,941 in ACX stock (d)$88,235 in BB stock,$70,588 in REM stock,$141,176 in ACX stock Answer:(c) 9.In the CAPM,the trade-off line is called the (a)capital market line (b)portfolio market line (c)asset market line (d)capital asset line Answer:(a) 10.The correct equation for the Capital Market Line(CML)is a@E()+y=o4 (b)E(r)=+ E- OM (c)E(r)= E(r)- OM (d)E(r)=r+m Answer:(b) 13-3
13-3 8. Suppose there are four securities: BB stock, REM stock, ACX stock, and a risk-free asset. The total market values of each at current prices are $50 million of BB stock, $40 million of REM stock, $80 million of ACX stock, and $30 million of the risk-free asset. Determine the holdings of the three risky assets of a trader who invests $60,000 of a $300,000 portfolio in the riskless security. (a) $70,000 in BB stock, $50,000 in REM stock, $120,000 in ACX stock (b) $60,000 in BB stock, $48,000 in REM stock, $96,00 in ACX stock (c) $70,588 in BB stock, $56,471 in REM stock, $112,941 in ACX stock (d) $88,235 in BB stock, $70,588 in REM stock, $141,176 in ACX stock Answer: (c) 9. In the CAPM, the trade-off line is called the ________. (a) capital market line (b) portfolio market line (c) asset market line (d) capital asset line Answer: (a) 10. The correct equation for the Capital Market Line (CML) is ________. (a) M E r rf (b) M f f M E r r E r r (c) M f M E r r E r (d) E r r M f M Answer: (b)
11.Investors must be offered an expected rate of return that the risk-free rate of interest when being induced to accept a market portfolio. (a)is less than (b)is the same as (c)exceeds (d)minimizes Answer:(c) 12.The the average degree of risk aversion of the population,the the risk premium required. (a)greater;lower (b)greater;greater the insignificance of (c)lower;higher (d)greater;higher Answer:(d) 13.The slope of the Capital Market Line represents the: (a)volatility of interest rates (b)market reward-to-risk ratio (c)individual risk-to-reward ratio (d)individual preference Answer:(b) 14.Suppose the standard deviation of the market portfolio is 0.15 and the average degree of risk aversion is 1.5.Then the risk premium on the market portfolio is: (a)0.034 (b)0.051 (c0.225 (d)0.340 Answer:(a) 13-4
13-4 11. Investors must be offered an expected rate of return that ________ the risk-free rate of interest when being induced to accept a market portfolio. (a) is less than (b) is the same as (c) exceeds (d) minimizes Answer: (c) 12. The ________ the average degree of risk aversion of the population, the ________ the risk premium required. (a) greater; lower (b) greater; greater the insignificance of (c) lower; higher (d) greater; higher Answer: (d) 13. The slope of the Capital Market Line represents the: (a) volatility of interest rates (b) market reward-to-risk ratio (c) individual risk-to-reward ratio (d) individual preference Answer: (b) 14. Suppose the standard deviation of the market portfolio is 0.15 and the average degree of risk aversion is 1.5. Then the risk premium on the market portfolio is: (a) 0.034 (b) 0.051 (c) 0.225 (d) 0.340 Answer: (a)
15.Suppose the standard deviation of the market portfolio is 0.15 and the average degree of risk aversion is 1.5.If the expected return on the market portfolio is 0.15 per year,what is the slope of the Capital Market Line? (a)0.034 (b)0.180 (c)0.225 (d0.516 Answer:(c) 16.Suppose the standard deviation of the market portfolio is 0.25 and the average degree of risk aversion is 3.If the expected return on the market portfolio is 0.24,what is the slope of the Capital Market Line? (a0.1875 (b)0.6912 (c)0.7500 (d0.7813 Answer:(d) 17. is a measure of a security's market-related risk and it tells us how much the security's rate of return tends to change when the return on the market portfolio changes. (a)alpha (b)beta (c)delta (d)gamma Answer:(b) 18.The equation for the Security Market Line(SML)is (a)Ey)=r×BE(g)=r×p,E(w)-y] (b)E(r)=+B,E(rx)- a(FgG-7 (@E(G)=B,E(u)-r]- Answer:(b) 13-5
13-5 15. Suppose the standard deviation of the market portfolio is 0.15 and the average degree of risk aversion is 1.5. If the expected return on the market portfolio is 0.15 per year, what is the slope of the Capital Market Line? (a) 0.034 (b) 0.180 (c) 0.225 (d) 0.516 Answer: (c) 16. Suppose the standard deviation of the market portfolio is 0.25 and the average degree of risk aversion is 3. If the expected return on the market portfolio is 0.24, what is the slope of the Capital Market Line? (a) 0.1875 (b) 0.6912 (c) 0.7500 (d) 0.7813 Answer: (d) 17. ________ is a measure of a security’s market-related risk and it tells us how much the security’s rate of return tends to change when the return on the market portfolio changes. (a) alpha (b) beta (c) delta (d) gamma Answer: (b) 18. The equation for the Security Market Line (SML) is ________. (a) E r r E r r E r r j f j f j M f (b) E r r E r r j f j M f (c) f j j M f r E r E r r (d) E r E r r r j j M f f Answer: (b)