Risk, Return, and Capital Budgeting
practice preparation exam
Capital Asset Pricing Model (CAPM) - correct answersa model to analyze the risk and required rates of
return on assets when held in portfolios
the beta of the stock is : - correct answersthe correlation coefficient times the stock's standard
deviation, divided by the market's standard deviation
the market portfolio - correct answersportfolio of all assets in the economy
the market portfolio is used as a benchmark to measure the _____ - correct answersrisk of individual
stocks
Beta - correct answerssensitivity of a stock's return to the return on the market portfolio
beta is a measure of market ____ - correct answersrisk
Portfolio Beta - correct answersthe weighted average of the betas of the individual assets; with the
weights being equal to the proportion of wealth invested in each asset
the least risky investment is _______ - correct answerstreasury bills (because the return on T-bills is
fixed)
the beta of a t-bill is _____ - correct answerszero
- because tbills are fixed, they are unaffected by what happens in the market
market risk premium: - correct answersthe difference between the expected rate of return and the
interest rate on t-bills (risk-free asset)
Benchmark Betas - correct answerssince the return on a t-bill is fixed and unaffected by what happens
next; the beta of the risk-free asset is 0
the beta of the market portfolio is ____ - correct answers1
with a beta of 0.5 and a market risk of 7%, a security's risk premium is: - correct answers0.5 x 7 = 3..5%
CAPM theory states that the expected risk premium on any security equals its _____ - correct
answersbeta times the market risk premium
according to the CAPM, the expected rate of return demanded by investors depends on: - correct
answers- compensation for the time value of money (the risk-free rate, rf)
- a risk premium, which depends on the beta and the market risk premium (MRP)
practice preparation exam
Capital Asset Pricing Model (CAPM) - correct answersa model to analyze the risk and required rates of
return on assets when held in portfolios
the beta of the stock is : - correct answersthe correlation coefficient times the stock's standard
deviation, divided by the market's standard deviation
the market portfolio - correct answersportfolio of all assets in the economy
the market portfolio is used as a benchmark to measure the _____ - correct answersrisk of individual
stocks
Beta - correct answerssensitivity of a stock's return to the return on the market portfolio
beta is a measure of market ____ - correct answersrisk
Portfolio Beta - correct answersthe weighted average of the betas of the individual assets; with the
weights being equal to the proportion of wealth invested in each asset
the least risky investment is _______ - correct answerstreasury bills (because the return on T-bills is
fixed)
the beta of a t-bill is _____ - correct answerszero
- because tbills are fixed, they are unaffected by what happens in the market
market risk premium: - correct answersthe difference between the expected rate of return and the
interest rate on t-bills (risk-free asset)
Benchmark Betas - correct answerssince the return on a t-bill is fixed and unaffected by what happens
next; the beta of the risk-free asset is 0
the beta of the market portfolio is ____ - correct answers1
with a beta of 0.5 and a market risk of 7%, a security's risk premium is: - correct answers0.5 x 7 = 3..5%
CAPM theory states that the expected risk premium on any security equals its _____ - correct
answersbeta times the market risk premium
according to the CAPM, the expected rate of return demanded by investors depends on: - correct
answers- compensation for the time value of money (the risk-free rate, rf)
- a risk premium, which depends on the beta and the market risk premium (MRP)
