FIN 421 Lecture 6 Practice Questions with Answers: Arizona State University

PROF. DAVID SCHREINDORFER FIN 421 - SPRING 2019 Lecture 6 Practice Questions 1. The variance of a portfolio of risky securities is . A) the sum of the securities’ covariances with the portfolio B) the sum of the securities’ variances C) the weighted sum of the securities’ covariances with the porfolio D) the weighted sum of the securities’ variances E) none of the above Answer: C 2. According to the capital asset pricing model, . A) all securities must lie on the capital market line B) all securities must lie on the security market line C) underpriced securities lie below the security market line D) overpriced securities lie above the security market line E) all of the above Answer: B The SML plots expected returns against betas. All securities should lie on this line. If a security lies above the line, its expected return is higher than implied by the CAPM, therefore the security will be underpriced. 3. A security’s beta coefficient will be negative if A) its returns are negatively correlated with market index returns B) its returns are positively correlated with market index returns C) its stock price has historically been very stable