Multiple choice

1. The main shortcoming of CAPM is that it  

a. Ignores the return on the market portfolio 

b. Uses too many factors 

c. Requires a single risk measure of systematic risk 

d. Ignores risk-free rate of return 

2. If a stock is overpriced it would plot:  

a. Above the security market line 

b. Below the security market line 

c. On the security market line 

d. On the Y-axis 

3. If a stock is underpriced it would plot:  

a. Above the security market line 

b. Below the security market line 

c. On the security market line 

d. On the Y-axis 

4. Given the following data for a stock: beta = 1.5; risk-free rate = 4%; market rate of return = 12%; and Expected rate of return on the stock = 15%. Then the stock is:  

a. Overpriced 

b. Underpriced 

c. Correctly priced 

d. Cannot be determined 

5. Given the following data for a stock: beta = 0.5; risk-free rate = 4%; market rate of return = 12%; and Expected rate of return on the stock = 10%. Then the stock is:  

a. Overpriced 

b. Under priced 

c. Correctly priced 

d. Cannot be determined 

6. Given the following data for a stock: beta = 0.9; risk-free rate = 4%; market rate of return = 14%; and Expected rate of return on the stock = 13%. Then the stock is:  

a. Overpriced 

b. Under priced 

c. Correctly priced 

d. Cannot be determined 

7. A "factor" in APT is a variable that:  

a. Is pure "noise" 

b. Correlates with risky asset returns in an unsystematic manner 

c. Affects the return of risky assets in a systematic manner 

d. Affects the return of a risky asset in a random manner 

8. Given the following data for a stock: risk-free rate = 4%; factor-1 beta = 1.5; factor-2 beta = 0.5 factor-1 risk-premium = 8%; factor-2 risk-premium = 2%. Calculate the expected rate of return on the stock using the two-factor APT model.  

a. 13% 

b. 17% 

c. 10% 

d. None of the above 

9. The three factors in the Three-Factor Model are: I) Market factor II) Size factor III) Book-to-market factor  

a. I only 

b. I and II only 

c. I, II, and III 

d. III only 

10. Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.5; beta (size) = 0.3; beta (book-to-market) = 1.1; market risk premium = 7%; size risk premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using the Fama-French three-factor model.  

a. 22.3% 

b. 7.8% 

c. 11.5% 

d. None of the above