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Capital Asset Pricing Model and Return

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Capital Asset Pricing Model and Return
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Portfolio Theory, Asset Pricing Models, and Behavioral Finance Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.

True/False Easy: (24.4) SML FN Answer: b EASY . The slope of the SML is determined by the value of beta. a. True b. False (24.4) SML FN Answer: a EASY . If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck’s stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future. a. True b. False (24.5) Beta coefficient FN Answer: a EASY . If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False (24.5) Beta coefficient FN Answer: b EASY . A stock with a beta equal to -1.0 has zero systematic (or market) risk. a. True b. False (24.5) Beta coefficient FN Answer: a EASY . It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative. a. True b. False (24.5) Portfolio risk FN Answer: a EASY . In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data. a. True b. False
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