#1
What does the Capital Asset Pricing Model (CAPM) measure?
The expected return of a security
ExplanationMeasures expected returns of securities.
#2
Which factor is NOT considered in the Capital Asset Pricing Model (CAPM)?
Unsystematic risk
ExplanationIgnores unsystematic risk.
#3
In the CAPM formula, what does beta represent?
Systematic risk
ExplanationBeta represents systematic risk.
#4
Which assumption is made about investors in the CAPM?
Investors are risk-averse and rational.
ExplanationAssumes investors are rational and risk-averse.
#5
What is the formula for calculating the expected return of a security in the CAPM?
Expected Return = Risk-free Rate + (Beta * Market Risk Premium)
ExplanationFormula for expected return calculation.
#6
Which type of risk does the CAPM primarily focus on?
Market risk
ExplanationPrimarily focuses on market risk.
#7
What is the significance of the risk-free rate in the CAPM?
It represents the minimum return an investor expects for any investment.
ExplanationRepresents minimum expected return.
#8
Which assumption about markets is fundamental to the Capital Asset Pricing Model (CAPM)?
Markets are always in equilibrium.
ExplanationFundamental assumption: markets are in equilibrium.
#9
What is the relationship between a security's beta coefficient and its risk in CAPM?
Beta directly measures a security's risk.
ExplanationBeta directly correlates with security risk.
#10
What does the Security Market Line (SML) represent in the context of CAPM?
It represents the expected return of a security based on its systematic risk.
ExplanationIllustrates expected return based on systematic risk.
#11
How does CAPM assist in investment decision-making?
It aids in determining the appropriate required rate of return for investments.
ExplanationAssists in determining required rate of return.
#12
What does the beta coefficient of 1.5 indicate in the context of CAPM?
The security is riskier than the market.
ExplanationBeta > 1 implies security is riskier than market.
#13
How do changes in the risk-free rate affect the Security Market Line (SML) in CAPM?
The SML shifts vertically.
ExplanationChanges in risk-free rate shift SML vertically.
#14
What does the Security Market Line (SML) represent graphically in the CAPM?
The relationship between expected returns and market risk for individual securities
ExplanationGraphically represents relationship between returns and risk.