Capital Asset Pricing Model (CAPM) and Risk Premium Quiz
Test your understanding of Capital Asset Pricing Model (CAPM) concepts, including beta, risk premium, SML, and more. Take the quiz now!
#1
What does CAPM stand for?
Common Asset Pricing Model
Capital Allocation Pricing Model
Capital Asset Pricing Model
Comprehensive Asset Pricing Model
#2
Which of the following is a key assumption of the CAPM?
Investors are risk-averse
Investors have perfect information
Investors have different opinions about risk
Investors always maximize their profits
#3
What is the formula for calculating the expected return using CAPM?
Expected Return = Risk-free Rate + Beta * Market Risk Premium
Expected Return = Risk-free Rate / Beta * Market Risk Premium
Expected Return = Risk-free Rate - Beta * Market Risk Premium
Expected Return = Risk-free Rate * Beta / Market Risk Premium
#4
Which factor does Beta represent in CAPM?
Systematic Risk
Unsystematic Risk
Market Risk Premium
Risk-free Rate
#5
What does the Beta coefficient measure in CAPM?
The sensitivity of an asset's returns to market returns
The total risk of an asset
The expected return of an asset
The correlation between two assets
#6
Which market portfolio is typically used in CAPM?
The portfolio with the highest returns
The portfolio with the lowest volatility
The market portfolio, often represented by a broad stock market index
The portfolio with the most diverse assets
#7
In CAPM, what does the term 'Market Risk Premium' represent?
The return earned by investing in a risk-free asset
The return earned by investing in a market portfolio minus the risk-free rate
The risk associated with a specific asset
The additional return expected from an investment in the stock market
#8
Which financial theorist introduced the Capital Asset Pricing Model (CAPM)?
Harry Markowitz
Eugene Fama
William Sharpe
Jack Treynor
#9
What does the Security Market Line (SML) depict in CAPM?
The relationship between systematic risk and expected return
The relationship between unsystematic risk and expected return
The relationship between risk-free rate and expected return
The relationship between market risk premium and expected return
#10
What is the primary limitation of the CAPM model?
It relies heavily on historical data
It assumes a linear relationship between risk and return
It does not account for all types of risk
It requires precise estimates of market parameters
#11
How does the CAPM model treat unsystematic risk?
It considers it in calculating the expected return
It assumes it can be diversified away
It adds it to the market risk premium
It ignores it completely
#12
What is the formula for calculating the Beta coefficient in CAPM?
Beta = Covariance (Asset Returns, Market Returns) / Variance (Market Returns)
Beta = Variance (Asset Returns) / Covariance (Asset Returns, Market Returns)
Beta = Variance (Market Returns) / Covariance (Asset Returns, Market Returns)
Beta = Covariance (Asset Returns, Market Returns) / Variance (Asset Returns)
#13
What is the primary assumption made about the market portfolio in CAPM?
It includes all possible assets in the market
It has the highest possible return
It has the lowest possible risk
It is perfectly diversified and efficient
#14
What role does the risk-free rate play in the CAPM model?
It represents the maximum return an investor can achieve
It is used as a baseline for calculating the expected return of an asset
It is added to the market risk premium
It adjusts the Beta coefficient of an asset
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