#1
What does CAPM stand for?
Capital Asset Pricing Model
ExplanationA model used to determine the expected return on an investment based on risk.
#2
Which of the following is a key assumption of the CAPM?
Investors are risk-averse
ExplanationAssumes investors prefer less risk and require higher returns for higher risk investments.
#3
What is the formula for calculating the expected return using CAPM?
Expected Return = Risk-free Rate + Beta * Market Risk Premium
ExplanationCalculates expected return by adding risk-free rate to product of beta and market risk premium.
#4
Which factor does Beta represent in CAPM?
Systematic Risk
ExplanationBeta measures the sensitivity of an asset's returns to market returns, indicating systematic risk.
#5
What does the Beta coefficient measure in CAPM?
The sensitivity of an asset's returns to market returns
ExplanationBeta quantifies how an asset's returns move relative to changes in market returns.
#6
Which market portfolio is typically used in CAPM?
The market portfolio, often represented by a broad stock market index
ExplanationUses a portfolio that includes all available investments in the market.
#7
In CAPM, what does the term 'Market Risk Premium' represent?
The return earned by investing in a market portfolio minus the risk-free rate
ExplanationThe additional return expected for taking on the risk of investing in the market.
#8
Which financial theorist introduced the Capital Asset Pricing Model (CAPM)?
William Sharpe
ExplanationWilliam Sharpe developed CAPM, earning a Nobel Prize in Economics for it.
#9
What does the Security Market Line (SML) depict in CAPM?
The relationship between systematic risk and expected return
ExplanationIllustrates the expected return for an asset given its systematic risk.
#10
What is the primary limitation of the CAPM model?
It does not account for all types of risk
ExplanationDoes not consider factors like liquidity risk and market sentiment.
#11
How does the CAPM model treat unsystematic risk?
It assumes it can be diversified away
ExplanationViews unsystematic risk as manageable through diversification.
#12
What is the formula for calculating the Beta coefficient in CAPM?
Beta = Covariance (Asset Returns, Market Returns) / Variance (Market Returns)
ExplanationDetermines beta by comparing an asset's returns to market returns.
#13
What is the primary assumption made about the market portfolio in CAPM?
It is perfectly diversified and efficient
ExplanationBelieves the market portfolio contains all investments and is optimally diversified.
#14
What role does the risk-free rate play in the CAPM model?
It is used as a baseline for calculating the expected return of an asset
ExplanationServes as a reference point for expected returns on riskier assets.