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Charles P. Jones, Investment: Principles and Concepts, Twelfth Edition, John Wiley & Sons test bank.
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Charles P. Jones, Investment: Principles and Concepts, Twelfth Edition, John Wiley & Sons.
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File: Ch.09, Chapter 9: Asset Pricing ModelsMultiple Choice Questions
1. The Capital Asset Pricing Model:
a. has serious flaws because of its complexity.
b. measures relevant risk of a security and shows the relationship between risk and
expected return.
c. was developed by Markowitz in the 1930s.
d. discounts almost all of the Markowitz portfolio theory.
Ans: b
Difficulty: Moderate
Ref: Capital Market Theory
2. Which of the following is not one of the assumptions of the CMT?
a. All investors have the same one-period time horizon.
b. There are no personal income taxes.
c. There is no interest rate charged on borrowing.
d. There are no transaction costs.
Ans: c
Difficulty: Moderate
Ref: Capital Market Theory
3. Which of the following is an assumption of the CMT?
a. Single investors can affect the market by their buying and selling decisions.
b. There is no inflation.
c. Investors prefer capital gains over dividends.
d. Different investors have different probability distributions..
Ans: b
Difficulty: Moderate
Ref: Capital Market Theory
4. Which of the following regarding investors and the CMT is true?
a. Investors recognize that all the assumptions of the CMT are unrealistic.
b. Investors recognize that all of the CMT assumptions are not unrealistic.
c. Investors are not aware of the assumptions of the CMT model.
d. Investors recognize the CMT is useless for individual investors.
Ans: b
Difficulty: Moderate
Chapter Nine 105
Asset Pricing Models
, Ref: Capital Market Theory
5. Which of the following is generally used as a proxy for the risk-free rate of
return?
a. savings account
b. certificate of deposit
c. Treasury bill
d. Treasury bond
Ans: c
Difficulty: Easy
Ref: Capital Market Theory
6. What does it mean when the CAPM is called "robust?"
a. The CAPM requires no assumptions.
b. Even if most of the assumptions of the CAPM are relaxed, most of the
conclusions will still hold.
c. The CAPM is based on realistic assumptions.
d. No other model can represent stock returns better than the CAPM.
Ans: b
Difficulty: Difficult
Ref: Capital Market Theory
7. When markets are in equilibrium, the CML will be upward sloping
a. because it shows the optimum combination of risky securities.
b. because the price of risk must always be positive.
c. because it contains all securities weighted by their market values.
d. because the CML indicates the required return for each portfolio risk level.
Ans: b
Difficulty: Moderate
Ref: The Equilibrium Return-Risk Tradeoff
8. __________, the CML can be downward sloping.
a. Ex post
b. When investors are risk-lovers
c. When the SML is upward sloping
d. When the risk premium for the market is very high
Ans: a
Difficulty: Difficult
Ref: The Equilibrium Return-Risk Tradeoff
Chapter Nine 106
Asset Pricing Models
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