1. The CAPM assumes (a) investors are risk averse. (b) a corporate tax rate of 34%. (c) the cost to borrow is greater than the benefit from lending. (d) shares must be purchased in integer increments. (e) investors will hold the securities for three years. 2. The CAPM assumes an investor will choose a portfolio with (a) the largest expected return. (b) the largest expected return for a given level of risk. (c) the smallest risk. (d) the largest expected return and the largest risk. (e) the largest risk divided by the expected return. 3. To choose different portfolio, the CAPM assumes investors have different(a) Beta forecasts. (b) tangent points on the efficient set of portfolios. (c) tax rates. (d) indifference curves. (e) values for the risk-free return. 4. The separation theorem for the CAPM includes (a) each investor must separate his desired return from his risk. (b) every investor will invest in the same risky portfolio. (c) each investor's indifference curve will determine his risk portfolio. (d) security risk is considered before returns are analyzed. (e) each investor will choose a different efficient portfolio. 5. The market portfolio assumes (a) only the most efficient security is included. (b) at least 10 securities are included for diversification. (c) all securities are included. (d) only efficient securities are included. 6. At equilibrium, the market portfolio for the CAPM assumes (a) demand for shares is greater than supply. (b) investors will eliminate inefficient shares from the portfolio. (c) prices are such that shares demanded equals shares outstanding. (d) the proportion invested in each security is based on the price per share. 7. For the CAPM, the market portfolio (a) should only include domestic investments. (b) includes a well-defined group of common and preferred stocks. (c) includes only dividend or interest paying investment. (d) should not include real estate investments. (e) is frequently represented by the Standard and Poor's 500. 8. Comparing a low dividend yield portfolio to a well-diversified portfolio may provide misleading results because (a) of the tendency to ignore dividends and interest. (b) low dividend yield stocks are not traded on the New York Stock Exchange. (c) low dividend yield stocks have lower risk. (d) low dividend yield stocks tend to have a smaller percentage price increase. (e) (e) low dividend yield stocks are not traded daily. 9. When you draw a line through the risk-free return and the market portfolio, all other portfolios (a) lie above the line. (b) lie below the line. (c) lie on the line. (d) are efficient. (e) can be above or below the line. 10. You have analyzed a market portfolio with an expected return of 18% and a standard deviation of 10%. If the risk-free return is 6%, the slope of the Capital Market Line is: (a) 0.75. (b) 1.33. (c) 1.20. (d) -0.75. (e) -1.20. 1 11. In developing the CAPM, the relevant measure of risk for each security is its (a) individual standard deviation. (b) weight or proportion of the portfolio. (c) correlation with each alternative security. (d) covariance with the market portfolio. (e) expected rate of return divided by the standard deviation. 12. The relationship between covariance risk and the expected return for securities is the(a) Beta. (b) Correlation Coefficient. (c) Security Market Line. (d) CAPM. (e) Market Portfolio. 13. When using a Beta, the slope of the Security Market Line is (a) expected return of the market portfolio - risk-free return. (b) risk-free return. (c) expected return of the market portfolio/risk-free return. (d) expected return of the market portfolio. (e) expected return of the market portfolio + risk-free return. 14. Your portfolio has three stocks, A, B, and C, in the proportions of .2, .3, .5. The Betas for the individual stocks are A at 1.2, B at 1.0, and C at .7. Beta of your portfolio is: (a) 1.00. (b) 1.02. (c) 0.94. (d) 1.09. (e) 0.89. 15. The SML must go through the market portfolio point since its Beta is (a) 1. (b) 0.5. (c) 0. (d) -1. (e) 2. 16. The Beta for a security is an alternative way of representing its (a) standard deviation. (b) risk-free return. (c) expected rate of return. (d) covariance with each other security. (e) covariance with the market. 17. The CAPM assumes equilibrium in that (a) all investors desire the risk-free return. (b) the supply of securities is less than the quantity demanded. (c) the slope of the SML is 1. (d) the supply of securities is equal to the quantity demanded. 18. The Market Model differs from the CAPM in that the Market Model (a)uses a risk-free return. (b) uses the market portfolio. ????????? (c) uses a market index. (d) describes how prices are not