Q2

The Capital Asset pricing Model (CAPM) relates the _______________ risk of an investment with the expected return on that investment because______________________________________.

1.systematic, because systematic risk can be diversified away

2.systematic ; unsystematic risk can be diversified away.

3.unsystematic; because unsystematic risk can be diversified to a limit.

4.total; because systematic risk can be diversified to a limit

5.total, because unsystematic risk cannot be diversified away

Q3

Multifactor pricing models such as Fama and French's three factor model, or the Arbitrage Pricing Theory are considered ____________________ in predicting expected returns of an investment compared with the Capital Asset pricing Model because ____________________.

Group of answer choices

1.superior; the Capital Asset Pricing Model uses a single factor that is difficult to construct in the real world.

2.inferior ; Multi-factor models have no theoretical framework while CAPM has a sound theoretical framework.

3.similar ; both models are affected by assumptions that are not realistic and cannot be used in the real world.

4.superior ; an increased number of factors are better able to measure the sensitivity of the investment against each factor.

5.superior ; the Capital Asset pricing Model assumes an efficient market