Copenhagen Business School

FINANCE Corporate

Quiz 2

1)Empirically, low beta stocks give a higher return than expected according to the CAPM and high beta stocks gives a lower return than expected according to the CAPM. This implies that empirically:

• • The security market line is more flat than what theory predicts.
  • The security market line is less flat than what theory predicts.
  • The empirical observation is not related to the shape of the security market line.
  • None of the above.

2. 
   Consider the following returns of the market and a stock in various future scenarios.

Is the information in the table sufficient for calculating the stock beta?

• • No. We need information on the risk free rate.
  • No. We need information on the correlation coefficient.
  • No. We need information on the variance of the market return.
  • None of the above.

3. What type of risk matters for an undiversified investor?
   • Market risk.
   • Idiosyncratic risk.
   • Default risk.
   • None of the above.

4. Which of the following statements is true about an investment with a beta of 0?
   • The required return is equal to the risk free rate
   • The return of the investment is uncorrelated with the return on the market portfolio.
   • The investment has the lowest possible expected return.
   • None of the above.

5. The capital market line (CML) describes the relationship between portfolio volatility and expected equilibrium return. Which of the following statements are true:
   • All portfolios on CML have the same Sharpe Ratio.
   • You can obtain any expected return on the CML by holding a portfolio which is a combination of the market portfolio and the risk free asset.
   • Any portfolio on CML will be equally desirable for a given investor.