1. If all investors become more less risk-averse, the SML will _______________ and stock required returns will ________.

Multiple Choice

• have the same slope but larger intercept; fall

• have the same intercept with a flatter slope; fall

• have the same intercept with a steeper slope; rise

• have the same slope but smaller intercept; rise

2. The assumptions of the CAPM model include _______________

I. The stock's price can be affected by investor's trades.
II. All investors plan for various holding periods.
III. All investors analyze securities in the same way and share the same economic view of the world.
IV. All investors have different levels of risk aversion.

Multiple Choice

• III and IV only

• I, III, and IV only

• I, II, and III only

• II and III only

3. Which of the following is (are) correct according to CAPM?

Multiple Choice

• A fairly priced security should have a beta = zero.

• Alpha is the intercept while beta is the slope of the Security Market Line (SML).

• Risk-free rate is the intercept while beta is the slope of the Security Market Line (SML).

• Beta represents diversifiable risk.

• None of the above.

4. In a simple CAPM world which of the following statements is (are) correct?

I. All investors will choose to hold the portfolio which includes all riskless assets in the world.
II. Investors will choose the same portfolio even if their levels of risk aversion are different.
III. The return per unit of risk will be different for different individual assets.
IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio.

Multiple Choice

• IV only

• I and III only

• I and IV only

• I, II, III, and IV

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