Question

In the context of CAPM/SML, which of these is not true about Beta:

it is fairly stable over time |
||

it shows how much on average the stock price changed when the market return moved +/- 1% |
||

it measures unsystematic risk |
||

it is estimated by running a regression of stock returns vs market returns |

Answer #1

Beta which is used in CAPM (Capital Assets Pricing Model) shows the volatility and systematic risk of any security or portfolio. It measures volitality of an individual stock and not of the whole market. Beta shows the slope of line through regression of data points of a single stock against that of the market.

It shows the relationship between the systematic risk and expected return of stocks. It describes the behaviour of security's return due to fluctuations in the market.

Market is taken as base for the calculation, therefore any change in the market affects the stock price.

If beta=1: volatile, if beta>1: more volatile, if beta<1: less volatile.

Keeping all these things in the mind we can conclude that two things in the given question is not true about beta:

It is fairly stable over time; and

It measures unsystematic risk.

1.1. In the context of the CAPM, explain the difference between
the SML and the CML (3).
1.2. The market portfolio has an expected return of 0.12 and a
standard deviation of 0.40, and the risk-free rate is 0.04.
Calculate the slope of the security market (2).
1.3. Explain what the slope of the SML represents (3).

Which of the following is not true about CAPM? Multiple
Choice
Not all assumptions of CAPM are realistic
CAPM allows for multiple sources of systematic risk
The expected return of a security with a beta of zero is the
risk-free rate
Expected returns increase with higher beta

Question B4
(a) The beta of a stock is 1.25, the risk-free rate is 3%, and
the expected return on the market is 15%. If the actual returns of
the stock and the market are 15% and 12% respectively, calculate
the systematic portion and unsystematic portion of the unexpected
returns of the stock.
(b) Identify and explain briefly TWO disadvantages of
Fama-French Three-Factor Model over Capital Asset Pricing Model
(CAPM).

1. The Security Market Line (SML) is a graphical representation
of returns associated with beta. Choose the correct statement
regarding to the SML. If your estimated return is above the SML,
the stock is overvalued. You cannot use SML to understand if the
stock is overvalued or undervalued. If your estimated return is on
the SML, the stock is overvalued. If your estimated return is below
the SML, the stock is overvalued. None of the above are
correct.
2.
What...

Assume that CAPM holds. Which of the following statements is
TRUE?
a)Beta indicates a stock’s diversifiable risk
b)Two stocks with the same stand-alone risk must have the same
betas
c)The slope of the security market line is given by the market
risk premium
d)If the beta of a Stock doubles, then its required rate of
return must also double
e)If the risk-free rate decreases, then the market risk premium
must also decrease

1.) According to the CAPM, what is the expected return on a
security given a market risk premium of 9%, a stock beta of 0.57,
and a risk free interest rate of 1%? Put the answers in decimal
place.
2.) Consider the CAPM. The risk-free rate is 2% and
the expected return on the market is 14%. What is the expected
return on a portfolio with a beta of 0.5? (Put answers
in decimal points instead of percentage)
3.) A...

Which of the following statements is true?
Select one:
A. Beta identifies the appropriate level of risk for which an
investor should be compensated.
B. Unsystematic risk is not diversifiable, so there is no reward
for taking on such risk.
C. Stocks with same betas will always earn different
returns.
D. The market risk premium is calculated by multiplying beta by
the difference between the expected return on the market and the
risk-free rate of return.

Which of the following statements about the beta coefficient is
false?
A
A stock’s beta coefficient measures its volatility relative to
the market portfolio.
B
A stock’s beta coefficient can be estimated by plotting the
stock’s returns versus the market portfolio’s returns.
C
A stock’s reported beta coefficient is based on forecasted
future volatility.
D
A stock with a beta coefficient greater than 1.0 is said to be
riskier than the market portfolio.
E
Using the capital asset pricing model,...

Which of the following is TRUE?
Select one:
a. The correlation coefficient is an index of the degree of
movement of an asset's return in response to a change in the
risk-free asset return.
b. The capital asset pricing model (CAPM) links together
unsystematic risk and return for all assets.
c. The security market line is not stable over time and shifts over
time in response to changing inflationary expectations.
d. The CAPM uses standard deviation to relate an asset's...

Which of the following statements is/are incorrect? 1) A
security's beta measures its market risk. 2) If investors become
less risk averse, the slope of SML will decrease accordingly. 3)
The tighter the probability distribution of its expected future
return, the greater risk of a given investment as measured by its
standard deviation. 4) SML is a graphical depiction of CAPM?

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