Question

The capital asset pricing theory is based on the premise that:

only unsystematic variability in cash flows is relevant. |
||

neither systematic nor unsystematic variability in cash flows is relevant. |
||

both systematic and unsystematic variability in cash flows are relevant. |
||

none of the above. |

Answer #1

Option D is correct: none of the above.

The capital asset pricing theory is based on the premise that
only **systematic variability** in cash flows is
relevant. We do not have this as one of our answer choices.

Option A is incorrect because the unsystematic variability is not relevant because the investors are assumed to be diversified

Option B is incorrect because the capital asset pricing theory considers systematic vatiability as relevant

Option C is incorrect because only systematic variability in cash flows is relevant and unsystematic risk is not relevant

Compare and contrast Capital Asset Pricing Model (CAPM) with
Arbitrage Pricing Theory (APT). What is the single most important
issue with CAPM? Which model is more realistic? Why?

What is the cost of equity capital for PCP based on the CAPM
(Capital Asset Pricing Model)? Use the information in footnote
15.
"FOOTNOTE 15: BERKSHIRE HATHAWAY's cost of equity was 9.2%, which
reflected a beta of .90, an expected market return of 9.90%, and a
risk-free rate of 2.89%. The yield on corporate bonds rated AA was
3.95% - and after a 39% expected marginal tax rate, the cost of
debt would be 2.3% Weights on capital were 16.9%...

1. Asset 1 has a beta of 1.2 and Asset 2 has a beta of 0.6.
Which of the following statements is correct?
A. Asset 1 is more volatile than Asset 2.
B. Asset 1 has a higher expected return than Asset 2.
C. In a regression with individual asset’s return as the
dependent variable and the market’s return as the independent
variable, the R-squared value is higher for Asset 1 than it is for
Asset 2.
D. All of...

Capital Asset Pricing Model
Studies have found that Beta is not the only factor that matters
for determining the expected return on a stock a. Mention and
explain 3 other factors that impact the expected return of the
stock and how they could affect it.

Keeping an asset implies reinvestment in the asset. Finance
theory is consistent with the notion that reinvestment is at
current value, or replacement cost. Such a decision is presumably
based on comparing expected future cash flows that will be
generated by the asset and the cost of replacing it with a new one
that could generate the same or different cash flows. According to
the conceptual framework, the purpose of financial statements is to
provide information regarding performance. Investment or...

Karen Kay, a portfolio manager at Collins Asset Management, is
using the capital asset pricing model for making recommendations to
her clients. Her research department has developed the information
shown in the following exhibit.
Security
Expected Return
Standard
Deviation
Beta
A
12%
15%
0.8
B
16%
9%
1.4
Market Return
13%
10%
Risk-Free Rate
5%
With regard to Securities A and B only, which security has the
smaller total risk?
With regard to Securities A and B only, which security...

8
San Diego Gas and Electronic Company’s treasurer uses both the
capital asset pricing model and the dividend valuation model to
compute the cost of common equity (also referred to as the required
rate of return for common equity).
Assume: Rf = 6 % Km = 9 % β = 2.2 D1 = $ .70 P0 = $ 15 g = 6
%
a. Compute Ki (required rate of return on
common equity based on the capital asset pricing model)....

Which of the following statements about the Capital Asset
Pricing Model (CAPM), which is the “father” of the Security Market
Line (SML), is most correct?
A
The CAPM is based on a restrictive set of assumptions.
B
It has not been empirically verified.
C
In general, its inputs are difficult to estimate.
D
In spite of its deficiencies, it provides investors with a
rational way of thinking about required rates of return.
E
All of the above responses are correct.

1. The capital asset pricing model uses three variables to
evaluate required returns on common equity: the risk-free rate, the
beta coefficient, and the market risk premium.
2. A firm's cost of capital is influenced by current ratio.
3. Two projects that have the same cost and the same expected
cash flows will have the same net present value.
4. If the net present value of a project is zero, then it must
be accepted.
5. Financial leverage affects a...

The volatility of an asset’s return can be broken into
diversifiable (i.e., unsystematic or firm-specific) and
non-diversifiable (i.e., systematic) components. Investors who hold
the asset should be compensated only for the non-diversifiable
risk, which is measured by the “beta” of the asset. A stock that
has a zero beta has no systematic risk and its expected rate of
return should equal the risk free rate. Suppose that you have two
different stocks: • SysVol, which has a beta of 1.00...

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