Question

In the theoretical Capital Asset Pricing Model (CAPM), the slope of the Securities Market Line (SML) is determined by the value of beta. True or False?

Answer #1

False

The slope of Securities Market Line as determined by CAPM model is not beta but it is equity or market risk premium that is market return-risk free rate. The slope is same for every stock, it is the beta that changes and hence the required return changes. In SML, beta is the independent variable, market risk premium is slope, risk free rate is intercept and required/expected return is the dependent variable.

E(return of stock)=risk free+market risk premium*beta of the stock

32. Consider the Securities Market Line (SML) of the Capital
Asset Pricing Model, holding all else constant if the firm's beta
decreases the required rate of return will? Increase, stay the same
decrease, move around randomly
33. Consider the Securities Market Line (SML) of the Capital
Asset Pricing Model, for a stock with a positive beta and holding
all else constant if the market risk premium increases the required
rate of return will: increase, stay the same decrease, move around...

What is the Capital Asset Pricing Model (CAPM)? Explain each
variable in CAPM. What is the Security Market Line (SML)? Please
feel free to expand on your answers.

Explain what the capital asset pricing model (CAPM) is mainly
used for, and its theoretical foundation.

Assume for parts (a) to (c) that the Capital Asset Pricing Model
holds. The market portfolio has an expected return of 5%. Stock A's
return has a market beta of 1.5, an expected value of 7% and a
standard deviation of 10%. Stock B's return has a market beta of
0.5 and a standard deviation of 20%. The correlation between stock
A's and stock B's returns is 0.5.
1.what the risk-free rate? What is the expected return on stock
B?...

Explain why this statement is true or false: The capital asset
pricing model predicts that security with a beta less than zero
will provide an expected return higher than the market portfolio
return.
Explain why this statement is true or false: According to CAPM,
the price of a security will fall if its expected rate of return
lies above the security market line.

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.

Manipulating CAPM Use the basic equation for the capital asset
pricing model (CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 0.54
when the risk-free rate and market return are 6 % and 8 % ,
respectively.
b. Find the risk-free rate for a firm with a required return
of 6.368 % and a beta of 0.26 when the market return is 11 % .
c. Find the market...

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...

Use the basic equation for the capital asset pricing model
(CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 0.84
when the risk-free rate and market return are 77% and 15 %
respectively.
b. Find the risk-free rate for a firm with a required return of
7.394% and a beta of 1.16 when the market return is 7 %.
c. Find the market return for an asset with a...

Discuss how costs of capital relate to Capital Asset
Pricing Model (CAPM).

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