Examples of events that increase risk aversion include (a) a stock market crash. (b) assassination of a key political leader. (c) the outbreak of war. (d) all of the above.

61. Examples of events that increase risk aversion include
(a) a stock market crash.
(b) assassination of a key political leader.
(c) the outbreak of war.
(d) all of the above.
Answer: D
Level of Difficulty: 2
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)

62. In the capital asset pricing model, the beta coefficient is a measure of _________ risk and an index of the degree of movement of an asset’s return in response to a change in

_________.
(a) diversifiable; the prime rate
(b) nondiversifiable; the Treasury bill rate
(c) diversifiable; the bond index rate
(d) nondiversifiable; the market return
Answer: D
Level of Difficulty: 2
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)
63. Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on
the market portfolio of assets is 12 percent. The asset’s market risk premium is
(a) 7.2 percent.
(b) 6.0 percent.
(c) 13.2 percent.
(d) 10 percent.
Answer: B
Level of Difficulty: 2
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM) (Equation 5.8)
64. In the capital asset pricing model, the beta coefficient is a measure of
(a) economic risk.
(b) diversifiable risk.
(c) nondiversifiable risk.
(d) unsystematic risk.
Answer: C
Level of Difficulty: 2
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)
65. Asset P has a beta of 0.9. The risk-free rate of return is 8 percent, while the return on
the market portfolio of assets is 14 percent. The asset’s required rate of return is
(a) 13.4 percent.
(b) 6.0 percent.
(c) 5.4 percent.
(d) 10 percent.
Answer: A
Level of Difficulty: 3
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM) (Equation 5.8)
66. As risk aversion increases
(a) a firm’s beta will increase.
(b) investors’ required rate of return will increase.
(c) a firm’s beta will decrease.
(d) investors’ required rate of return will decrease.
Answer: B
Level of Difficulty: 3
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)
67. In the capital asset pricing model, an increase in inflationary expectations will be
reflected by a(n)
(a) increase in the slope of the security market line.
(b) decrease in the slope of the security market line.
(c) parallel shift downward in the security market line.
(d) parallel shift upward in the security market line.
Answer: D
Level of Difficulty: 4
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)
68. In the capital asset pricing model, the general risk preferences of investors in the
marketplace are reflected by
(a) the risk-free rate.
(b) the level of the security market line.
(c) the slope of the security market line.
(d) the difference between the security market line and the risk-free rate.
Answer: C
Level of Difficulty: 4
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)
69. An increase in the beta of a corporation indicates _________, and, all else being the
same, results in _________.
(a) a decrease in risk; a higher required rate of return and hence a lower share price
(b) an increase in risk; a higher required rate of return and hence a lower share price
(c) a decrease in risk; a lower required rate of return and hence a higher share price
(d) an increase in risk; a lower required rate of return and hence a higher share price
Answer: B
Level of Difficulty: 4
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)
70. A change in the risk-free rate would not be due to
(a) an international trade embargo.
(b) a change in Federal Reserve policy.
(c) foreign competition in the firm’s product market area.
(d) None of the above.
Answer: C
Level of Difficulty: 4
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)