Question

10-15

true or false for each statement

0 0 10. In the CAPM, stocks with larger betas will have lower expected returns. 0 0 11. The SML intersects the risk axis when drawn. 12. The market risk premium would not be the same for high-beta and low-beta 0 0 stocks. 0 0 13. Systematic risk and nondiversifiable risk are synonymous. 0 0 14. Correlations can only be positive. 0 0 15. When two states of the economy are equal and possible returns are -10% and 8%, the expected return <0%.

Answer 1

ANSWER STATEMENT TRUE/FALSE FALSE 10 11 FALSE FALSE REASON The stocks with a larger beta will be having higher expected return as the CAPM pays extra return for taking extra risk. The SML intersects at return axis at risk-free rate. The market risk premium is calculated as Rm - Rf, where Rm is the Market Return and Rf is the risk-free rate. Hence, both will remain same for all the stocks. Both are synonymous since the systematic risk which is computed by beta is a non-diversifiable risk as it's a Macro level risk which exits for each and every stock in a market. Correlations can be Positive, No correlation, and Negative correlation. Since ,ER = (-10%*0.5)+(8%*0.5) = -1% which is less than 0% . TRUE 14 FALSE TRUE 15