Question

Question 13 (0.2 points) Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rfis the risk-free rate, B is the security's beta, and E(RM) is the expected rate of return on the market. O 1) E(RM) - RF O2) B[E(RM) - RA O 3) E(R) - E(RM) 04) E(R) - [E(RM) + RA View hint for Question 13 Question 14 (0.2 points) Which one of the following statement about the capital asset pricing model is correct? 1) rewards investors based on unsystematic risk. O2) rewards investors based on systematic risk. 03) assumes the market has a beta of zero. O 4) applies to portfolios but not to individual securities. View hint for Question 14 Question 15 (0.2 points) Which one of the following statements is correct? 01) The higher the expected rate of return, the wider the distribution of returns. O 2 ) The risk-free rate of return has a risk premium of 1.0. 0 3) Risks and expected return are inversely related. O4) The reward for bearing risk is called the standard deviation. D View hint for Question 15

Answer 1

Question 13

Risk premium = Expected return on the market - Risk-free rate

Risk premium = E(Rm) - Rf

Option 1 is correct

Question 14

Option 2 is correct

CAPM rewards investors based on systematic risk because it cannot be diversified.

Option 1 is incorrect because unsystematic risk can be diversified and hence the CAPM does not reward investors based on unsystematic risk.

Option 3 is incorrect because CAPM assumes market has a beta of 1

Option 4 is incorrect because CAPM applies to both portfolio and individual securities.

Question 15

Option 1 is correct.

The higher the expected rate of return, the wider the distribution of returns.

Option 2 is incorrect because the risk-free rate of return has no risk premium.

Option 3 is incorrect because risks and expected returns are directly related.

Option 4 is incorrect because the reward for bearing risk is called the expected return.

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