# Thread: RE: Multiple choice problems

1. ## RE: Multiple choice problems

Hi guys

Just a quick quiz we were given, some very interesting questions involved.

I have attached the document with the questions and my answers, hope that someone can confirm these please?

The first section is just true or false and the second section is merely multiples choice

Thanks a lot for all contributions

THE CAPITAL ASSET PRICING MODEL

TRUE/FALSE QUESTIONS

1 One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate. T

2 Since many of the assumptions made by the capital market theory are unrealistic, the theory is not applicable in the real world. T

3 A risk-free asset is one in which the return is completely guaranteed, there is no uncertainty.

4 The market portfolio consists of all risky assets. F

5 The introduction of lending and borrowing severely limits the available risk/return opportunities. F

6 The capital market line is the tangent line between the risk free rate of return and the efficient frontier. T

7 The portfolio on the capital market line are combinations of the risk-free asset and the market portfolio.

8 If you borrow money at the RFR and invest the money in the market portfolio, the rate of return on your portfolio will be higher than the market rate of return. F

9 Studies have shown that a well diversified investor needs as few as five stocks. F

10 Beta is a measure of unsystematic risk. F

11 Securities with returns that lie above the security market line are undervalued. F

12 Securities with returns that lie below the security market line are undervalued. T

MULTIPLE CHOICE QUESTIONS

1 Which of the following statements about the risk-free asset is correct?
a) The risk-free asset is defined as an asset for which there is uncertainty regarding the expected rate of return.
b) The standard deviation of return for the risk-free asset is equal to zero.
c) The standard deviation of return for the risk-free asset cannot be zero, since division by zero is undefined.
d) Choices a and b
e) Choices a and c

2 The market portfolio consists of all
a) New York Stock Exchange stocks.
b) High grade stocks and bonds.
c) Stocks and bonds.
d) U.S. and non-U.S. stocks and bonds.
e) Risky assets.

3 The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the
a) Security market line.
b) Capital asset pricing model.
c) Characteristic line.
d) Line of least resistance.
e) Market line.

4 The correlation coefficient between the market return and a risk-free asset would
a) be + infinity.
b) be - infinity.
c) be +1.
d) be –1.
e) be Zero.

5 As the number of securities in a portfolio increases, the amount of systematic risk
a) Remains constant.
b) Decreases.
c) Increases.
d) Changes.
e) None of the above

6 Theoretically, the correlation coefficient between a completely diversified portfolio and the market portfolio should be
a) - 1.0.
b) + 1.0.
c) 0.0.
d) - 0.5.
e) + 0.5.

7 A completely diversified portfolio would have a correlation with the market portfolio that is
a) Equal to zero because it has only unsystematic risk.
b) Equal to one because it has only systematic risk.
c) Less than zero because it has only systematic risk.
d) Less than one because it has only unsystematic tisk.
e) Less than one because it has only systematic risk.

2. Some of these solutions appear to be incorrect, can anyone confirm if these answers are correct?