SOLVED

5.6Â Â Web Appendix 1: Models of Asset Pricing 1) The riskiness of an asset is measured by ________. A) the magnitude of its return B) the absolute value of any change in the asset’s price C) the standard deviation of its return D) risk is impossible to measure 2) Holding many risky assets and thus reducing the overall risk an investor faces is called ________. A) diversification B) foolishness C) risk acceptance D) capitalization 3) The ________ the returns on two securities move together, the ________ benefit there is from diversification. A) less; more B) less; less C) more; more D) more; greater 4) A higher ________ means that an asset’s return is more sensitive to changes in the value of the market portfolio. A) alpha B) beta C) CAPM D) APT 5) The riskiness of an asset that is unique to the particular asset is ________. A) systematic risk B) portfolio risk C) investment risk D) nonsystematic risk 6) The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio. A) systematic B) nonsystematic C) portfolio D) investment 7) Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return ________. A) when it has a greater systematic risk B) when it has a greater risk in isolation C) when it has a lower systematic risk D) when it has a lower systematic risk and a lower risk in isolation 8) In contrast to the CAPM, the APT assumes that there can be several sources of ________ that cannot be eliminated through diversification. A) nonsystematic risk B) systematic risk C) credit risk D) arbitrary risk 9) Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return ________. A) when it has a greater systematic risk B) when it has a greater risk in isolation C) when it has a lower systematic risk D) when it has a lower systematic risk and a lower risk in isolation 10) A limitation of the CAPM is the assumption that ________. A) there are multiple sources of systematic risk B) there is a single source of systematic risk C) investors have different assessments of expected returns and standard deviations D) they cannot borrow freely at the risk-free rate