Assume That the Assumptions Underlying the Standard CAPM Hold

question 5

Short Answer

Assume that the assumptions underlying the standard CAPM hold.Indicate whether each of the following statements is true or false.
a. A firm with a high variance will have a higher beta than a firm with a low variance.
b. A portfolio is efficient if it has no unsystematic risk.
c. A firm that is highly correlated with the market will have a higher beta than a firm that is less correlated.
d. If the variance of the market portfolio goes up, the betas of all securities will go down.
e. A well-managed firm will have a lower beta than a poorly managed firm.
f. The market portfolio is efficient. Therefore, it contains only the best stocks in the market.
g. A risk-seeking investor should hold the riskiest stocks in the market, and a risk-averse investor should hold the safest stocks.
h. If the riskless rate increases, the slope of the capital market line will decrease.

---

Definitions:

Par Value

The face value of a stock or bond as stated by the issuing company, which does not necessarily match the market value.

Common Stock

A type of equity security that represents ownership in a corporation, entitling the holder to vote on corporate matters and receive dividends.

Dividends in Arrears

Unpaid dividends on cumulative preferred stock, which must be paid out before any dividends can be issued to common stockholders.

Cumulative Preferred Stock

A type of preferred stock where missed dividend payments are accumulated and must be paid before any dividends can be issued on other stock classes.