The risk that a shareholder requires an extra return for (risk premium) is:
The total risk of the share
The unique risk of the share
The unsystematic risk of the share
The market related risk of the share
Which of the following is NOT a determinant of systematic risk?
Sensitivity of revenue to the general level of economic activity
Involvement in a rapidly developing technology
Relationship of fixed and variable costs
Level of financial gearing
ß (beta) is
The covariance of the returns of a share with that of the market divided by the variance of the returns of the market
The standard deviation of the returns of a share divided by the standard deviation of the market
The variance of the returns of a share divided by the standard deviation of the market
The correlation coefficient of the returns of the share and the market divided by the variance of the returns of the market
If a company's shares have a ß of .75 this means that:
The return on the shares is ¾ that of the market
The total risk of the company is ¾ that of the market
The volatility of the returns of the shares as regards economic fluctuations is ¾ that of the market
The non-systematic risk of the company is ¼ that of the market
Company H has a share beta of 1.5 whilst company L has a share beta of .8. This means that other things being equal:
H will outperform L when the market is rising
L will outperform H when the market is rising
H will always outperform L
The returns on H will be 1.5/.8 that of L
The shares of Chelsea plc have a beta of 1.8. If the return on government securities is 3% and the expected return on the market is 8% then the expected return on Chelsea's shares will be:
5.4%
9%
12%
14.4%
The alpha coefficient represents:
The total risk of the share
The movements in share price that are not related to the market as a whole
An important aspect of beta
Risk requiring extra return
So far as investors are concerned, which of the following is NOT necessary for the CAPM to hold:
They are rational and risk averse
They have the same expectations about the future
They perceive utility in terms of returns
They have access to all possible information about the companies they invest in
Empirical tests of the CAPM compared to its theoretical construction suggest that:
It is a perfect measure of company risk
Whilst there are some differences it still provides a useful tool for assessing appropriate returns
The differences are so great that we should disregard CAPM
We need to take dividends into account when we assess returns
If a company decides to use CAPM in project appraisal, it should calculate beta of a project that is not its usual type of project based on:
The average beta of its shares over the past few years
The beta of its shares adjusted for its gearing
The beta of companies that specialise in that type of project