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<h2 class="hd hd-2 unit-title">Systematic vs. Idiosyncratic Risk</h2>
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<h3 class="hd hd-2">Systematic vs. Idiosyncratic Risk</h3>
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<h2 class="hd hd-2 unit-title">The CAPM</h2>
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<h3 class="hd hd-2">The CAPM</h3>
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<h2 class="hd hd-2 unit-title">Exercise: The CAPM</h2>
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Multiple Choice
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<div class="problem">
<div>
<span>
<ol class="enumerate">
<li value="1">
<p>
True or false. Stocks with a beta of zero should always offer an expected rate of return of zero.<br/><div class="wrapper-problem-response" tabindex="-1" aria-label="Question 1" role="group"><div class="choicegroup capa_inputtype" id="inputtype_ca61c4d9b0284011bcc462f255438bdf_2_1">
<fieldset aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_2_1">
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_2_1" id="input_ca61c4d9b0284011bcc462f255438bdf_2_1_choice_1" class="field-input input-radio" value="choice_1"/><label id="ca61c4d9b0284011bcc462f255438bdf_2_1-choice_1-label" for="input_ca61c4d9b0284011bcc462f255438bdf_2_1_choice_1" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_2_1"> <text> True</text>
</label>
</div>
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_2_1" id="input_ca61c4d9b0284011bcc462f255438bdf_2_1_choice_2" class="field-input input-radio" value="choice_2"/><label id="ca61c4d9b0284011bcc462f255438bdf_2_1-choice_2-label" for="input_ca61c4d9b0284011bcc462f255438bdf_2_1_choice_2" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_2_1"> <text> False</text>
</label>
</div>
<span id="answer_ca61c4d9b0284011bcc462f255438bdf_2_1"/>
</fieldset>
<div class="indicator-container">
<span class="status unanswered" id="status_ca61c4d9b0284011bcc462f255438bdf_2_1" data-tooltip="Not yet answered.">
<span class="sr">unanswered</span><span class="status-icon" aria-hidden="true"/>
</span>
</div>
</div></div> </p>
</li>
<li value="2">
<p>
True or false. The CAPM implies that investors require a higher return to hold highly volatile securities.<br/><div class="wrapper-problem-response" tabindex="-1" aria-label="Question 2" role="group"><div class="choicegroup capa_inputtype" id="inputtype_ca61c4d9b0284011bcc462f255438bdf_3_1">
<fieldset aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_3_1">
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_3_1" id="input_ca61c4d9b0284011bcc462f255438bdf_3_1_choice_1" class="field-input input-radio" value="choice_1"/><label id="ca61c4d9b0284011bcc462f255438bdf_3_1-choice_1-label" for="input_ca61c4d9b0284011bcc462f255438bdf_3_1_choice_1" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_3_1"> <text> True</text>
</label>
</div>
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_3_1" id="input_ca61c4d9b0284011bcc462f255438bdf_3_1_choice_2" class="field-input input-radio" value="choice_2"/><label id="ca61c4d9b0284011bcc462f255438bdf_3_1-choice_2-label" for="input_ca61c4d9b0284011bcc462f255438bdf_3_1_choice_2" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_3_1"> <text> False</text>
</label>
</div>
<span id="answer_ca61c4d9b0284011bcc462f255438bdf_3_1"/>
</fieldset>
<div class="indicator-container">
<span class="status unanswered" id="status_ca61c4d9b0284011bcc462f255438bdf_3_1" data-tooltip="Not yet answered.">
<span class="sr">unanswered</span><span class="status-icon" aria-hidden="true"/>
</span>
</div>
</div></div> </p>
</li>
<li value="3">
<p>Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. A stock has an expected rate of return of 4%. Would anyone consider buying this risky asset which provides an expected return less than the risk-free rate? Assume the CAPM holds.
<div class="wrapper-problem-response" tabindex="-1" aria-label="Question 3" role="group"><div class="choicegroup capa_inputtype" id="inputtype_ca61c4d9b0284011bcc462f255438bdf_4_1">
<fieldset aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_4_1">
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_4_1" id="input_ca61c4d9b0284011bcc462f255438bdf_4_1_choice_1" class="field-input input-radio" value="choice_1"/><label id="ca61c4d9b0284011bcc462f255438bdf_4_1-choice_1-label" for="input_ca61c4d9b0284011bcc462f255438bdf_4_1_choice_1" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_4_1"> <text> Yes</text>
</label>
</div>
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_4_1" id="input_ca61c4d9b0284011bcc462f255438bdf_4_1_choice_2" class="field-input input-radio" value="choice_2"/><label id="ca61c4d9b0284011bcc462f255438bdf_4_1-choice_2-label" for="input_ca61c4d9b0284011bcc462f255438bdf_4_1_choice_2" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_4_1"> <text> No</text>
</label>
</div>
<span id="answer_ca61c4d9b0284011bcc462f255438bdf_4_1"/>
</fieldset>
<div class="indicator-container">
<span class="status unanswered" id="status_ca61c4d9b0284011bcc462f255438bdf_4_1" data-tooltip="Not yet answered.">
<span class="sr">unanswered</span><span class="status-icon" aria-hidden="true"/>
</span>
</div>
</div></div> </p>
</li>
<li value="4">
<p>
Stocks 1 and 2 have the same beta of 0.8, but stock 1's return has a standard deviation of 40% and stock 2's return has a standard deviation of 60%. If the CAPM holds, which stock should have the higher expected returns?
<div class="wrapper-problem-response" tabindex="-1" aria-label="Question 4" role="group"><div class="choicegroup capa_inputtype" id="inputtype_ca61c4d9b0284011bcc462f255438bdf_5_1">
<fieldset aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_5_1">
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_5_1" id="input_ca61c4d9b0284011bcc462f255438bdf_5_1_choice_1" class="field-input input-radio" value="choice_1"/><label id="ca61c4d9b0284011bcc462f255438bdf_5_1-choice_1-label" for="input_ca61c4d9b0284011bcc462f255438bdf_5_1_choice_1" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_5_1"> <text> Stock 1</text>
</label>
</div>
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_5_1" id="input_ca61c4d9b0284011bcc462f255438bdf_5_1_choice_2" class="field-input input-radio" value="choice_2"/><label id="ca61c4d9b0284011bcc462f255438bdf_5_1-choice_2-label" for="input_ca61c4d9b0284011bcc462f255438bdf_5_1_choice_2" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_5_1"> <text> Stock 2</text>
</label>
</div>
<div class="field">
<input type="radio" name="input_ca61c4d9b0284011bcc462f255438bdf_5_1" id="input_ca61c4d9b0284011bcc462f255438bdf_5_1_choice_3" class="field-input input-radio" value="choice_3"/><label id="ca61c4d9b0284011bcc462f255438bdf_5_1-choice_3-label" for="input_ca61c4d9b0284011bcc462f255438bdf_5_1_choice_3" class="response-label field-label label-inline" aria-describedby="status_ca61c4d9b0284011bcc462f255438bdf_5_1"> <text> They should have the same expected return</text>
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<h2 class="hd hd-2 unit-title">The Cost of Capital in Biopharma</h2>
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