CAPM Practice Questions
I am completely stuck on the questions below, please help…..
Question 1) In our real life, the value of assets cannot be
estimated perfectly because we can’t be certain for the future cash flows that
the asset generates and also we can’t be certain for the discount rate. Because
of the uncertainty for the future cash flows and the discount rate, we cannot
complete the balance sheet if we do have the income statement first.
Can you explain how the uncertainty is related to earnings
quality and how the uncertainty can be reduced?
Question 2) Company A and Company B each have a $ 10,000
bond outstanding
If both companies’ bonds are due in ten years, what factors
might make the bond market value the Company A bond at an amount greater than
the Company B bond? If so, would Company A have a higher credit rating than
Company B? If so, would the market rate of the Company A bond be higher than
the market rate of the Company B bond
(using the guidance in SFAC No. 7)?
If both companies have the same credit rating, what factors
might make the bond market value the Company A bond at an amount greater than
the Company B bond (using the guidance in SFAC No 7)?
I would like to confirm that my answers below are correct.
Thank you!
Question 3) In the market, what form of EMH has been
generally supported?
A) strong
B) semistrong
C) weak
Question 4) Which one is false for the capital asset pricing
model (CAPM)
A) CAPM is based on the positive relation between risks and
returns
B) CAPM can be used to forecast an unexpected return of
individual security
C) CAPM assumes that only systematic risk is rewarded in the
market, and unsystematic risk can be diversified by making portfolio
D) CAPM is based on fundamental analysis
Question 5) Which one is false?
A) to measure the risk, CAPM assumes a possibility of
mispricing in the market
B) the risk measure in CAPM is the beta
C) the risk is measured based on the relation between market
portfolio return and individual security return
D) a higher risk measure means that investors require more
return
Question 6) What income measurement approach is
comprehensive income based?
A) traditional accounting transactions approach
B) revenue recognition approach
C) capital maintenance approach
D) cash-based approach
Question 7) Which one is false?
A) IASB has no enforcement authority for company’s adoption
of international accounting standards
B) FASB is not a member of IASB
C) on Dec 17, 2003, IASB published the revised international
accounting standards
D) to list their securities in the US markets, foreign
companies must recast their financial statements based on either US GAAP or
International Accounting Standards
Question 8) Which one is false?
A) Agency theory is based on the assumption that a conflict
of interest exists between the owners of a firm and the managers
B) SFAS No 1 suggests that financial reporting should
provide the information for the potential agency costs of the firm
C) Generally companies’ agency costs are not controlled by
companies themselves
D) The agency relation is defined as a relationship by
consent between two parties, whereby one party agrees to act on behalf of the
other
Question 9) Which one is not a main objective of financial
reporting on SFAC 1?
A) to provide information for assessing cash-flow prospects
B) to provide information for making investment and credit
decisions
C) to provide information for evaluating management
stewardship and peformance
D) to provide information for customer relationship
management
Question 10) Which one is false?
A) the fundamental analysis heavily depends on the
accounting and financial information
B) the fundamental analysis is to find mispriced securities
in the market
C) fundamental analysis is based on the efficient market
hypothesis