CM CIS (M8 + M8A) – Collective Investment Schemes

Explanation:
The correct answer is (b) The Required Rate of Return will be equal to the Risk-Free Rate. When the Market Rate of Return equals the Risk-Free Rate, the Required Rate of Return for a security with a Beta coefficient of 1 will be the same as the Risk-Free Rate.

Explanation:
The correct answer is (a) The Required Rate of Return will decrease. In the CAPM, a decrease in the Market Rate of Return, holding other factors constant, leads to a lower Required Rate of Return.

Explanation:
The correct answer is (b) The Required Rate of Return will increase. Even with a Beta coefficient less than 1, the higher Market Rate of Return in the CAPM leads to a higher Required Rate of Return.

Explanation:
The correct answer is (b) It reflects the total risk, both systematic and unsystematic. The Market Rate of Return in the CAPM incorporates both systematic and unsystematic risk, providing a comprehensive measure of the market’s expected return.

Explanation:
The correct answer is (c) Market Risk Premium. The Market Risk Premium in the CAPM represents the additional return investors expect for taking on the systematic risk associated with the overall market.

Explanation:
The correct answer is (b) 6%. The Market Risk Premium is calculated by subtracting the Risk-Free Rate from the expected return on the overall market (8% – 2% = 6%).

Explanation:
The correct answer is (a) Investment A will have a higher Required Rate of Return. A higher Beta coefficient indicates higher sensitivity to market movements, resulting in a higher Required Rate of Return.

Explanation:
The correct answer is (b) The Required Rate of Return will increase. An increase in the Market Risk Premium implies higher compensation for market risk, leading to a higher Required Rate of Return.

Explanation:
The correct answer is (c) The Risk-Free Rate becomes the sole determinant. A negative Market Risk Premium implies that investors would prefer risk-free assets over the overall market, making the Risk-Free Rate the primary factor in determining the Required Rate of Return.

Explanation:
The correct answer is (b) The Required Rate of Return will be lower than 12%. A Beta coefficient less than 1 indicates lower systematic risk, leading to a lower Required Rate of Return compared to the Market Risk Premium.

Explanation:
The correct answer is (b) 18%. The expected return on the overall market is the sum of the Risk-Free Rate and the Market Risk Premium (3% + 15% = 18%).

Explanation:
The correct answer is (b) The Required Rate of Return will be equal to the Risk-Free Rate for all securities. When the Market Risk Premium is zero, the Risk-Free Rate becomes the sole determinant of the Required Rate of Return in the CAPM.

Explanation:
The correct answer is (b) Stock A will have a higher Required Rate of Return. A Beta coefficient greater than 1 indicates higher sensitivity to market movements, resulting in a higher Required Rate of Return.

Explanation:
The correct answer is (a) The stock has no market risk. A Beta coefficient of 0 indicates that the stock’s returns are not correlated with market movements, suggesting no market risk.

Explanation:
The correct answer is (b) The stock’s returns are less volatile than the market. A Beta coefficient less than 1 indicates lower volatility compared to the overall market.

Explanation:
The correct answer is (c) The stock will perform worse than the market. A Beta coefficient greater than 1 implies higher sensitivity to market downturns, leading to relatively poorer performance.

Explanation:
The correct answer is (a) The stock’s returns move in the opposite direction of the market. A negative Beta coefficient indicates an inverse relationship with market movements.

Explanation:
The correct answer is (b) Stock R with Beta -0.3 and Stock S with Beta 0.9. A combination of negative and low Beta coefficients helps in constructing a portfolio with minimal market risk.

Explanation:
The correct answer is (b) Stock X is more sensitive, and Stock Y is less sensitive to market movements. A higher Beta coefficient (1.5) indicates greater sensitivity, while a lower Beta coefficient (0.7) suggests less sensitivity.

Explanation:
The correct answer is (c) The Required Rate of Return is equivalent to the market Risk-Free Rate. A Beta coefficient of 1.0 indicates the same level of market risk as the overall market.

Explanation:
The correct answer is (b) To estimate the expected return on an investment based on its risk. The CAPM helps investors calculate the expected return by considering the investment’s risk in relation to the overall market.

Explanation:
The correct answer is (a) It represents the minimum return an investor expects. The Risk-Free Rate is the baseline return expected by investors for an investment with no risk.

Explanation:
The correct answer is (a) Investment X will have a higher Required Rate of Return. A Beta coefficient greater than 1 indicates higher risk and, therefore, a higher Required Rate of Return.

Explanation:
The correct answer is (b) The Required Rate of Return increases. The Required Rate of Return is influenced by the expected market return, and an increase in the latter leads to a higher Required Rate of Return.

Explanation:
The correct answer is (b) The stock underperformed the market. A negative Jensen’s Alpha suggests that the actual return of the investment was lower than the expected return predicted by the CAPM.

Explanation:
The correct answer is (a) The Required Rate of Return decreases. A lower Risk-Free Rate reduces the baseline return, leading to a decrease in the Required Rate of Return.

Explanation:
The correct answer is (a) The investment is less risky with a lower expected return. A Beta coefficient less than 1 indicates lower risk and, consequently, a lower expected return.

Explanation:
The correct answer is (a) The investment outperformed the market. A positive Jensen’s Alpha indicates that the actual return of the investment exceeded the expected return predicted by the CAPM.

Explanation:
The correct answer is (b) It allows for the comparison of cash flows at different points in time. Time value of money recognizes that a sum of money today is not equivalent to the same sum in the future, enabling better decision-making in financial matters.

Explanation:
The correct answer is (a) Option A. The time value of money implies that receiving a sum sooner is preferable, as it allows for the possibility of earning interest on that amount during the time.