Question 1

If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP.

Accepted Answer

A) βHPQ 
B) βKMP 
C) σM 
D) All of the options 
E) None of the options 
A) βHPQ 
B) βKMP 
C) σM 
D) All of the options 
E) None of the options D

Question 2

If the index model is valid, _________ would be helpful in determining the covariance between assets GM and GE.

Accepted Answer

A) βGM 
B) βGE 
C) σM 
D) All of the options 
E) None of the options 
A) βGM 
B) βGE 
C) σM 
D) All of the options 
E) None of the options D

Question 3

Discuss a commonly used adjustment technique to provide an adjusted beta.

Accepted Answer

Over time, security betas move toward 1, as the average beta of all securities is 1 and variables regress toward the mean.Thus, if a historic beta has been greater than 1, the chances are that in the future, this beta will be less than the historic beta.The opposite relationship will be observed if the historic beta has been less than one.A commonly used adjustment technique would provide an adjusted beta of 2/3 (sample beta) + 1/3 (1).
Feedback: This question is important, as many published sources quote an "adjusted beta" with no explanation as to how such a number was obtained.The regression toward the mean is a valid statistical concept and it is important that the student understands that this concept represents the theory behind the possibly undocumented "adjusted betas."

Question 4

According to the index model, covariances among security pairs are

Accepted Answer

A) due to the influence of a single common factor represented by the market index return. 
B) extremely difficult to calculate. 
C) related to industry-specific events. 
D) usually positive. 
E) due to the influence of a single common factor represented by the market index return and usually positive. 
A) due to the influence of a single common factor represented by the market index return. 
B) extremely difficult to calculate. 
C) related to industry-specific events. 
D) usually positive. 
E) due to the influence of a single common factor represented by the market index return and usually positive.

Question 5

The intercept in the regression equations calculated by beta books is equal to

Accepted Answer

A) α in the CAPM. 
B) α + rf(1 + β). 
C) α + rf(1 - β). 
D) 1 - α. 
A) α in the CAPM. 
B) α + rf(1 + β). 
C) α + rf(1 - β). 
D) 1 - α.

Question 6

A single-index model uses __________ as a proxy for the systematic risk factor.

Accepted Answer

A) a market index, such as the S&P 500 
B) the current account deficit 
C) the growth rate in GNP 
D) the unemployment rate 
A) a market index, such as the S&P 500 
B) the current account deficit 
C) the growth rate in GNP 
D) the unemployment rate

Question 7

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds.If the σ of your portfolio was 0.18 and σM was 0.24, the β of the portfolio would be approximately

Accepted Answer

A) 0.75. 
B) 0.56. 
C) 0.07. 
D) 1.03. 
A) 0.75. 
B) 0.56. 
C) 0.07. 
D) 1.03.

Question 8

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 750 stocks in order to construct a mean-variance efficient portfolio constrained by 750 investments.They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimates for the variance of the macroeconomic factor.

Accepted Answer

A) 750; 1 
B) 750; 750 
C) 124,750; 1 
D) 124,750; 750 
E) 562,500; 750 
A) 750; 1 
B) 750; 750 
C) 124,750; 1 
D) 124,750; 750 
E) 562,500; 750

Question 9

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments.They will need to calculate ____________ covariances.

Accepted Answer

A) 45 
B) 780 
C) 4,950 
D) 10,000 
A) 45 
B) 780 
C) 4,950 
D) 10,000

Question 10

The beta of a stock has been estimated as 1.8 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of

Accepted Answer

A) 1.20. 
B) 1.53. 
C) 1.13. 
D) 1.0. 
A) 1.20. 
B) 1.53. 
C) 1.13. 
D) 1.0.

Question 11

Analysts may use regression analysis to estimate the index model for a stock.When doing so, the slope of the regression line is an estimate of

Accepted Answer

A) the α of the asset. 
B) the β of the asset. 
C) the σ of the asset. 
D) the δ of the asset. 
A) the α of the asset. 
B) the β of the asset. 
C) the σ of the asset. 
D) the δ of the asset.

Question 12

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 217 stocks in order to construct a mean-variance efficient portfolio constrained by 217 investments.They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A) 217; 47,089 
B) 217; 217 
C) 47,089; 217 
D) 47,089; 47,089 
E) None of the options 
A) 217; 47,089 
B) 217; 217 
C) 47,089; 217 
D) 47,089; 47,089 
E) None of the options

Question 13

Security returns

Accepted Answer

A) are based on both macro events and firm-specific events. 
B) are based on firm-specific events only. 
C) are usually positively correlated with each other. 
D) are based on firm-specific events only and are usually positively correlated with each other. 
E) are based on both macro events and firm-specific events and are usually positively correlated with each other. 
A) are based on both macro events and firm-specific events. 
B) are based on firm-specific events only. 
C) are usually positively correlated with each other. 
D) are based on firm-specific events only and are usually positively correlated with each other. 
E) are based on both macro events and firm-specific events and are usually positively correlated with each other.

Question 14

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.

Accepted Answer

A) 100; 100 
B) 100; 4950 
C) 4950; 100 
D) 4950; 4950 
A) 100; 100 
B) 100; 4950 
C) 4950; 100 
D) 4950; 4950

Question 15

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 60 stocks in order to construct a mean-variance efficient portfolio constrained by 60 investments.They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A) 200; 19,900 
B) 200; 200 
C) 60; 60 
D) 19,900; 19.900 
E) None of the options 
A) 200; 19,900 
B) 200; 200 
C) 60; 60 
D) 19,900; 19.900 
E) None of the options

Question 16

The idea that there is a limit to the reduction of portfolio risk due to diversification is

Accepted Answer

A) contradicted by both the CAPM and the single-index model. 
B) contradicted by the CAPM. 
C) contradicted by the single-index model. 
D) supported in theory, but not supported empirically. 
E) supported both in theory and by empirical evidence. 
A) contradicted by both the CAPM and the single-index model. 
B) contradicted by the CAPM. 
C) contradicted by the single-index model. 
D) supported in theory, but not supported empirically. 
E) supported both in theory and by empirical evidence.

Question 17

Suppose the following equation best describes the evolution of β over time: βt = 0.3 + 0.2βt - 1
If a stock had a β of 0.8 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A) 0.46 
B) 0.60 
C) 0.70 
D) 0.94 
A) 0.46 
B) 0.60 
C) 0.70 
D) 0.94

Question 18

The single-index model

Accepted Answer

A) greatly reduces the number of required calculations relative to those required by the Markowitz model. 
B) enhances the understanding of systematic versus nonsystematic risk. 
C) greatly increases the number of required calculations relative to those required by the Markowitz model. 
D) greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk. 
E) enhances the understanding of systematic versus nonsystematic risk and greatly increases the number of required calculations relative to those required by the Markowitz model. 
A) greatly reduces the number of required calculations relative to those required by the Markowitz model. 
B) enhances the understanding of systematic versus nonsystematic risk. 
C) greatly increases the number of required calculations relative to those required by the Markowitz model. 
D) greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk. 
E) enhances the understanding of systematic versus nonsystematic risk and greatly increases the number of required calculations relative to those required by the Markowitz model.

Question 19

Suppose the following equation best describes the evolution of β over time: βt = 0.30 + 0.70βt - 1
If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A) 0.91 
B) 0.77 
C) 0.63 
D) 0.87 
A) 0.91 
B) 0.77 
C) 0.63 
D) 0.87

Question 20

Rosenberg and Guy found that __________ helped to predict a firm's beta.

Accepted Answer

A) the firm's financial characteristics 
B) the firm's industry group 
C) firm size 
D) the firm's financial characteristics and the firm's industry group 
E) All of the options 
A) the firm's financial characteristics 
B) the firm's industry group 
C) firm size 
D) the firm's financial characteristics and the firm's industry group 
E) All of the options

Exam 8: Index Models

If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP.

If the index model is valid, _________ would be helpful in determining the covariance between assets GM and GE.

Discuss a commonly used adjustment technique to provide an adjusted beta.

According to the index model, covariances among security pairs are

The intercept in the regression equations calculated by beta books is equal to

A single-index model uses __________ as a proxy for the systematic risk factor.

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds.If the σ of your portfolio was 0.18 and σM was 0.24, the β of the portfolio would be approximately

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments.They will need to calculate ____________ covariances.

The beta of a stock has been estimated as 1.8 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of

Analysts may use regression analysis to estimate the index model for a stock.When doing so, the slope of the regression line is an estimate of

Security returns

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.

The idea that there is a limit to the reduction of portfolio risk due to diversification is

Suppose the following equation best describes the evolution of β over time: βt = 0.3 + 0.2βt - 1 If a stock had a β of 0.8 last year, you would forecast the β to be _______ in the coming year.

The single-index model

Suppose the following equation best describes the evolution of β over time: βt = 0.30 + 0.70βt - 1 If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

Rosenberg and Guy found that __________ helped to predict a firm's beta.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds.If the σ of your portfolio was 0.18 and σ_M was 0.24, the β of the portfolio would be approximately

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate ___ expected returns and _ variances of returns.

Suppose the following equation best describes the evolution of β over time: β_t = 0.3 + 0.2β_t _{- 1} If a stock had a β of 0.8 last year, you would forecast the β to be _______ in the coming year.

Suppose the following equation best describes the evolution of β over time: β_t = 0.30 + 0.70β_{t -} ₁ If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.