Question 1

As diversification increases, the total variance of a portfolio approaches

Accepted Answer

A) 0. 
B) 1. 
C) the variance of the market portfolio. 
D) infinity. 
E) None of the options 
A) 0. 
B) 1. 
C) the variance of the market portfolio. 
D) infinity. 
E) None of the options

Question 2

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.8RM + eA.
RB = 0.02 + 1.1RM + eB.
ΣM = 0.30 σ(eA) = 0.20 σ(eB) = 0.10.
The covariance between the returns on stocks A and B is

Accepted Answer

A) 0.0384. 
B) 0.0406. 
C) 0.1920. 
D) 0.0050. 
E) 0.0792. 
A) 0.0384. 
B) 0.0406. 
C) 0.1920. 
D) 0.0050. 
E) 0.0792.

Question 3

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 0.24 and σM was 0.18, the β of the portfolio would be approximately

Accepted Answer

A) 0.64. 
B) 1.33. 
C) 1.25. 
D) 1.56. 
A) 0.64. 
B) 1.33. 
C) 1.25. 
D) 1.56.

Question 4

The beta of JCP stock has been estimated as 1.2 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) 1.32. 
C) 1.13. 
D) 1.0. 
A) 1.20. 
B) 1.32. 
C) 1.13. 
D) 1.0.

Question 5

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 132 stocks in order to construct a mean-variance efficient portfolio constrained by 132 investments.They will need to calculate ____________ covariances.

Accepted Answer

A) 100 
B) 132 
C) 4,950 
D) 8,646 
A) 100 
B) 132 
C) 4,950 
D) 8,646

Question 6

Discuss the security characteristic line (SCL).

Accepted Answer

The security characteristic line (SCL) i

Question 7

The index model was first suggested by

Accepted Answer

A) Graham. 
B) Markowitz. 
C) Miller. 
D) Sharpe. 
A) Graham. 
B) Markowitz. 
C) Miller. 
D) Sharpe.

Question 8

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 0.22 and σM was 0.19, the β of the portfolio would be approximately

Accepted Answer

A) 1.34. 
B) 1.16. 
C) 1.25. 
D) 1.56. 
A) 1.34. 
B) 1.16. 
C) 1.25. 
D) 1.56.

Question 9

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

Accepted Answer

A) βk 
B) βL 
C) σM 
D) All of the options 
E) None of the options 
A) βk 
B) βL 
C) σM 
D) All of the options 
E) None of the options

Question 10

Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE.Using a single-index model rather than the Markowitz model

Accepted Answer

A) increases the number of inputs needed from about 1,400 to more than 1.4 million. 
B) increases the number of inputs needed from about 10,000 to more than 125,000. 
C) reduces the number of inputs needed from more than 125,000 to about 10,000. 
D) reduces the number of inputs needed from more than 4 million to about 9,000. 
E) increases the number of inputs needed from about 150 to more than 1,500. 
A) increases the number of inputs needed from about 1,400 to more than 1.4 million. 
B) increases the number of inputs needed from about 10,000 to more than 125,000. 
C) reduces the number of inputs needed from more than 125,000 to about 10,000. 
D) reduces the number of inputs needed from more than 4 million to about 9,000. 
E) increases the number of inputs needed from about 150 to more than 1,500.

Question 11

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments.They will need to calculate ____________ covariances.

Accepted Answer

A) 125 
B) 7,750 
C) 15,625 
D) 11,750 
A) 125 
B) 7,750 
C) 15,625 
D) 11,750

Question 12

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained by 200 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) 19,900; 200 
D) 19,900; 19.900 
A) 200; 19,900 
B) 200; 200 
C) 19,900; 200 
D) 19,900; 19.900

Question 13

Covariances between security returns tend to be

Accepted Answer

A) positive because of SEC regulations. 
B) positive because of Exchange regulations. 
C) positive because of economic forces that affect many firms. 
D) negative because of SEC regulations. 
E) negative because of economic forces that affect many firms. 
A) positive because of SEC regulations. 
B) positive because of Exchange regulations. 
C) positive because of economic forces that affect many firms. 
D) negative because of SEC regulations. 
E) negative because of economic forces that affect many firms.

Question 14

Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.

Accepted Answer

For a 50 security portfolio, the Markowi

Question 15

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 _____________ expected returns and ___________ variances of returns.

Accepted Answer

A) 100; 100 
B) 40; 40 
C) 4950; 100 
D) 4950; 4950 
E) None of the options 
A) 100; 100 
B) 40; 40 
C) 4950; 100 
D) 4950; 4950 
E) None of the options

Question 16

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained by 175 investments.They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A) 175; 15,225 
B) 175; 175 
C) 15,225; 175 
D) 15,225; 15,225 
A) 175; 15,225 
B) 175; 175 
C) 15,225; 175 
D) 15,225; 15,225

Question 17

The index model for stock A has been estimated with the following result: RA = 0.01 + 0.94RM + eA
If σM = 0.30 and R2A = 0.28, the standard deviation of return of stock A is

Accepted Answer

A) 0.2025. 
B) 0.2500. 
C) 0.4500. 
D) 0.5329. 
A) 0.2025. 
B) 0.2500. 
C) 0.4500. 
D) 0.5329.

Question 18

The security characteristic line (SCL) associated with the single-index model is a plot of

Accepted Answer

A) the security's returns on the vertical axis and the market index's returns on the horizontal axis. 
B) the market index's returns on the vertical axis and the security's returns on the horizontal axis. 
C) the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis. 
D) the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis. 
E) the security's returns on the vertical axis and Beta on the horizontal axis. 
A) the security's returns on the vertical axis and the market index's returns on the horizontal axis. 
B) the market index's returns on the vertical axis and the security's returns on the horizontal axis. 
C) the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis. 
D) the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis. 
E) the security's returns on the vertical axis and Beta on the horizontal axis.

Question 19

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.

Accepted Answer

A) 150; 150 
B) 150; 22500 
C) 22500; 150 
D) 22500; 22500 
A) 150; 150 
B) 150; 22500 
C) 22500; 150 
D) 22500; 22500

Question 20

If a firm's beta was calculated as 1.6 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

Accepted Answer

A) less than 0.6 but greater than zero. 
B) between 0.6 and 1.0. 
C) between 1.0 and 1.6. 
D) greater than 1.6. 
E) zero or less. 
A) less than 0.6 but greater than zero. 
B) between 0.6 and 1.0. 
C) between 1.0 and 1.6. 
D) greater than 1.6. 
E) zero or less.

Exam 8: Index Models

As diversification increases, the total variance of a portfolio approaches

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.8RM + eA. RB = 0.02 + 1.1RM + eB. ΣM = 0.30 σ(eA) = 0.20 σ(eB) = 0.10. The covariance between the returns on stocks A and B is

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 0.24 and σM was 0.18, the β of the portfolio would be approximately

The beta of JCP stock has been estimated as 1.2 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 132 stocks in order to construct a mean-variance efficient portfolio constrained by 132 investments.They will need to calculate ____________ covariances.

Discuss the security characteristic line (SCL).

The index model was first suggested by

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 0.22 and σM was 0.19, the β of the portfolio would be approximately

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

Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE.Using a single-index model rather than the Markowitz model

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments.They will need to calculate ____________ covariances.

Covariances between security returns tend to be

Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.

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 _____________ expected returns and ___________ variances of returns.

The index model for stock A has been estimated with the following result: RA = 0.01 + 0.94RM + eA If σM = 0.30 and R2A = 0.28, the standard deviation of return of stock A is

The security characteristic line (SCL) associated with the single-index model is a plot of

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.

If a firm's beta was calculated as 1.6 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

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

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The index model has been estimated for stocks A and B with the following results: R_A = 0.01 + 0.8R_M + e_A. R_B = 0.02 + 1.1R_M + e_B. Σ_M = 0.30 σ(e_A) = 0.20 σ(e_B) = 0.10. The covariance between the returns on stocks A and B is

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 0.24 and σ_M was 0.18, the β of the portfolio would be approximately

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 0.22 and σ_M was 0.19, 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 ___ expected returns and _ variances of returns.

The index model for stock A has been estimated with the following result: R_A = 0.01 + 0.94R_M + e_A If σ_M = 0.30 and R²_A = 0.28, the standard deviation of return of stock A is

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments.They will need to calculate ___ expected returns and _ variances of returns.