Question 1

Unlike the capital market line, the security market line is unique for each investor.

Accepted Answer

A) True 
 B)False  False

Question 2

Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with likelihood of 20%, 30%, 25%, and 25%, respectively. The expected value of the portfolio is:

Accepted Answer

A) 10.0%. 
B) 9.0%. 
C) 9.3%. 
D) 9.25%. 
E) None of the above 
A) 10.0%. 
B) 9.0%. 
C) 9.3%. 
D) 9.25%. 
E) None of the above C

Question 3

In an efficient market context, the ability to achieve high returns may be more directly related to absorption of additional risk than superior ability in selecting stocks.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following are assumptions of the capital asset pricing model?

Accepted Answer

A) Funds can be borrowed or lent in unlimited quantities at risk-free rate 
B) The objective of all investors is to maximize their expected utility over the same one-period time frame using the same basis for evaluating investments 
C) There are no taxes or transaction costs associated with any investment 
D) All of the above are correct assumptions 
A) Funds can be borrowed or lent in unlimited quantities at risk-free rate 
B) The objective of all investors is to maximize their expected utility over the same one-period time frame using the same basis for evaluating investments 
C) There are no taxes or transaction costs associated with any investment 
D) All of the above are correct assumptions

Question 5

Using the formula for the security market line (Formula 21-7), if the risk-free rate (RF) is 6%, the market rate of return (KM) is 12%, and the beta (bi) is 1.2, compute the anticipated return for stock i (Ki).

Accepted Answer

A) 20.4% 
B) 16.33% 
C) 13.64% 
D) 13.4% 
E) 13.2% 
A) 20.4% 
B) 16.33% 
C) 13.64% 
D) 13.4% 
E) 13.2%

Question 6

Countercyclical investments are more likely to have:

Accepted Answer

A) high positive correlation with a normal portfolio. 
B) slight positive correlation with a normal portfolio. 
C) no correlation with a normal portfolio. 
D) high negative correlation with a normal portfolio. 
A) high positive correlation with a normal portfolio. 
B) slight positive correlation with a normal portfolio. 
C) no correlation with a normal portfolio. 
D) high negative correlation with a normal portfolio.

Question 7

Because of portfolio effect, the most significant factor related to the risk of any investment is:

Accepted Answer

A) its standard deviation, or degree of uncertainty. 
B) its effect on the risk of the portfolio. 
C) systematic risk associated with the investment. 
D) None of the above 
A) its standard deviation, or degree of uncertainty. 
B) its effect on the risk of the portfolio. 
C) systematic risk associated with the investment. 
D) None of the above

Question 8

The beta coefficient is a measure of:

Accepted Answer

A) the relationship between the return of an individual stock and the return on the market. 
B) the relationship between the return on a stock and the return on the portfolio. 
C) the relationship between the portfolio risk and the market risk. 
D) None of the above 
A) the relationship between the return of an individual stock and the return on the market. 
B) the relationship between the return on a stock and the return on the portfolio. 
C) the relationship between the portfolio risk and the market risk. 
D) None of the above

Question 9

Using the formula for the capital market line (Formula 21-5), if the risk-free rate (RF) is 6%, the market rate of return (KM) is 12%, the market standard deviation (σM) is 11%, and the standard deviation of the portfolio (σP) is 14%, compute the anticipated return of the portfolio (KP).

Accepted Answer

A) 20.4% 
B) 16.33% 
C) 13.64% 
D) 13.4% 
E) 13.2% 
A) 20.4% 
B) 16.33% 
C) 13.64% 
D) 13.4% 
E) 13.2%

Question 10

By picking stocks that are not perfectly correlated, unsystematic risk may be eliminated.

Accepted Answer

A) True 
 B)False

Question 11

For two investments with a correlation coefficient (rij) less than +1, the portfolio standard deviation will be __________ the weighted average of the individual investments' standard deviation.

Accepted Answer

A) more than 
B) less than 
C) equal to 
D) zero compared to 
A) more than 
B) less than 
C) equal to 
D) zero compared to

Question 12

There is debate in regard to the capital asset pricing model about the appropriate RF, KM, and stability of beta.

Accepted Answer

A) True 
 B)False

Question 13

Unsystematic risk cannot be diversified away.

Accepted Answer

A) True 
 B)False

Question 14

Risk measurement usually considers only losses rather than the dispersion of all outcomes.

Accepted Answer

A) True 
 B)False

Question 15

The capital asset pricing model (CAPM) takes off where the _________ concluded.

Accepted Answer

A) Security market line 
B) Capital market line 
C) Efficient frontier and Markowitz portfolio theory 
D) Arbitrage pricing theory 
A) Security market line 
B) Capital market line 
C) Efficient frontier and Markowitz portfolio theory 
D) Arbitrage pricing theory

Question 16

The security market line shows the risk-return trade-off for an individual security.

Accepted Answer

A) True 
 B)False

Question 17

The expected value is a commonly used measure of dispersion.

Accepted Answer

A) True 
 B)False

Question 18

Harry Markowitz developed the theory that an efficient set of portfolios exists which represent the maximum return possible for any given level of risk.

Accepted Answer

A) True 
 B)False

Question 19

If you took all the possible investments that investors could acquire and determined the optimum basket of investments, you would come up with point _________ on the capital market line.

Accepted Answer

A) RF 
B) K 
C) M 
D) Z 
A) RF 
B) K 
C) M 
D) Z

Question 20

Which of the following is NOT a problem associated with proving the validity of the security market line?

Accepted Answer

A) The appropriate risk-free and market rates 
B) The additional return required for each additional increment of risk in the market place 
C) The stability of beta on an individual security over time 
D) All of the above are associated problems 
A) The appropriate risk-free and market rates 
B) The additional return required for each additional increment of risk in the market place 
C) The stability of beta on an individual security over time 
D) All of the above are associated problems

Exam 17: A Basic Look at Portfolio Management and Capital Market Theory

Unlike the capital market line, the security market line is unique for each investor.

Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with likelihood of 20%, 30%, 25%, and 25%, respectively. The expected value of the portfolio is:

In an efficient market context, the ability to achieve high returns may be more directly related to absorption of additional risk than superior ability in selecting stocks.

Which of the following are assumptions of the capital asset pricing model?

Using the formula for the security market line (Formula 21-7), if the risk-free rate (RF) is 6%, the market rate of return (KM) is 12%, and the beta (bi) is 1.2, compute the anticipated return for stock i (Ki).

Countercyclical investments are more likely to have:

Because of portfolio effect, the most significant factor related to the risk of any investment is:

The beta coefficient is a measure of:

Using the formula for the capital market line (Formula 21-5), if the risk-free rate (RF) is 6%, the market rate of return (KM) is 12%, the market standard deviation (σM) is 11%, and the standard deviation of the portfolio (σP) is 14%, compute the anticipated return of the portfolio (KP).

By picking stocks that are not perfectly correlated, unsystematic risk may be eliminated.

For two investments with a correlation coefficient (rij) less than +1, the portfolio standard deviation will be __________ the weighted average of the individual investments' standard deviation.

There is debate in regard to the capital asset pricing model about the appropriate RF, KM, and stability of beta.

Unsystematic risk cannot be diversified away.

Risk measurement usually considers only losses rather than the dispersion of all outcomes.

The capital asset pricing model (CAPM) takes off where the _________ concluded.

The security market line shows the risk-return trade-off for an individual security.

The expected value is a commonly used measure of dispersion.

Harry Markowitz developed the theory that an efficient set of portfolios exists which represent the maximum return possible for any given level of risk.

If you took all the possible investments that investors could acquire and determined the optimum basket of investments, you would come up with point _________ on the capital market line.

Which of the following is NOT a problem associated with proving the validity of the security market line?

The Investment Setting

Security Markets

Participating in the Market

Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Economic Activity

Industry Analysis

Valuation of the Individual Firm

Financial Statement Analysis

Efficient Markets and Anomalies

Behavioral Finance and Technical Analysis

Bond and Fixed-Income Fundamentals

Principles of Bond Valuation and Investment

Convertible Securities and Warrants

Put and Call Options

Commodities and Financial Futures

Stock Index Futures and Options

Duration and Bond Portfolio Management

International Securities Markets

Investments in Real Assets

Alternative Investments: Private Equity and Hedge Funds

Measuring Risks and Returns of Portfolio Managers

A Comprehensive Analysis for Real Estate Investment Decisions

The Makeup of Institutional Investors

Filters

Using the formula for the security market line (Formula 21-7), if the risk-free rate (R_F) is 6%, the market rate of return (K_M) is 12%, and the beta (b_i) is 1.2, compute the anticipated return for stock i (K_i).

Using the formula for the capital market line (Formula 21-5), if the risk-free rate (R_F) is 6%, the market rate of return (K_M) is 12%, the market standard deviation (σ_M) is 11%, and the standard deviation of the portfolio (σ_P) is 14%, compute the anticipated return of the portfolio (K_P).

There is debate in regard to the capital asset pricing model about the appropriate R_F, K_M, and stability of beta.