Question 1

Under the following conditions, what are the expected returns for stocks Y and Z?

Accepted Answer

A)  12.0 percent and 13.3 percent 
B)  13.5 percent and 14.2 percent 
C)  13.9 percent and 15.6 percent 
D)  14.0 percent and 16.9 percent 
E)  15.8 percent and 17.3 percent 
A)  12.0 percent and 13.3 percent 
B)  13.5 percent and 14.2 percent 
C)  13.9 percent and 15.6 percent 
D)  14.0 percent and 16.9 percent 
E)  15.8 percent and 17.3 percent

Question 2

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.3. What is the beta for Radtron using the proxy index?

Accepted Answer

A)  0.87 
B)  0.97 
C)  1.02 
D)  1.15 
E)  1.28 
A)  0.87 
B)  0.97 
C)  1.02 
D)  1.15 
E)  1.28

Question 3

Fama and French suggest a four-factor model approach that explains many prior market anomalies.

Accepted Answer

A) True 
 B)False

Question 4

A friend has information that the stock of Zip Incorporated is going to rise from $62.00 to $65.00 per share over the next year. You know that the annual return on the S&P 500 has been 10 percent and the 90-day T-bill rate has been yielding 6 percent per year over the past 10 years. If beta for Zip is 0.9, will you purchase the stock?

Accepted Answer

A)  Yes, because it is overvalued. 
B)  Yes, because it is undervalued. 
C)  No, because it is undervalued. 
D)  No, because it is overvalued. 
E)  Yes, because the expected return equals the estimated return. 
A)  Yes, because it is overvalued. 
B)  Yes, because it is undervalued. 
C)  No, because it is undervalued. 
D)  No, because it is overvalued. 
E)  Yes, because the expected return equals the estimated return.

Question 5

In the presence of transactions costs, the SML will be

Accepted Answer

A)  a single straight line. 
B)  a kinked line. 
C)  a set of lines rather than a single straight line. 
D)  a curve rather than a single straight line. 
E)  impossible to determine. 
A)  a single straight line. 
B)  a kinked line. 
C)  a set of lines rather than a single straight line. 
D)  a curve rather than a single straight line. 
E)  impossible to determine.

Question 6

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.1. Compute the intercept of the characteristic line for RA Computer.

Accepted Answer

A)  -9.41 
B)  11.63 
C)  4.92 
D)  -4.92 
E)  -7.98 
A)  -9.41 
B)  11.63 
C)  4.92 
D)  -4.92 
E)  -7.98

Question 7

Calculate the expected return for F Inc., which has a beta of 1.3 when the risk-free rate is 0.06 and you expect the market return to be 0.125.

Accepted Answer

A)  12.65 percent 
B)  13.55 percent 
C)  14.45 percent 
D)  15.05 percent 
E)  16.34 percent 
A)  12.65 percent 
B)  13.55 percent 
C)  14.45 percent 
D)  15.05 percent 
E)  16.34 percent

Question 8

CML and SML measure total risk by the standard deviation of the investment.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is NOTa relaxation of the assumptions for the CAPM?

Accepted Answer

A)  differential lending and borrowing rates 
B)  a zero-beta model 
C)  transaction costs 
D)  taxes 
E)  fixed planning periods 
A)  differential lending and borrowing rates 
B)  a zero-beta model 
C)  transaction costs 
D)  taxes 
E)  fixed planning periods

Question 10

An investor wishes to construct a portfolio consisting of a 70 percent allocation to a stock index and a 30 percent allocation to a risk-free asset. The return on the risk-free asset is 4.5 percent, and the expected return on the stock index is 12 percent. The standard deviation of returns on the stock index is 6 percent. Calculate the expected standard deviation of the portfolio.

Accepted Answer

A)  4.20 percent 
B)  25.20 percent 
C)  3.29 percent 
D)  10.80 percent 
E)  5.02 percent 
A)  4.20 percent 
B)  25.20 percent 
C)  3.29 percent 
D)  10.80 percent 
E)  5.02 percent

Question 11

The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors.

Accepted Answer

A) True 
 B)False

Question 12

To date, the results of empirical tests of the Arbitrage Pricing Model have been

Accepted Answer

A)  clearly favorable. 
B)  clearly unfavorable. 
C)  mixed. 
D)  unavailable. 
E)  biased. 
A)  clearly favorable. 
B)  clearly unfavorable. 
C)  mixed. 
D)  unavailable. 
E)  biased.

Question 13

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.4. Which of the following statements is correct?

Accepted Answer

A)  Stocks X, Y, and Z are undervalued. 
B)  Stocks X, Y, and Z are overvalued. 
C)  Stocks X and Y are overvalued, and stock Z is undervalued. 
D)  Stocks X and Y are undervalued, and stock Z is overvalued. 
E)  Stocks X, Y, and Z are all properly valued. 
A)  Stocks X, Y, and Z are undervalued. 
B)  Stocks X, Y, and Z are overvalued. 
C)  Stocks X and Y are overvalued, and stock Z is undervalued. 
D)  Stocks X and Y are undervalued, and stock Z is overvalued. 
E)  Stocks X, Y, and Z are all properly valued.

Question 14

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

Accepted Answer

A)  zero beta model. 
B)  unstable beta or a higher borrowing rate. 
C)  zero beta model or a higher borrowing rate. 
D)  higher borrowing rate. 
E)  unstable beta. 
A)  zero beta model. 
B)  unstable beta or a higher borrowing rate. 
C)  zero beta model or a higher borrowing rate. 
D)  higher borrowing rate. 
E)  unstable beta.

Question 15

Calculate the expected return for C Inc., which has a beta of 0.8 when the risk-free rate is 0.04 and you expect the market return to be 0.12.

Accepted Answer

A)  8.10 percent 
B)  9.60 percent 
C)  10.40 percent 
D)  11.20 percent 
E)  12.60 percent 
A)  8.10 percent 
B)  9.60 percent 
C)  10.40 percent 
D)  11.20 percent 
E)  12.60 percent

Question 16

Consider the following two factor APT model: E(R) = $\lambda$0 + $\lambda$1b1 + $\lambda$2b2

Accepted Answer

A)  $\lambda$1 is the expected return on the asset with zero systematic risk. 
B)  $\lambda$1 is the expected return on asset 1. 
C)  $\lambda$1 is the pricing relationship between the risk premium and the asset. 
D)  $\lambda$1 is the risk premium. 
E)  $\lambda$1 is the factor loading. 
A)  $\lambda$1 is the expected return on the asset with zero systematic risk. 
B)  $\lambda$1 is the expected return on asset 1. 
C)  $\lambda$1 is the pricing relationship between the risk premium and the asset. 
D)  $\lambda$1 is the risk premium. 
E)  $\lambda$1 is the factor loading.

Question 17

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.3. The covariance between Radtron and the true index is

Accepted Answer

A)  57.30. 
B)  86.50. 
C)  88.00. 
D)  92.50. 
E)  107.90. 
A)  57.30. 
B)  86.50. 
C)  88.00. 
D)  92.50. 
E)  107.90.

Question 18

Consider the following list of risk factors:   Which of the following factors would you use to develop a microeconomic-based risk factor model?

Accepted Answer

A)  (1), (2), and (3) 
B)  (1), (3), and (5) 
C)  (2), (4), and (5) 
D)  (1), (3), and (6) 
E)  (4), (5), and (6) 
A)  (1), (2), and (3) 
B)  (1), (3), and (5) 
C)  (2), (4), and (5) 
D)  (1), (3), and (6) 
E)  (4), (5), and (6)

Question 19

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.1. Compute the correlation coefficient between RA Computer and the Market Index.

Accepted Answer

A)  -0.32 
B)  0.78 
C)  0.66 
D)  0.58 
E)  0.32 
A)  -0.32 
B)  0.78 
C)  0.66 
D)  0.58 
E)  0.32

Question 20

Assume that the risk-free rate of return is 3 percent and the market portfolio on the Capital Market Line (CML) has an expected return of 11 percent and a standard deviation of 14 percent. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8 percent?

Accepted Answer

A)  invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate 
B)  invest $80,000 in the market portfolio and the remainder in the risk-free security 
C)  invest $63,636.36 in the market portfolio and the remainder in the risk-free security 
D)  invest $36,363.64 in the market portfolio and the remainder in the risk-free security 
E)  invest $100,000 on another portfolio on the CML that does not contain any of the market portfolio or the risk-free security but has a standard deviation of 8 percent. 
A)  invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate 
B)  invest $80,000 in the market portfolio and the remainder in the risk-free security 
C)  invest $63,636.36 in the market portfolio and the remainder in the risk-free security 
D)  invest $36,363.64 in the market portfolio and the remainder in the risk-free security 
E)  invest $100,000 on another portfolio on the CML that does not contain any of the market portfolio or the risk-free security but has a standard deviation of 8 percent.

Under the following conditions, what are the expected returns for stocks Y and Z?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. What is the beta for Radtron using the proxy index?

Fama and French suggest a four-factor model approach that explains many prior market anomalies.

In the presence of transactions costs, the SML will be

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.1. Compute the intercept of the characteristic line for RA Computer.

Calculate the expected return for F Inc., which has a beta of 1.3 when the risk-free rate is 0.06 and you expect the market return to be 0.125.

CML and SML measure total risk by the standard deviation of the investment.

Which of the following is NOTa relaxation of the assumptions for the CAPM?

The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors.

To date, the results of empirical tests of the Arbitrage Pricing Model have been

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.4. Which of the following statements is correct?

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

Calculate the expected return for C Inc., which has a beta of 0.8 when the risk-free rate is 0.04 and you expect the market return to be 0.12.

Consider the following two factor APT model: E(R) = $\lambda$ 0 + $\lambda$ 1b1 + $\lambda$ 2b2

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. The covariance between Radtron and the true index is

Consider the following list of risk factors: Which of the following factors would you use to develop a microeconomic-based risk factor model?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.1. Compute the correlation coefficient between RA Computer and the Market Index.

Assume that the risk-free rate of return is 3 percent and the market portfolio on the Capital Market Line (CML) has an expected return of 11 percent and a standard deviation of 14 percent. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8 percent?

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 7: Asset Pricing Models

Under the following conditions, what are the expected returns for stocks Y and Z?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. What is the beta for Radtron using the proxy index?

Fama and French suggest a four-factor model approach that explains many prior market anomalies.

In the presence of transactions costs, the SML will be

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.1. Compute the intercept of the characteristic line for RA Computer.

Calculate the expected return for F Inc., which has a beta of 1.3 when the risk-free rate is 0.06 and you expect the market return to be 0.125.

CML and SML measure total risk by the standard deviation of the investment.

Which of the following is NOTa relaxation of the assumptions for the CAPM?

The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors.

To date, the results of empirical tests of the Arbitrage Pricing Model have been

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.4. Which of the following statements is correct?

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

Calculate the expected return for C Inc., which has a beta of 0.8 when the risk-free rate is 0.04 and you expect the market return to be 0.12.

Consider the following two factor APT model: E(R) = λ\lambdaλ 0 + λ\lambdaλ 1b1 + λ\lambdaλ 2b2

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. The covariance between Radtron and the true index is

Consider the following list of risk factors: Which of the following factors would you use to develop a microeconomic-based risk factor model?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.1. Compute the correlation coefficient between RA Computer and the Market Index.

Assume that the risk-free rate of return is 3 percent and the market portfolio on the Capital Market Line (CML) has an expected return of 11 percent and a standard deviation of 14 percent. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8 percent?

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Consider the following two factor APT model: E(R) = $\lambda$ 0 + $\lambda$ 1b1 + $\lambda$ 2b2