Question 1

In the APT model, the identity of all the factors is known.

Accepted Answer

A) True 
 B)False

Question 2

In a microeconomic (or characteristic)-based risk factor model, the following factor would be one of many appropriate factors:

Accepted Answer

A)  confidence risk. 
B)  maturity risk. 
C)  expected inflation risk. 
D)  call risk. 
E)  return difference between small capitalization and large capitalization stocks. 
A)  confidence risk. 
B)  maturity risk. 
C)  expected inflation risk. 
D)  call risk. 
E)  return difference between small capitalization and large capitalization stocks.

Question 3

Assume that as a portfolio manager the beta of your portfolio is 1.15 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

A)  2.53 percent lower 
B)  3.85 percent lower 
C)  2.53 percent higher 
D)  4.4 percent higher 
E)  3.85 percent higher 
A)  2.53 percent lower 
B)  3.85 percent lower 
C)  2.53 percent higher 
D)  4.4 percent higher 
E)  3.85 percent higher

Question 4

The variance of returns for a risky asset is 25 percent. The variance of the error term, Var(e), is 8 percent. What portion of the total risk of the asset, as measured by variance, is systematic?

Accepted Answer

A)  32 percent 
B)  8 percent 
C)  68 percent 
D)  25 percent 
E)  75 percent 
A)  32 percent 
B)  8 percent 
C)  68 percent 
D)  25 percent 
E)  75 percent

Question 5

The planning period for the CAPM is the same length of time for every investor.

Accepted Answer

A) True 
 B)False

Question 6

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor betas).
   The zero-beta return ($\lambda$0) = 3 percent, and the risk premia are $\lambda$1 = 10 percent and $\lambda$2 = 8 percent. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7.9. Assume that you wish to create a portfolio with no net wealth invested. The portfolio that achieves this has 50 percent in stock X, -100 percent in stock Y, and 50 percent in stock Z. The weighted exposure to risk factor 1 for stocks X, Y, and Z are

Accepted Answer

A)  0.50, -1.0, 0.50. 
B)  -0.50, 1.0, -0.50. 
C)  0.60, -0.85, 0.25. 
D)  -0.275, 0.10, 0.175. 
E)  0.40, -0.75, 0.25. 
A)  0.50, -1.0, 0.50. 
B)  -0.50, 1.0, -0.50. 
C)  0.60, -0.85, 0.25. 
D)  -0.275, 0.10, 0.175. 
E)  0.40, -0.75, 0.25.

Question 7

The expected return for a stock, calculated using the CAPM, is 25 percent. The risk-free rate is 7.5 percent, and the beta of the stock is 0.80. Calculate the implied return on the market.

Accepted Answer

A)  7.50 percent 
B)  13.91 percent 
C)  17.50 percent 
D)  21.88 percent 
E)  14.38 percent 
A)  7.50 percent 
B)  13.91 percent 
C)  17.50 percent 
D)  21.88 percent 
E)  14.38 percent

Question 8

The APT does not require a market portfolio.

Accepted Answer

A) True 
 B)False

Question 9

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.3. The average return for Radtron is

Accepted Answer

A)  1 percent. 
B)  2 percent. 
C)  3 percent. 
D)  4 percent. 
E)  5 percent. 
A)  1 percent. 
B)  2 percent. 
C)  3 percent. 
D)  4 percent. 
E)  5 percent.

Question 10

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6 percent with a standard deviation of 13 percent and a beta of 1.3. The market risk premium for this period of time was 6 percent, and the risk-free rate of return was 5 percent.
-Refer to Exhibit 7.6. How does Jonathan Crowley's portfolio compare to the market portfolio?

Accepted Answer

A)  Crowley's portfolio is less risky than the market portfolio. 
B)  Crowley's portfolio significantly outperformed the market portfolio. 
C)  On a risk-adjusted basis Crowley's portfolio performed similar to the market portfolio. 
D)  On a risk-adjusted basis Crowley's portfolio significantly underperformed the market. 
E)  On a risk-adjusted basis Crowley's portfolio significantly outperformed the market. 
A)  Crowley's portfolio is less risky than the market portfolio. 
B)  Crowley's portfolio significantly outperformed the market portfolio. 
C)  On a risk-adjusted basis Crowley's portfolio performed similar to the market portfolio. 
D)  On a risk-adjusted basis Crowley's portfolio significantly underperformed the market. 
E)  On a risk-adjusted basis Crowley's portfolio significantly outperformed the market.

Question 11

Assume that as a portfolio manager the beta of your portfolio is 1.1 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

A)  3.2 percent lower 
B)  6.4 percent lower 
C)  4.9 percent lower 
D)  3.2 percent higher 
E)  6.4 percent higher 
A)  3.2 percent lower 
B)  6.4 percent lower 
C)  4.9 percent lower 
D)  3.2 percent higher 
E)  6.4 percent higher

Question 12

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.4. If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM? X Y Z

Accepted Answer

A)  4.8% 18.3% 16.9% 
B)  7.2% 20.7% 22.3% 
C)  10.7% 17.5% 14.4% 
D)  10.1% 12.2% 19.2% 
E)  11.1% 12.2% 21.3% 
A)  4.8% 18.3% 16.9% 
B)  7.2% 20.7% 22.3% 
C)  10.7% 17.5% 14.4% 
D)  10.1% 12.2% 19.2% 
E)  11.1% 12.2% 21.3%

Question 13

The expected return for Zbrite stock calculated using the CAPM is 15.5 percent. The risk-free rate is 3.5 percent and the beta of the stock is 1.2. Calculate the implied market risk premium.

Accepted Answer

A)  5.5 percent 
B)  6.5 percent 
C)  10.0 percent 
D)  15.5 percent 
E)  12.0 percent 
A)  5.5 percent 
B)  6.5 percent 
C)  10.0 percent 
D)  15.5 percent 
E)  12.0 percent

Question 14

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor betas).
   The zero-beta return ($\lambda$0) = 3 percent, and the risk premia are $\lambda$1 = 10 percent and $\lambda$2 = 8 percent. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7.9. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are

Accepted Answer

A)  $53.55, $54.4, and $55.25. 
B)  $45.35, $54.4, and $55.25. 
C)  $55.55, $56.35, and $57.15. 
D)  $50, $50, and $50. 
E)  $51.35, $47.79, and $51.58. 
A)  $53.55, $54.4, and $55.25. 
B)  $45.35, $54.4, and $55.25. 
C)  $55.55, $56.35, and $57.15. 
D)  $50, $50, and $50. 
E)  $51.35, $47.79, and $51.58.

Question 15

If an incorrect proxy market portfolio such as the S&P index is used when developing the security market line, the slope of the line will tend to be underestimated.

Accepted Answer

A) True 
 B)False

Question 16

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

A)  4.2 percent lower 
B)  3.6 percent lower 
C)  3.8 percent lower 
D)  4.2 percent higher 
E)  3.6 percent higher 
A)  4.2 percent lower 
B)  3.6 percent lower 
C)  3.8 percent lower 
D)  4.2 percent higher 
E)  3.6 percent higher

Question 17

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor betas).
   The zero-beta return ($\lambda$0) = 3 percent, and the risk premia are $\lambda$1 = 10 percent and $\lambda$2 = 8 percent. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7.9. Assume that you wish to create a portfolio with no net wealth invested and the portfolio that achieves this has 50 percent in stock X, -100 percent in stock Y, and 50 percent in stock Z. The net arbitrage profit is

Accepted Answer

A)  $8. 
B)  $5. 
C)  $7. 
D)  $12. 
E)  $15. 
A)  $8. 
B)  $5. 
C)  $7. 
D)  $12. 
E)  $15.

Question 18

One approach for using multifactor models is to use factors that capture systematic risk. Which of the following is NOT a common factor used in this approach?

Accepted Answer

A)  unexpected changes in inflation 
B)  consumer confidence 
C)  yield curve shifts 
D)  unexpected changes in real GDP 
E)  All of these are correct. 
A)  unexpected changes in inflation 
B)  consumer confidence 
C)  yield curve shifts 
D)  unexpected changes in real GDP 
E)  All of these are correct.

Question 19

Calculate the expected return for D Industries, which has a beta of 1.0 when the risk-free rate is 0.03 and you expect the market return to be 0.13.

Accepted Answer

A)  8.6 percent 
B)  9.2 percent 
C)  11.0 percent 
D)  12.0 percent 
E)  13.0 percent 
A)  8.6 percent 
B)  9.2 percent 
C)  11.0 percent 
D)  12.0 percent 
E)  13.0 percent

Question 20

The "true" market portfolio is unknown.

Accepted Answer

A) True 
 B)False

In the APT model, the identity of all the factors is known.

In a microeconomic (or characteristic)-based risk factor model, the following factor would be one of many appropriate factors:

Assume that as a portfolio manager the beta of your portfolio is 1.15 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

The variance of returns for a risky asset is 25 percent. The variance of the error term, Var(e), is 8 percent. What portion of the total risk of the asset, as measured by variance, is systematic?

The planning period for the CAPM is the same length of time for every investor.

The expected return for a stock, calculated using the CAPM, is 25 percent. The risk-free rate is 7.5 percent, and the beta of the stock is 0.80. Calculate the implied return on the market.

The APT does not require a market portfolio.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. The average return for Radtron is

Assume that as a portfolio manager the beta of your portfolio is 1.1 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.4. If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM? X Y Z

The expected return for Zbrite stock calculated using the CAPM is 15.5 percent. The risk-free rate is 3.5 percent and the beta of the stock is 1.2. Calculate the implied market risk premium.

If an incorrect proxy market portfolio such as the S&P index is used when developing the security market line, the slope of the line will tend to be underestimated.

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

One approach for using multifactor models is to use factors that capture systematic risk. Which of the following is NOT a common factor used in this approach?

Calculate the expected return for D Industries, which has a beta of 1.0 when the risk-free rate is 0.03 and you expect the market return to be 0.13.

The "true" market portfolio is unknown.

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

In the APT model, the identity of all the factors is known.

In a microeconomic (or characteristic)-based risk factor model, the following factor would be one of many appropriate factors:

Assume that as a portfolio manager the beta of your portfolio is 1.15 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

The variance of returns for a risky asset is 25 percent. The variance of the error term, Var(e), is 8 percent. What portion of the total risk of the asset, as measured by variance, is systematic?

The planning period for the CAPM is the same length of time for every investor.

The expected return for a stock, calculated using the CAPM, is 25 percent. The risk-free rate is 7.5 percent, and the beta of the stock is 0.80. Calculate the implied return on the market.

The APT does not require a market portfolio.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. The average return for Radtron is

Assume that as a portfolio manager the beta of your portfolio is 1.1 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.4. If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM? X Y Z

The expected return for Zbrite stock calculated using the CAPM is 15.5 percent. The risk-free rate is 3.5 percent and the beta of the stock is 1.2. Calculate the implied market risk premium.

If an incorrect proxy market portfolio such as the S&P index is used when developing the security market line, the slope of the line will tend to be underestimated.

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

One approach for using multifactor models is to use factors that capture systematic risk. Which of the following is NOT a common factor used in this approach?

Calculate the expected return for D Industries, which has a beta of 1.0 when the risk-free rate is 0.03 and you expect the market return to be 0.13.

The "true" market portfolio is unknown.

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