Question 1

A completely diversified portfolio would have a correlation with the market portfolio that is

Accepted Answer

A)  equal to zero because it has only unsystematic risk. 
B)  equal to one because it has only systematic risk. 
C)  less than zero because it has only systematic risk. 
D)  less than one because it has only unsystematic risk. 
E)  less than one because it has only systematic risk. 
A)  equal to zero because it has only unsystematic risk. 
B)  equal to one because it has only systematic risk. 
C)  less than zero because it has only systematic risk. 
D)  less than one because it has only unsystematic risk. 
E)  less than one because it has only systematic risk.

Question 2

There can be only one zero-beta portfolio.

Accepted Answer

A) True 
 B)False

Question 3

Studies indicate that neither firm size nor the time interval used is important when computing beta.

Accepted Answer

A) True 
 B)False

Question 4

The January Effect is an anomaly in that returns in January are significantly smaller than in any other month.

Accepted Answer

A) True 
 B)False

Question 5

Recently you have received a tip that the stock of Buttercup Industries is going to rise from $76.00 to $85.00 per share over the next year. You know that the annual return on the S&P 500 has been 13 percent and the 90-day T-bill rate has been yielding 3 percent per year over the past 10 years. If beta for Buttercup is 1.0, 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 6

Empirical tests of the APT model have found that as the size of a portfolio increased, so did the number of factors.

Accepted Answer

A) True 
 B)False

Question 7

The CAPM can also be illustrated as the security market line (SML).

Accepted Answer

A) True 
 B)False

Question 8

Your broker has advised you that he believes that the stock of Brat Inc. is going to rise from $20 to $22.15 per share over the next year. You know that the annual return on the S&P 500 has been 11.25 percent and the 90-day T-bill rate has been yielding 4.75 percent per year over the past 10 years. If beta for Brat is 1.25, will you purchase the stock?

Accepted Answer

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

Question 9

CAPM states that only the overall market risk premium matters.

Accepted Answer

A) True 
 B)False

Question 10

In a macroeconomic-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 11

Findings by Basu that stocks with high P/E ratios tended to outperform stocks with low P/E ratios challenge the efficacy of the CAPM.

Accepted Answer

A) True 
 B)False

Question 12

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. If you know that the actual prices one year from now are stock X $55, stock Y $52, and stock Z $57, then

Accepted Answer

A)  stock X is undervalued, stock Y is undervalued, and stock Z is undervalued. 
B)  stock X is undervalued, stock Y is overvalued, and stock Z is overvalued. 
C)  stock X is overvalued, stock Y is undervalued, and stock Z is undervalued. 
D)  stock X is undervalued, stock Y is overvalued, and stock Z is undervalued. 
E)  stock X is overvalued, stock Y is overvalued, and stock Z is undervalued. 
A)  stock X is undervalued, stock Y is undervalued, and stock Z is undervalued. 
B)  stock X is undervalued, stock Y is overvalued, and stock Z is overvalued. 
C)  stock X is overvalued, stock Y is undervalued, and stock Z is undervalued. 
D)  stock X is undervalued, stock Y is overvalued, and stock Z is undervalued. 
E)  stock X is overvalued, stock Y is overvalued, and stock Z is undervalued.

Question 13

An investor constructs a portfolio with a 75 percent allocation to a stock index and a 25 percent allocation to a risk-free asset. The expected returns on the risk-free asset and the stock index are 3 percent and 10 percent, respectively. The standard deviation of returns on the stock index is 14 percent. Calculate the expected standard deviation of the portfolio.

Accepted Answer

A)  7.5 percent 
B)  9.0 percent 
C)  10.5 percent 
D)  11.5 percent 
E)  13.0 percent 
A)  7.5 percent 
B)  9.0 percent 
C)  10.5 percent 
D)  11.5 percent 
E)  13.0 percent

Question 14

Assume that as a portfolio manager the beta of your portfolio is 1.2 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 percent lower 
B)  1 percent lower 
C)  5 percent lower 
D)  1 percent higher 
E)  2 percent higher 
A)  2 percent lower 
B)  1 percent lower 
C)  5 percent lower 
D)  1 percent higher 
E)  2 percent higher

Question 15

Studies have shown the beta is more stable for portfolios than for individual securities.

Accepted Answer

A) True 
 B)False

Question 16

Calculate the expected return for B Services which has a beta of 0.83 when the risk-free rate is 0.05 and you expect the market return to be 0.12.

Accepted Answer

A)  14.96 percent 
B)  16.15 percent 
C)  10.81 percent 
D)  17.00 percent 
E)  15.25 percent 
A)  14.96 percent 
B)  16.15 percent 
C)  10.81 percent 
D)  17.00 percent 
E)  15.25 percent

Question 17

Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):

Accepted Answer

A)  a quadratic utility function. 
B)  normally distributed returns. 
C)  the stochastic process generating asset returns can be represented by a factor model. 
D)  a mean-variance efficient market portfolio consisting of all risky assets. 
E)  capital markets are imperfectly competitive. 
A)  a quadratic utility function. 
B)  normally distributed returns. 
C)  the stochastic process generating asset returns can be represented by a factor model. 
D)  a mean-variance efficient market portfolio consisting of all risky assets. 
E)  capital markets are imperfectly competitive.

Question 18

Recently your broker has advised you that he believes that the stock of Casey Incorporated is going to rise from $55.00 to $70.00 per share over the next year. You know that the annual return on the S&P 500 has been 12.5 percent and the 90-day T-bill rate has been yielding 6 percent per year over the past 10 years. If beta for Casey is 1.3, 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 19

The capital asset pricing model (CAPM) extends capital market theory in a way that allows investors to evaluate the risk-return trade-off for both diversified portfolios and individual securities.

Accepted Answer

A) True 
 B)False

Question 20

In a multifactor model, confidence risk represents

Accepted Answer

A)  unanticipated changes in the level of overall business activity. 
B)  unanticipated changes in investors' desired time to receive payouts. 
C)  unanticipated changes in short-term and long-term inflation rates. 
D)  unanticipated changes in the willingness of investors to take on investment risk. 
E)  None of these are correct. 
A)  unanticipated changes in the level of overall business activity. 
B)  unanticipated changes in investors' desired time to receive payouts. 
C)  unanticipated changes in short-term and long-term inflation rates. 
D)  unanticipated changes in the willingness of investors to take on investment risk. 
E)  None of these are correct.

A completely diversified portfolio would have a correlation with the market portfolio that is

There can be only one zero-beta portfolio.

Studies indicate that neither firm size nor the time interval used is important when computing beta.

The January Effect is an anomaly in that returns in January are significantly smaller than in any other month.

Empirical tests of the APT model have found that as the size of a portfolio increased, so did the number of factors.

The CAPM can also be illustrated as the security market line (SML).

CAPM states that only the overall market risk premium matters.

In a macroeconomic-based risk factor model, the following factor would be one of many appropriate factors:

Findings by Basu that stocks with high P/E ratios tended to outperform stocks with low P/E ratios challenge the efficacy of the CAPM.

Assume that as a portfolio manager the beta of your portfolio is 1.2 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?

Studies have shown the beta is more stable for portfolios than for individual securities.

Calculate the expected return for B Services which has a beta of 0.83 when the risk-free rate is 0.05 and you expect the market return to be 0.12.

Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):

The capital asset pricing model (CAPM) extends capital market theory in a way that allows investors to evaluate the risk-return trade-off for both diversified portfolios and individual securities.

In a multifactor model, confidence risk represents

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

A completely diversified portfolio would have a correlation with the market portfolio that is

There can be only one zero-beta portfolio.

Studies indicate that neither firm size nor the time interval used is important when computing beta.

The January Effect is an anomaly in that returns in January are significantly smaller than in any other month.

Empirical tests of the APT model have found that as the size of a portfolio increased, so did the number of factors.

The CAPM can also be illustrated as the security market line (SML).

CAPM states that only the overall market risk premium matters.

In a macroeconomic-based risk factor model, the following factor would be one of many appropriate factors:

Findings by Basu that stocks with high P/E ratios tended to outperform stocks with low P/E ratios challenge the efficacy of the CAPM.

Assume that as a portfolio manager the beta of your portfolio is 1.2 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?

Studies have shown the beta is more stable for portfolios than for individual securities.

Calculate the expected return for B Services which has a beta of 0.83 when the risk-free rate is 0.05 and you expect the market return to be 0.12.

Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following assumption(s):

The capital asset pricing model (CAPM) extends capital market theory in a way that allows investors to evaluate the risk-return trade-off for both diversified portfolios and individual securities.

In a multifactor model, confidence risk represents

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