Question 1

If the assumption that there are no transaction costs is relaxed, the SML will be a

Accepted Answer

A)  straight line. 
B)  band of securities. 
C)  convex curve. 
D)  concave curve. 
E)  parabolic curve. 
A)  straight line. 
B)  band of securities. 
C)  convex curve. 
D)  concave curve. 
E)  parabolic curve.

Question 2

The usefulness of CAPM theory is limited in practice due to benchmark error.

Accepted Answer

A) True 
 B)False

Question 3

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.3. The covariance between Radtron and the proxy 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 4

The ____ the number of stocks in a portfolio and the ____ the time period, the ____ the portfolio beta.

Accepted Answer

A)  larger, longer, less stable 
B)  larger, longer, more stable 
C)  larger, shorter, less stable 
D)  larger, shorter, more stable 
E)  smaller, longer, more stable 
A)  larger, longer, less stable 
B)  larger, longer, more stable 
C)  larger, shorter, less stable 
D)  larger, shorter, more stable 
E)  smaller, longer, more stable

Question 5

Dhrymes, Friend, and Gultekin, in their study of the APT, found that

Accepted Answer

A)  as the number of securities used to form portfolios increased, the number of factors that characterized the return generating process decreased. 
B)  as the number of securities used to form portfolios increased, the number of factors that characterized the return generating process increased. 
C)  as the number of securities used to form portfolios decreased, the number of factors that characterized the return generating process increased. 
D)  as the number of securities used to form portfolios increased, the number of factors that characterized the return generating process remained unchanged. 
E)  None of these are correct. 
A)  as the number of securities used to form portfolios increased, the number of factors that characterized the return generating process decreased. 
B)  as the number of securities used to form portfolios increased, the number of factors that characterized the return generating process increased. 
C)  as the number of securities used to form portfolios decreased, the number of factors that characterized the return generating process increased. 
D)  as the number of securities used to form portfolios increased, the number of factors that characterized the return generating process remained unchanged. 
E)  None of these are correct.

Question 6

If an individual owns only one security the most appropriate measure of risk is

Accepted Answer

A)  standard deviation. 
B)  correlation. 
C)  beta. 
D)  covariance. 
E)  the risk-free rate. 
A)  standard deviation. 
B)  correlation. 
C)  beta. 
D)  covariance. 
E)  the risk-free rate.

Question 7

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
  
-Refer to Exhibit 7.7. What are the required rates of return for the three stocks (in the order A, B, C)?

Accepted Answer

A)  13.0 percent, 10.6 percent, 8.8 percent 
B)  15.0 percent, 11.1 percent, 2.9 percent 
C)  18.7 percent, 11.1 percent, 8.8 percent 
D)  21.7 percent, 10.0 percent, 6.9 percent 
E)  25.0 percent, 11.1 percent, 7.1 percent 
A)  13.0 percent, 10.6 percent, 8.8 percent 
B)  15.0 percent, 11.1 percent, 2.9 percent 
C)  18.7 percent, 11.1 percent, 8.8 percent 
D)  21.7 percent, 10.0 percent, 6.9 percent 
E)  25.0 percent, 11.1 percent, 7.1 percent

Question 8

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

Accepted Answer

A)  11.58 percent and 12.8 percent 
B)  15.65 percent and 18.23 percent 
C)  13.27 percent and 15.6 percent 
D)  18.2 percent and 16.45 percent 
E)  22.35 percent and 13.25 percent 
A)  11.58 percent and 12.8 percent 
B)  15.65 percent and 18.23 percent 
C)  13.27 percent and 15.6 percent 
D)  18.2 percent and 16.45 percent 
E)  22.35 percent and 13.25 percent

Question 9

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
  
-Refer to Exhibit 7.2. What are the estimated rates of return for the three stocks (in the order X, Y, Z)?

Accepted Answer

A)  21.25 percent, 8.33 percent, 11.43 percent 
B)  6.20 percent, 2.20 percent, 8.20 percent 
C)  16.50 percent, 5.50 percent, 22.00 percent 
D)  9.25 percent, 10.5 percent, 7.5 percent 
E)  15.00 percent, 3.50 percent, 7.30 percent 
A)  21.25 percent, 8.33 percent, 11.43 percent 
B)  6.20 percent, 2.20 percent, 8.20 percent 
C)  16.50 percent, 5.50 percent, 22.00 percent 
D)  9.25 percent, 10.5 percent, 7.5 percent 
E)  15.00 percent, 3.50 percent, 7.30 percent

Question 10

Beta is a measure of

Accepted Answer

A)  company specific risk. 
B)  industry risk. 
C)  diversifiable risk. 
D)  systematic risk. 
E)  unique risk. 
A)  company specific risk. 
B)  industry risk. 
C)  diversifiable risk. 
D)  systematic risk. 
E)  unique risk.

Question 11

The error caused by NOT using the true market portfolio has become known as the

Accepted Answer

A)  portfolio deviation. 
B)  CAPM shift. 
C)  benchmark error. 
D)  market error. 
E)  beta error. 
A)  portfolio deviation. 
B)  CAPM shift. 
C)  benchmark error. 
D)  market error. 
E)  beta error.

Question 12

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
  
-Refer to Exhibit 7.2. What is your investment strategy concerning the three stocks?

Accepted Answer

A)  buy X and Y; sell Z 
B)  sell X, Y, and Z 
C)  sell X and Z; buy Y 
D)  buy X, Y, and Z 
E)  buy X and Z; sell Y 
A)  buy X and Y; sell Z 
B)  sell X, Y, and Z 
C)  sell X and Z; buy Y 
D)  buy X, Y, and Z 
E)  buy X and Z; sell Y

Question 13

According to the APT model, all securities should be priced such that riskless arbitrage is possible.

Accepted Answer

A) True 
 B)False

Question 14

Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)  14.1 percent and 12.9 percent 
B)  12.5 percent and 19.5 percent 
C)  19.5 percent and 18.5 percent 
D)  21.2 percent and 18.5 percent 
E)  11.5 percent and 15.5 percent 
A)  14.1 percent and 12.9 percent 
B)  12.5 percent and 19.5 percent 
C)  19.5 percent and 18.5 percent 
D)  21.2 percent and 18.5 percent 
E)  11.5 percent and 15.5 percent

Question 16

Under the following conditions, what are the expected returns for stocks A and B?

Accepted Answer

A)  24.8 percent and 19.7 percent 
B)  22.1 percent and 18.0 percent 
C)  20.3 percent and 17.8 percent 
D)  19.9 percent and 16.9 percent 
E)  18.7 percent and 15.3 percent 
A)  24.8 percent and 19.7 percent 
B)  22.1 percent and 18.0 percent 
C)  20.3 percent and 17.8 percent 
D)  19.9 percent and 16.9 percent 
E)  18.7 percent and 15.3 percent

Question 17

Overall, the correlation coefficients of industries to the market portfolio vary widely, which is expected due to the wide variance of industry Betas.

Accepted Answer

A) True 
 B)False

Question 18

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.4. What are the expected returns for stocks X, Y, and Z for the next period based on the above prices and dividends? X Y Z

Accepted Answer

A)  4.8% 18.3% 16.9% 
B)  10.7% 17.5% 14.4% 
C)  11.2% 20.7% 16.9% 
D)  12.3% 22.5% 22.3% 
E)  13.1% 24.3% 18.2% 
A)  4.8% 18.3% 16.9% 
B)  10.7% 17.5% 14.4% 
C)  11.2% 20.7% 16.9% 
D)  12.3% 22.5% 22.3% 
E)  13.1% 24.3% 18.2%

Question 19

All of the following are assumptions of the Capital Asset Pricing Model (CAPM) EXCEPT

Accepted Answer

A)  investors can borrow and lend any amount at the risk-free rate. 
B)  investors all have homogeneous expectations regarding expected returns. 
C)  investors can have different time horizons, daily, weekly, annual, or some other period. 
D)  all investments are infinitely divisible. 
E)  capital markets are in equilibrium. 
A)  investors can borrow and lend any amount at the risk-free rate. 
B)  investors all have homogeneous expectations regarding expected returns. 
C)  investors can have different time horizons, daily, weekly, annual, or some other period. 
D)  all investments are infinitely divisible. 
E)  capital markets are in equilibrium.

Question 20

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
  
-Refer to Exhibit 7.7. What is your investment strategy concerning the three stocks?

Accepted Answer

A)  buy A and B; sell C 
B)  sell A, B, and C 
C)  sell A and B; buy C 
D)  buy A, B, and C 
E)  buy A and C; sell B 
A)  buy A and B; sell C 
B)  sell A, B, and C 
C)  sell A and B; buy C 
D)  buy A, B, and C 
E)  buy A and C; sell B

If the assumption that there are no transaction costs is relaxed, the SML will be a

The usefulness of CAPM theory is limited in practice due to benchmark error.

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

The the number of stocks in a portfolio and the the time period, the the portfolio beta.

Dhrymes, Friend, and Gultekin, in their study of the APT, found that

If an individual owns only one security the most appropriate measure of risk is

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

Beta is a measure of

The error caused by NOT using the true market portfolio has become known as the

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks. -Refer to Exhibit 7.2. What is your investment strategy concerning the three stocks?

According to the APT model, all securities should be priced such that riskless arbitrage is possible.

Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.

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

Under the following conditions, what are the expected returns for stocks A and B?

Overall, the correlation coefficients of industries to the market portfolio vary widely, which is expected due to the wide variance of industry Betas.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.4. What are the expected returns for stocks X, Y, and Z for the next period based on the above prices and dividends? X Y Z

All of the following are assumptions of the Capital Asset Pricing Model (CAPM) EXCEPT

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks. -Refer to Exhibit 7.7. What is your investment strategy concerning the three stocks?

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

If the assumption that there are no transaction costs is relaxed, the SML will be a

The usefulness of CAPM theory is limited in practice due to benchmark error.

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

The ____ the number of stocks in a portfolio and the ____ the time period, the ____ the portfolio beta.

Dhrymes, Friend, and Gultekin, in their study of the APT, found that

If an individual owns only one security the most appropriate measure of risk is

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

Beta is a measure of

The error caused by NOT using the true market portfolio has become known as the

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks. -Refer to Exhibit 7.2. What is your investment strategy concerning the three stocks?

According to the APT model, all securities should be priced such that riskless arbitrage is possible.

Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.

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

Under the following conditions, what are the expected returns for stocks A and B?

Overall, the correlation coefficients of industries to the market portfolio vary widely, which is expected due to the wide variance of industry Betas.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.4. What are the expected returns for stocks X, Y, and Z for the next period based on the above prices and dividends? X Y Z

All of the following are assumptions of the Capital Asset Pricing Model (CAPM) EXCEPT

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks. -Refer to Exhibit 7.7. What is your investment strategy concerning the three stocks?

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

The the number of stocks in a portfolio and the the time period, the the portfolio beta.