Question 1

CML can be applied only to portfolio holdings that are already fully diversified, whereas the SML can be applied to any individual asset or collection of assets.

Accepted Answer

A) True 
 B)False

Question 2

Because the market portfolio is reasonable in theory, it is easy to implement when testing or using the CAPM.

Accepted Answer

A) True 
 B)False

Question 3

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
   ​
-Refer to Exhibit 7.5. Calculate the risk premium per unit of risk for the three portfolios above assuming the risk-free rate is 4.0%. A B C

Accepted Answer

A)  0.068 0.027 0.072 
B)  0.414 0.276 0.389 
C)  0.700 0.680 0.605 
D)  0.300 0.280 0.205 
E)  0.650 0.580 0.480 
A)  0.068 0.027 0.072 
B)  0.414 0.276 0.389 
C)  0.700 0.680 0.605 
D)  0.300 0.280 0.205 
E)  0.650 0.580 0.480

Question 4

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.3. The average proxy return 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 5

Assume that you are embarking on a test of the small-firm effect using APT. You form 10 size-based portfolios. Which of the following finding would suggest that there is evidence supporting APT?

Accepted Answer

A)  The top five size-based portfolios should have excess returns that exceed the bottom five size based portfolios. 
B)  The bottom five size-based portfolios should have excess returns that exceed the top five size-based portfolios. 
C)  The ten portfolios must have excess returns not significantly different from zero. 
D)  The ten portfolios must have excess returns significantly different from zero. 
E)  None of these are correct. 
A)  The top five size-based portfolios should have excess returns that exceed the bottom five size based portfolios. 
B)  The bottom five size-based portfolios should have excess returns that exceed the top five size-based portfolios. 
C)  The ten portfolios must have excess returns not significantly different from zero. 
D)  The ten portfolios must have excess returns significantly different from zero. 
E)  None of these are correct.

Question 6

The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing model (CAPM) uses ____.

Accepted Answer

A)  beta; total risk 
B)  standard deviation; total risk 
C)  standard deviation; systematic risk 
D)  unsystematic risk; total risk 
E)  systematic risk; beta 
A)  beta; total risk 
B)  standard deviation; total risk 
C)  standard deviation; systematic risk 
D)  unsystematic risk; total risk 
E)  systematic risk; beta

Question 7

Recently you have received a tip that the stock of Bubbly Incorporated is going to rise from $57 to $61 per share over the next year. You know that the annual return on the S&P 500 has been 9.25 percent and the 90-day T-bill rate has been yielding 3.75 percent per year over the past 10 years. If beta for Bubbly is 0.85, 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 8

In one of their empirical tests of the APT, Roll and Ross examined the relationship between a security's returns and its own standard deviation. A finding of a statistically significant relationship would indicate that

Accepted Answer

A)  APT is valid because a security's unsystematic component would be eliminated by diversification. 
B)  APT is valid because non-diversifiable components should be explained by factor sensitivities. 
C)  APT is invalid because a security's unsystematic component would be eliminated by diversification. 
D)  APT is invalid because standard deviation is not an appropriate factor. 
E)  None of these are correct. 
A)  APT is valid because a security's unsystematic component would be eliminated by diversification. 
B)  APT is valid because non-diversifiable components should be explained by factor sensitivities. 
C)  APT is invalid because a security's unsystematic component would be eliminated by diversification. 
D)  APT is invalid because standard deviation is not an appropriate factor. 
E)  None of these are correct.

Question 9

The only way to estimate a beta for a security is to calculate the covariance of the security with the market.

Accepted Answer

A) True 
 B)False

Question 10

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 expected returns for stock X, stock Y, and stock Z are

Accepted Answer

A)  3 percent, 8 percent, 10 percent 
B)  7.1 percent, 10.5 percent, 8.8 percent 
C)  7.1 percent, 8.8 percent, 10.5 percent 
D)  10 percent, 5.5 percent, 14 percent 
E)  14 percent, 5.5 percent, 12 percent 
A)  3 percent, 8 percent, 10 percent 
B)  7.1 percent, 10.5 percent, 8.8 percent 
C)  7.1 percent, 8.8 percent, 10.5 percent 
D)  10 percent, 5.5 percent, 14 percent 
E)  14 percent, 5.5 percent, 12 percent

Question 11

Fama and French suggest a three-factor model approach. Which of the following is NOT included in their approach?

Accepted Answer

A)  excess returns to a broad market index 
B)  return differences between small-cap and large-cap portfolios 
C)  return differences between industry characteristics 
D)  return differences between value and growth stocks 
E)  return differences between foreign stocks 
A)  excess returns to a broad market index 
B)  return differences between small-cap and large-cap portfolios 
C)  return differences between industry characteristics 
D)  return differences between value and growth stocks 
E)  return differences between foreign stocks

Question 12

The Capital Market Line (CML) refers only to those portfolios that lie on the line segment that extends from the risk-free asset to the point of tangency on the efficient frontier known as the market portfolio.

Accepted Answer

A) True 
 B)False

CML can be applied only to portfolio holdings that are already fully diversified, whereas the SML can be applied to any individual asset or collection of assets.

Because the market portfolio is reasonable in theory, it is easy to implement when testing or using the CAPM.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.5. Calculate the risk premium per unit of risk for the three portfolios above assuming the risk-free rate is 4.0%. A B C

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

Assume that you are embarking on a test of the small-firm effect using APT. You form 10 size-based portfolios. Which of the following finding would suggest that there is evidence supporting APT?

The capital market line (CML) uses as a risk measurement, whereas the capital asset pricing model (CAPM) uses .

In one of their empirical tests of the APT, Roll and Ross examined the relationship between a security's returns and its own standard deviation. A finding of a statistically significant relationship would indicate that

The only way to estimate a beta for a security is to calculate the covariance of the security with the market.

Fama and French suggest a three-factor model approach. Which of the following is NOT included in their approach?

The Capital Market Line (CML) refers only to those portfolios that lie on the line segment that extends from the risk-free asset to the point of tangency on the efficient frontier known as the market portfolio.

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

CML can be applied only to portfolio holdings that are already fully diversified, whereas the SML can be applied to any individual asset or collection of assets.

Because the market portfolio is reasonable in theory, it is easy to implement when testing or using the CAPM.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) ​ -Refer to Exhibit 7.5. Calculate the risk premium per unit of risk for the three portfolios above assuming the risk-free rate is 4.0%. A B C

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

Assume that you are embarking on a test of the small-firm effect using APT. You form 10 size-based portfolios. Which of the following finding would suggest that there is evidence supporting APT?

The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing model (CAPM) uses ____.

In one of their empirical tests of the APT, Roll and Ross examined the relationship between a security's returns and its own standard deviation. A finding of a statistically significant relationship would indicate that

The only way to estimate a beta for a security is to calculate the covariance of the security with the market.

Fama and French suggest a three-factor model approach. Which of the following is NOT included in their approach?

The Capital Market Line (CML) refers only to those portfolios that lie on the line segment that extends from the risk-free asset to the point of tangency on the efficient frontier known as the market portfolio.

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

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.5. Calculate the risk premium per unit of risk for the three portfolios above assuming the risk-free rate is 4.0%. A B C

The capital market line (CML) uses as a risk measurement, whereas the capital asset pricing model (CAPM) uses .