Question 1

Liquidity is a risk factor that ________.

Accepted Answer

A)  has yet to be accurately measured and incorporated into portfolio management 
B)  is unaffected by trading mechanisms on various stock exchanges 
C)  has no effect on the market value of an asset 
D)  affects bond prices but not stock prices 
A)  has yet to be accurately measured and incorporated into portfolio management 
B)  is unaffected by trading mechanisms on various stock exchanges 
C)  has no effect on the market value of an asset 
D)  affects bond prices but not stock prices

Question 2

What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

Accepted Answer

A)  3.8% 
B)  13.1% 
C)  15.6% 
D)  19.1% 
A)  3.8% 
B)  13.1% 
C)  15.6% 
D)  19.1%

Question 3

When all investors analyze securities in the same way and share the same economic view of the world, we say they have ________.

Accepted Answer

A)  heterogeneous expectations 
B)  equal risk aversion 
C)  asymmetric information 
D)  homogeneous expectations 
A)  heterogeneous expectations 
B)  equal risk aversion 
C)  asymmetric information 
D)  homogeneous expectations

Question 4

The measure of unsystematic risk can be found from an index model as ________.

Accepted Answer

A)  residual standard deviation 
B)  R-square 
C)  degrees of freedom 
D)  sum of squares of the regression 
A)  residual standard deviation 
B)  R-square 
C)  degrees of freedom 
D)  sum of squares of the regression

Question 5

One extensive study found that about ________ of financial managers use CAPM to estimate cost of capital.

Accepted Answer

A)  one-third 
B)  one-half 
C)  three quarters 
D)  ninety percent 
A)  one-third 
B)  one-half 
C)  three quarters 
D)  ninety percent

Question 6

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing ________ and ________.

Accepted Answer

A)  expected returns to fall; risk premiums to fall 
B)  expected returns to rise; risk premiums to fall 
C)  expected returns to rise; risk premiums to rise 
D)  expected returns to fall; risk premiums to rise 
A)  expected returns to fall; risk premiums to fall 
B)  expected returns to rise; risk premiums to fall 
C)  expected returns to rise; risk premiums to rise 
D)  expected returns to fall; risk premiums to rise

Question 7

Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately ________.

Accepted Answer

A)  .60 
B)  1 
C)  1.67 
D)  3.20 
A)  .60 
B)  1 
C)  1.67 
D)  3.20

Question 8

The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock?

Accepted Answer

A)  11.6% 
B)  13% 
C)  15.3% 
D)  19.5% 
A)  11.6% 
B)  13% 
C)  15.3% 
D)  19.5%

Question 9

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is:
I. Highly significant in predicting future stock returns
II. Relatively useless in predicting future stock returns
III. A good predictor of the firm's specific risk

Accepted Answer

A)  I only 
B)  II only 
C)  I and III only 
D)  I, II, and III 
A)  I only 
B)  II only 
C)  I and III only 
D)  I, II, and III

Question 10

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is ________.

Accepted Answer

A)  directly related to the risk aversion of the particular investor 
B)  inversely related to the risk aversion of the particular investor 
C)  directly related to the beta of the stock 
D)  inversely related to the alpha of the stock 
A)  directly related to the risk aversion of the particular investor 
B)  inversely related to the risk aversion of the particular investor 
C)  directly related to the beta of the stock 
D)  inversely related to the alpha of the stock

Question 11

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM ________.

Accepted Answer

A)  places less emphasis on market risk 
B)  recognizes multiple unsystematic risk factors 
C)  recognizes only one systematic risk factor 
D)  recognizes multiple systematic risk factors 
A)  places less emphasis on market risk 
B)  recognizes multiple unsystematic risk factors 
C)  recognizes only one systematic risk factor 
D)  recognizes multiple systematic risk factors

Question 12

According to the capital asset pricing model, a security with a ________.

Accepted Answer

A)  negative alpha is considered a good buy 
B)  positive alpha is considered overpriced 
C)  positive alpha is considered underpriced 
D)  zero alpha is considered a good buy 
A)  negative alpha is considered a good buy 
B)  positive alpha is considered overpriced 
C)  positive alpha is considered underpriced 
D)  zero alpha is considered a good buy

Question 13

Compensation of money managers is ________ based on alpha or other appropriate risk-adjusted measures.

Accepted Answer

A)  never 
B)  rarely 
C)  almost always 
D)  always 
A)  never 
B)  rarely 
C)  almost always 
D)  always

Question 14

Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return?

Accepted Answer

A)  15.9% 
B)  12.9% 
C)  13.2% 
D)  12% 
A)  15.9% 
B)  12.9% 
C)  13.2% 
D)  12%

Question 15

In a well-diversified portfolio, ________ risk is negligible.

Accepted Answer

A)  nondiversifiable 
B)  market 
C)  systematic 
D)  unsystematic 
A)  nondiversifiable 
B)  market 
C)  systematic 
D)  unsystematic

Question 16

According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?

Accepted Answer

A)  5% 
B)  9% 
C)  13% 
D)  14% 
A)  5% 
B)  9% 
C)  13% 
D)  14%

Question 17

Beta is a measure of ________.

Accepted Answer

A)  total risk 
B)  relative systematic risk 
C)  relative nonsystematic risk 
D)  relative business risk 
A)  total risk 
B)  relative systematic risk 
C)  relative nonsystematic risk 
D)  relative business risk

Question 18

You run a regression of a stock's returns versus a market index and find the following:
 
Based on the data, you know that the stock ________.

Accepted Answer

A)  earned a positive alpha that is statistically significantly different from zero 
B)  has a beta precisely equal to .890 
C)  has a beta that is likely to be anything between .6541 and 1.465 inclusive 
D)  has no systematic risk 
A)  earned a positive alpha that is statistically significantly different from zero 
B)  has a beta precisely equal to .890 
C)  has a beta that is likely to be anything between .6541 and 1.465 inclusive 
D)  has no systematic risk

Question 19

The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock?

Accepted Answer

A)  10% 
B)  11.5% 
C)  13.6% 
D)  14% 
A)  10% 
B)  11.5% 
C)  13.6% 
D)  14%

Question 20

What is the alpha of a portfolio with a beta of 2 and actual return of 15%?

Accepted Answer

A)  0% 
B)  13% 
C)  15% 
D)  17% 
A)  0% 
B)  13% 
C)  15% 
D)  17%

Liquidity is a risk factor that ________.

What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

When all investors analyze securities in the same way and share the same economic view of the world, we say they have ________.

The measure of unsystematic risk can be found from an index model as ________.

One extensive study found that about ________ of financial managers use CAPM to estimate cost of capital.

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing and .

Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately ________.

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: I. Highly significant in predicting future stock returns II. Relatively useless in predicting future stock returns III. A good predictor of the firm's specific risk

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is ________.

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM ________.

According to the capital asset pricing model, a security with a ________.

Compensation of money managers is ________ based on alpha or other appropriate risk-adjusted measures.

In a well-diversified portfolio, ________ risk is negligible.

According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?

Beta is a measure of ________.

You run a regression of a stock's returns versus a market index and find the following: Based on the data, you know that the stock ________.

What is the alpha of a portfolio with a beta of 2 and actual return of 15%?

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Efficient Diversification

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

Liquidity is a risk factor that ________.

What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

When all investors analyze securities in the same way and share the same economic view of the world, we say they have ________.

The measure of unsystematic risk can be found from an index model as ________.

One extensive study found that about ________ of financial managers use CAPM to estimate cost of capital.

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing ________ and ________.

Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately ________.

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: I. Highly significant in predicting future stock returns II. Relatively useless in predicting future stock returns III. A good predictor of the firm's specific risk

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is ________.

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM ________.

According to the capital asset pricing model, a security with a ________.

Compensation of money managers is ________ based on alpha or other appropriate risk-adjusted measures.

In a well-diversified portfolio, ________ risk is negligible.

According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?

Beta is a measure of ________.

You run a regression of a stock's returns versus a market index and find the following: Based on the data, you know that the stock ________.

What is the alpha of a portfolio with a beta of 2 and actual return of 15%?

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Efficient Diversification

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing and .