Finance Quiz 8

b Which of the following are assumptions of the simple CAPM model?I. Individual trades of investors do not affect a stock’s price.II. All investors plan for one identical holding period.III. All investors analyze securities in the same way and share the same economic view of the world.IV. All investors have the same level of risk aversion.A. I, II, and IV onlyB. I, II, and III onlyC. II, III, and IV onlyD. I, II, III, and IV
d When all investors analyze securities in the same way and share the same economic view of the world, wesay they have ____________________.A. heterogeneous expectationsB. equal risk aversionC. asymmetric informationD. homogeneous expectations
d In a simple CAPM world which of the following statements is (are) correct?I. All investors will choose to hold the market portfolio, which includes all risky assets in the world.II. Investors’ complete portfolio will vary depending on their risk aversion.III. The return per unit of risk will be identical for all individual assets.IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio.A. I, II, and III onlyB. II, III, and IV onlyC. I, III, and IV onlyD. I, II, III, and IV
d Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is theexpected return on a stock with a beta of 1.3?A. 6%B. 15.6%C. 18%D. 21.6%
d Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the betaon a stock with an expected return of 17%?A. .5B. .7C. 1D. 1.2
c Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of1.2 is 20%. What is the risk-free rate?A. 2%B. 6%C. 8%D. 12%
b The arbitrage pricing theory was developed by _________.A. Henry MarkowitzB. Stephen RossC. William SharpeD. Eugene Fama
b In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.A. unique riskB. betaC. the standard deviation of returnsD. the variance of returns
d Empirical results estimated from historical data indicate that betas _________.A. are always close to zeroB. are constant over timeC. of all securities are always between zero and 1D. seem to regress toward 1 over time
a If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing_____________ and ___________.A. expected returns to fall; risk premiums to fallB. expected returns to rise; risk premiums to fallC. expected returns to rise; risk premiums to riseD. expected returns to fall; risk premiums to rise
d The market portfolio has a beta of _________.A. -1B. 0C. .5D. 1
d In a well-diversified portfolio, __________ risk is negligible.A. nondiversifiableB. marketC. systematicD. unsystematic
c The capital asset pricing model was developed by _________.A. Kenneth FrenchB. Stephen RossC. William SharpeD. Eugene Fama
c According to the capital asset pricing model, a security with a _________.A. negative alpha is considered a good buyB. positive alpha is considered overpricedC. positive alpha is considered underpricedD. zero alpha is considered a good buy
c If all investors become more risk averse, the SML will _______________ and stock prices will_______________.A. shift upward; riseB. shift downward; fallC. have the same intercept with a steeper slope; fallD. have the same intercept with a flatter slope; rise
a Arbitrage is based on the idea that _________.A. assets with identical risks must have the same expected rate of returnB. securities with similar risk should sell at different pricesC. the expected returns from equally risky assets are differentD. markets are perfectly efficient
d Investors require a risk premium as compensation for bearing ______________.A. unsystematic riskB. alpha riskC. residual riskD. systematic risk
b According to the capital asset pricing model, a fairly priced security will plot _________.A. above the security market lineB. along the security market lineC. below the security market lineD. at no relation to the security market line
d According to the capital asset pricing model, fairly priced securities have _________.A. negative betasB. positive alphasC. positive betasD. zero alphas
a You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 inGE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What isyour portfolio beta?A. 1.048B. 1.033C. 1D. 1.037
c The graph of the relationship between expected return and beta in the CAPM context is called the_________.A. CMLB. CALC. SMLD. SCL
a . Research has revealed that regardless of what the current estimate of a firm’s beta is, beta will tend to movecloser to ______ over time.A. 1B. 0C. -1D. .5
a The beta of a security is equal to _________.A. the covariance between the security and market returns divided by the variance of the market’s returnsB. the covariance between the security and market returns divided by the standard deviation of the market’sreturnsC. the variance of the security’s returns divided by the covariance between the security and market returnsD. the variance of the security’s returns divided by the variance of the market’s returns
b According to the capital asset pricing model, in equilibrium _________.A. all securities’ returns must lie below the capital market lineB. all securities’ returns must lie on the security market lineC. the slope of the security market line must be less than the market risk premiumD. any security with a beta of 1 must have an excess return of zero
c According to the CAPM, which of the following is not a true statement regarding the market portfolio.A. All securities in the market portfolio are held in proportion to their market values.B. It includes all risky assets in the world, including human capital.C. It is always the minimum-variance portfolio on the efficient frontier.D. It lies on the efficient frontier.
b In a world where the CAPM holds, which one of the following is not a true statement regarding the capitalmarket line?A. The capital market line always has a positive slope.B. The capital market line is also called the security market line.C. The capital market line is the best-attainable capital allocation line.D. The capital market line is the line from the risk-free rate through the market portfolio.
b Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B hasa beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage ofan arbitrage opportunity, you should take a short position in portfolio __________ and a long position inportfolio _________.A. A; AB. A; BC. B; AD. B; B
c Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has abeta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage ofan arbitrage opportunity, you should take a short position in portfolio __________ and a long position inportfolio _________.A. A; AB. A; BC. B; AD. B; B
b Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the marketexpected rate of return is 15%. According to the capital asset pricing model, security X is _________.A. fairly pricedB. overpricedC. underpricedD. none of these answers
b The possibility of arbitrage arises when ____________.A. there is no consensus among investors regarding the future direction of the market, and thus trades are madearbitrarilyB. mispricing among securities creates opportunities for riskless profitsC. two identically risky securities carry the same expected returnsD. investors do not diversify
c An important characteristic of market equilibrium is _______________.A. the presence of many opportunities for creating zero-investment portfoliosB. all investors exhibit the same degree of risk aversionC. the absence of arbitrage opportunitiesD. the lack of liquidity in the market
c You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of thisportfolio is _________.A. 1.14B. 1.2C. 1.26D. 1.5
a In a single-factor market model the beta of a stock ________.A. measures the stock’s contribution to the standard deviation of the market portfolioB. measures the stock’s unsystematic riskC. changes with the variance of the residualsD. measures the stock’s contribution to the standard deviation of the stock
c Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has anexpected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%.Security __________ would be considered the better buy because _________.A. A; it offers an expected excess return of .2%B. A; it offers an expected excess return of 2.2%C. B; it offers an expected excess return of 1.8%D. B; it offers an expected return of 2.4%
c According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is_______________.A. directly related to the risk aversion of the particular investorB. inversely related to the risk aversion of the particular investorC. directly related to the beta of the stockD. inversely related to the alpha of the stock
b Beta is a measure of ______________.A. total riskB. relative systematic riskC. relative nonsystematic riskD. relative business risk
b According to capital asset pricing theory, the key determinant of portfolio returns is _________.A. the degree of diversificationB. the systematic risk of the portfolioC. the firm-specific risk of the portfolioD. economic factors
d According to the CAPM, investors are compensated for all but which of the following?A. Expected inflationB. Systematic riskC. Time value of moneyD. Residual risk
c The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital assetpricing model (CAPM) is that the CAPM _____________.A. places less emphasis on market riskB. recognizes multiple unsystematic risk factorsC. recognizes only one systematic risk factorD. recognizes multiple systematic risk factors
b Arbitrage is __________________________.A. an example of the law of one priceB. the creation of riskless profits made possible by relative mispricing among securitiesC. a common opportunity in modern marketsD. an example of a risky trading strategy based on market forecasting
b A stock’s alpha measures the stock’s ____________________.A. expected returnB. abnormal returnC. excess returnD. residual return
d One of the main problems with the arbitrage pricing theory is __________.A. its use of several factors instead of a single market index to explain the risk-return relationshipB. the introduction of nonsystematic risk as a key factor in the risk-return relationshipC. that the APT requires an even larger number of unrealistic assumptions than does the CAPMD. the model fails to identify the key macroeconomic variables in the risk-return relationship
a Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio betaof 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the marketreturn during the period was 13%, which adviser was the better stock picker?A. Advisor A was better because he generated a larger alpha.B. Advisor B was better because she generated a larger alpha.C. Advisor A was better because he generated a higher return.D. Advisor B was better because she achieved a good return with a lower beta.
b If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to18%, what is the new beta of the market index?A. .8B. 1C. 1.2D. 1.5
b According to the CAPM, what is the expected market return given an expected return on a security of15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?A. 5%B. 9%C. 13%D. 14%
b What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expectedmarket return of 15.5%?A. 3.8%B. 13.1%C. 15.6%D. 19.1%
a A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole.A. higher thanB. lower thanC. equal toD. indeterminable compared to
d The measure of risk used in the capital asset pricing model is ___________.A. specific riskB. the standard deviation of returnsC. reinvestment riskD. beta

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