FIN 320 QUIZ 2 (CH 5 & 6) & PRACTICE EXAM

E

A portfolio generates a Sharpe ratio of 0.83. Which of the following benchmark Sharpe ration would be considered show the portfolio over performed? A) 0.81 B) 0.79 C) 0.65 D) 0.62 E) All of the options are correct.

B

A reward-to-volatility ratio is useful in a) measuring the standard deviation of returns. b) understanding how returns increase relative to risk increases. c) analyzing returns on variable-rate bonds. d) assessing the effects of inflation. e) None of the options are correct.

B

A reward-to-volatility ratio is useful in: A) measuring the standard deviation of returns. B) understanding how returns increase relative to risk increases. C) analyzing returns on variable-rate bonds. D) assessing the effects of inflation. E) None of the options are correct

E

A statistic that measures how the returns of two risky assets move together is: A) variance. B) standard deviation. C) covariance. D) correlation. E) Both covariance and correlation measure this.

B

Market risk is also referred to as: A) systematic risk or diversifiable risk. B) systematic risk or nondiversifiable risk. C) unique risk or nondiversifiable risk. D) unique risk or diversifiable risk. E) None of the options are correct.

Janet yellen

Name the Secretary of the US Treasury

D

Other things equal, diversification is most effective when a) securities' returns are uncorrelated. b) securities' returns are positively correlated. c) securities' returns are high. d) securities' returns are negatively correlated. e) securities' returns are positively correlated and high.

D

Other things equal, diversification is most effective when: A) securities' returns are uncorrelated. B) securities' returns are positively correlated. C) securities' returns are high. D) securities' returns are negatively correlated. E) securities' returns are positively correlated and high.

B

Portfolio theory as described by Markowitz is most concerned with: A) the elimination of systematic risk. B) the effect of diversification on portfolio risk. C) the identification of unsystematic risk. D) active portfolio management to enhance returns. E) None of the options are correct.

C

Skewness is a measure of: A) how fat the tails of a distribution are. B) the downside risk of a distribution. C) the asymmetry of a distribution. D) the dividend yield of the distribution. E) None of the options are correct.

I and III

Steve is more risk-averse than Edie. On a graph that shows Steve and Edie's indifference curves, which of the following is true? Assume that the graph shows expected return on the vertical axis and standard deviation on the horizontal axis. I. Steve and Edie's indifference curves might intersect. II. Steve's indifference curves will have flatter slopes than Edie's. III. Steve's indifference curves will have steeper slopes than Edie's. IV. Steve and Edie's indifference curves will not intersect. V. Steve's indifference curves will be downward sloping, and Edie's will be upward sloping.

D

Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE. Using a single-index model rather than the Markowitz model A) increases the number of inputs needed from about 1,400 to more than 1.4 million. B) increases the number of inputs needed from about 10,000 to more than 125,000. C) reduces the number of inputs needed from more than 125,000 to about 10,000. D) reduces the number of inputs needed from more than 5 million to about 10,000. E) increases the number of inputs needed from about 150 to more than 1,500.

s2p/s2m = b2; (0.3)2/(0.16)2 = 3.52; b = 1.88.

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio was 0.30 and σM was 0.16, the β of the portfolio would be approximately 0.64. 1.80. 1.88. 1.56.

D

The best measure of a portfolio's risk adjusted performance is the _________ A) return B) standard deviation C) Jensen alpha D) Sharpe measure E) All of the options are correct.

1.53

The beta of Facebook stock has been estimated as 1.8 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of 1.20. 1.32. 1.13. 1.53.

D

The beta of Facebook stock has been estimated as 1.8 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of a) 1.20. b) 1.32. c) 1.13. d) 1.53.

A

The capital allocation line can be described as the: A) investment opportunity set formed with a risky asset and a risk-free asset. B) investment opportunity set formed with two risky assets. C) line on which lie all portfolios that offer the same utility to a particular investor. D) line on which lie all portfolios with the same expected rate of return and different standard deviations.

C

The capital allocation line provided by a risk-free security and N risky securities is: A) the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. B) the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. C) the line tangent to the efficient frontier of risky securities drawn from the risk-free rate. D) the horizontal line drawn from the risk-free rate. E) the vertical line drawn from the risk-free rate.

T-bill

The correlation coefficients between several pairs of stocks are as follows: Corr(A, B) = 0.85; Corr(A, C) = 0.60; Corr(A, D) = 0.45. Each stock has an expected return of 8% and a standard deviation of 20%. Your entire portfolio is now composed of stock A and you can add some of only one stock to your portfolio. Suppose that in addition to investing in one more stock you can invest in T-bills as well. If the T-bill rate is 8%, would you choose:

A

The expected return-beta relationship of the CAPM is graphically represented by a) the security-market line. b) the capital-market line. c) the capital-allocation line. d) the efficient frontier with a risk-free asset. e) the efficient frontier without a risk-free asset.

A

The first major step in asset allocation is a) assessing risk tolerance. b) analyzing financial statements. c) estimating security betas. d) identifying market anomalies.

0.0772

The index model has been estimated for stocks A and B with the following results: RA = 0.03 + 0.7RM + eA. RB = 0.01 + 0.9RM + eB. σM = 0.35; σ(eA) = 0.20; σ(eB) = 0.10. The covariance between the returns on stocks A and B is 0.0384. 0.0406. 0.1920. 0.0772. 0.4000.

A

The individual investor's optimal portfolio is designated by a) the point of tangency with the indifference curve and the capital allocation line. b) the point of highest reward to variability ratio in the opportunity set. c) the point of tangency with the opportunity set and the capital allocation line. d) the point of the highest reward to variability ratio in the indifference curve. e) None of the options are correct.

B

The market portfolio has a beta of a) 0. b) 1. c) −1. d) 0.5.

A

The market risk, beta, of a security is equal to: A) the covariance between the security's return and the market divided by the variance of the market's returns B) the covariance between the security and market returns divided by the standard deviation of the market's returns C) the variance of the security's returns divided by the covariance between the security and market returns D) the variance of the security's returns divided by the variance of the market's returns

B

The measure of risk in a Markowitz efficient frontier is a) specific risk. b) standard deviation of returns. c) reinvestment risk. d) beta.

A

The reduction in standard deviation from a well-diversified portfolio of 100 stocks will _________ than that of a 200-stock portfolio. A) not be statistically significantly different B) be statistically significantly different C) equal to D) be materially different E) None of the options are correct.

D

The risk premium for common stocks: A) must always be zero, for investors would be unwilling to invest in common stocks. B) must always be positive, in theory. C) is negative, as common stocks are risky. D) cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. E) cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

A

The risk that can be diversified away is a) firm-specific risk. b) beta. c) systematic risk. d) market risk.

B

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 10%, you should: A) buy CAT because it is overpriced B) sell short CAT because it is overpriced C) sell short CAT because it is underpriced D) buy CAT because it is underpriced E) None of the options, as CAT as fairly priced

D

The security market line (SML) is: A) the line that describes the expected return-beta relationship for well-diversified portfolios only. B) also called the capital allocation line. C) the line that is tangent to the efficient frontier of all risky assets. D) the line that represents the expected return-beta relationship.

D

The security market line (SML): A) can be portrayed graphically as the expected return-beta relationship. B) can be portrayed graphically as the expected return-standard deviation of market-returns relationship. C) provides a benchmark for evaluation of investment performance. D) can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance. E) can be portrayed graphically as the expected return-standard deviation of market-returns relationship and provides a benchmark for evaluation of investment performance.

E

The standard deviation of a portfolio of risky securities is a) the square root of the weighted sum of the securities' variances. b) the square root of the sum of the securities' variances. c) the square root of the weighted sum of the securities' variances and covariances. d) the square root of the sum of the securities' covariances. e) The standard deviation is the square root of the variance which is a weighted sum of the variance of the individual securities and the covariances between securities

A

The standard deviation of a two-asset portfolio with a correlation coefficient of 0.35 will be _________ the weighted average standard deviation of the portfolio. A) below B) above C) equal to D) incomparable to E) None of the options are correct.

E

The utility score an investor assigns to a particular portfolio, other things equal, A) will decrease as the rate of return increases. B) will decrease as the standard deviation decreases. C) will decrease as the variance decreases. D) will increase as the variance increases. E) will increase as the rate of return increases.

C

The variance of a portfolio of risky securities: A) is a weighted sum of the securities' variances. B) is the sum of the securities' variances. C) is the weighted sum of the securities' variances and covariances. D) is the sum of the securities' covariances. E) None of the options are correct.

False

True or False: Assume that expected returns and standard deviations for all securities (including the risk-free rate for borrowing and lending) are known. In this case, all investors will have the same optimal risky portfolio.

False

True or False: The standard deviation of the portfolio is always equal to the weighted average of the standard deviations of the assets in the portfolio.

B

Use the below information to answer the following question. U = E(r) − (A/2)s2, where A = 4.0. The variable ( A) in the utility function represents the a) investor's return requirement. b) investor's aversion to risk. c) certainty-equivalent rate of the portfolio. d) minimum required utility of the portfolio.

15%

What is the expected rate of return for a stock that has a beta of 1.0 if the expected return on the market is 15%?

D

What is the expected return of a zero-beta security? A) The market rate of return B) Zero rate of return C) A negative rate of return D) The risk-free rate E) None of the options are correct.

D

What is the expected return of a zero-beta security? a) The market rate of return b) Zero rate of return c) A negative rate of return d) The risk-free rate

0

What is the standard deviation of a risk-free asset?

C

When a distribution is negatively skewed, A) standard deviation overestimates risk. B) standard deviation correctly estimates risk. C) standard deviation underestimates risk. D) the tails are fatter than in a normal distribution. E) None of the options are correct.

D

Which of the following measures of risk best highlights the potential loss from extreme negative returns? A) Standard deviation B) Variance C) Upper partial standard deviation D) Value at risk (VaR) E) None of the options are correct.

I and II only

Which of the following statements is(are) true? I. Risk-averse investors reject investments that are fair games. II. Risk-neutral investors judge risky investments only by the expected returns. III. Risk-averse investors judge investments only by their riskiness. IV. Risk-loving investors will not engage in fair games.

C

Which of the following statements regarding risk-averse investors is true? A) They only care about the rate of return. B) They accept investments that are fair games. C) They only accept risky investments that offer risk premiums over the risk-free rate. D) They are willing to accept lower returns and high risk. E) They only care about the rate of return, and they accept investments that are fair games.

D

Which of the following statements regarding the capital allocation line (CAL) is false? A) The CAL shows risk-return combinations. B) The slope of the CAL equals the increase in the expected return of the complete portfolio per unit of additional standard deviation. C) The slope of the CAL is also called the reward-to-volatility ratio. D) The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset. Correct

NASDAQ S&P 500 (market proxy)

Which of the major stock indexes which we report on every class for the Top Stories, would you deduce has the highest beta?

A

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? Portfolio Expected Return Std dEV W 9% 21% X 5% 7% Y 15% 36% Z 12% 15% A) Only portfolio W cannot lie on the efficient frontier. B) Only portfolio X cannot lie on the efficient frontier. C) Only portfolio Y cannot lie on the efficient frontier. D) Only portfolio Z cannot lie on the efficient frontier. E) Cannot be determined from the information given.

D

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to: A) 0.47 B) 0.80 C) 2.14 D) 0.40 E) Cannot be determined

C

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.08? A) 30% and 70% B) 50% and 50% C) 60% and 40% D) 40% and 60% E) Cannot be determined.

A

You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to: A) 0.4667 B) 0.8000. C) 2.1400. D) 0.41667. E) Cannot be determined.

Beta books adjusts beta by taking the sample estimate of beta and averaging it with 1, using the weights of 2/3 and 1/3, as follows: Adjusted beta = [(2/3) × 1.24] + [(1/3) × 1] = 1.16 b. If you use your current estimate of beta to be βt−1 = 1.24, then βt = 0.3 + (0.7 × 1.24) = 1.168

A stock recently has been estimated to have a beta of 1.24: a. What will a beta book compute as the "adjusted beta" of this stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Suppose that you estimate the following regression describing the evolution of beta over time: βt = 0.3 + 0.7βt−1 What would be your predicted beta for next year? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

B

According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have: A) positive betas. B) zero alphas. C) negative betas. D) positive alphas. E) zero betas.

D

According to the Capital Asset Pricing Model (CAPM), underpriced securities have a) positive betas. b) zero alphas. c) negative betas. d) positive alphas. e) None of the options are correct.

D

According to the Capital Asset Pricing Model (CAPM), underpriced securities have: A) positive betas. B) zero alphas. C) negative betas. D) positive alphas. E) None of the options are correct.

Investment B dominates investment C.

According to the mean-variance criterion, which of the statements below is correct? Investment E(r) Std Dev A 10% 5% B 21% 11% C 18% 23% D 24% 16%

C

According to the mean-variance criterion, which one of the following investments dominates all others? A) E(r) = 0.10; Variance = 0.25 B) E(r) = 0.10; Variance = 0.20 C) E(r) = 0.15; Variance = 0.20 D) E(r) = 0.15; Variance = 0.25 E) None of these options dominates the other alternatives.

B

Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of a) the α of the asset. b) the β of the asset. c) the σ of the asset. d) the δ of the asset.

C

Consider a T-bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; Variance = 0.04 Security B: E(r) = 0.10; Variance = 0.0225 Security C: E(r) = 0.12; Variance = 0.01 Security D: E(r) = 0.13; Variance = 0.0625 From which set of portfolios, formed with the T-bill and any one of the four risky securities, would a risk-averse investor always choose his portfolio? A) The set of portfolios formed with the T-bill and security A. B) The set of portfolios formed with the T-bill and security B. C) The set of portfolios formed with the T-bill and security C. D) The set of portfolios formed with the T-bill and security D. E) Cannot be determined.

11% = 2% + b(11%); b = 0.82.

Consider the single-index model. The alpha of a stock is 2%. The return on the market index is 16%. The risk-free rate of return is 5%. The stock earns a return that exceeds the risk-free rate by 11%, and there are no firm-specific events affecting the stock performance. The β of the stock is 0.67. 0.75. 0.82. 1.33. 1.50.

D

Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. The weights of A and B in the global minimum variance portfolio are _____ and _____, respectively. a) 0.24; 0.76 b) 0.50; 0.50 c) 0.57; 0.43 d) 0.43; 0.57 e) 0.76; 0.24

D

Firm-specific risk is also referred to as: A) systematic risk or diversifiable risk. B) systematic risk or market risk. C) diversifiable risk or market risk. D) diversifiable risk or unique risk. E) None of the options are correct.

D

Given the capital allocation line, an investor's optimal portfolio is the portfolio that: A) maximizes her expected profit. B) maximizes her risk. C) minimizes both her risk and return. D) maximizes her expected utility E) none of the options are correct

C

If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be a) 0.12. b) 0.04. c) 0.32. d) 0.16. e) 0.25.

III and IV only

In a return-standard deviation space, which of the following statements is(are) true for risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.) I. An investor's own indifference curves might intersect. II. Indifference curves have negative slopes. III. In a set of indifference curves, the highest offers the greatest utility. IV. Indifference curves of two investors might intersect.

B

In a two-security minimum variance portfolio where the correlation between securities is greater than −1.0, A) the security with the higher standard deviation will be weighted more heavily. B) the security with the higher standard deviation will be weighted less heavily. C) the two securities will be equally weighted. D) the risk will be zero. E) the return will be zero.

Inverted

In one word, describe the shape the UST yield curve?

B

In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is: A) unique risk B) beta C) standard deviation of returns D) variance of returns E) alpha

B

In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called a) the security market line. b) the capital allocation line. c) the indifference curve. d) the investor's utility line.

C

In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor? A) It is the locus of portfolios that have the same expected rates of return and different standard deviations. B) It is the locus of portfolios that have the same standard deviations and different rates of return. C) It is the locus of portfolios that offer the same utility according to returns and standard deviations. D) It connects portfolios that offer increasing utilities according to returns and standard deviations. E) None of the options are correct.

The expected rate of return will be higher for the stock of Kaskin, Incorporated, than that of Quinn, Incorporated.

Kaskin, Incorporated, stock has a beta of 1.2 and Quinn, Incorporated, stock has a beta of 0.6. Which of the following statements is most accurate?