CM Chapter 6, CM Chapter 7, CM Chapter 8
The capital asset pricing model was developed by _________. A. Kenneth French B. Stephen Ross C. William Sharpe D. Eugene Fama
C. William Sharpe
Reward-to-variability ratios are ________ on the ________ capital market line. A. lower; steeper B. higher; flatter C. higher; steeper D. the same; flatter
A
Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to changes in the market as the returns of Stock B. A. 20% more B. slightly more C. 20% less D. slightly less
A
The _______ decision should take precedence over the _____ decision. A. asset allocation, stock selection B. bond selection, mutual fund selection C. stock selection, asset allocation D. stock selection, mutual fund selection
A
The term "complete portfolio" refers to a portfolio consisting of _________________. A. the risk-free asset combined with at least one risky asset B. the market portfolio combined with the minimum variance portfolio C. securities from domestic markets combined with securities from foreign markets D. common stocks combined with bonds
A
To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by _________. A. n/(n - 1) B. n * (n - 1) C. (n - 1)/n D. (n - 1) * n
A
What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A and the correlation coefficient between the two stocks is -.23. A. 9.7% B. 12.2% C. 14.0% D. 15.6%
A
Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two asset portfolio where the correlation coefficient is positive? A. σ2rp < (W12σ12 + W22σ22) B. σ2rp = (W12σ12 + W22σ22) C. σ2rp = (W12σ12 - W22σ22) D. σ2rp > (W12σ12 + W22σ22)
A
If the daily returns on the stock market are normally distributed with a mean of .05% and a standard deviation of 1%, the probability that the stock market would have a return of -23% or worse on one particular day (as it did on Black Monday) is approximately __________. A. .0% B. .1% C. 1% D. 10%
A. .0%
Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately _________. A. .1152 B. .1270 C. .1521 D. .1342
A. .1152
. What is the alpha of a portfolio with a beta of 2 and actual return of 15%? A. 0% B. 13% C. 15% D. 17%
A. 0%
The risk premium for exposure to exchange rates is 5% and the firm has a beta relative to exchanges rates of 0.4. The risk premium for exposure to the consumer price index is -6% and the firm has a beta relative to the CPI of 0.8. If the risk free rate is 3.0%, what is the expected return on this stock? A. 0.2% B. 1.5% C. 3.6% D. 4.0%
A. 0.2%
Research has revealed that regardless of what the current estimate of a firm's beta is, it will tend to move closer to ______ over time. A. 1 B. 0 C. -1 D. 0.5
A. 1
You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the stock in one year for $28. The stock's beta is 1.1, rf is 6% and E[rm] = 16%. What is the stock's abnormal return? A. 1% B. 2% C. -1% D. -2%
A. 1%
You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta? A. 1.048 B. 1.033 C. 1.000 D. 1.037
A. 1.048
The two factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate of (-1.3%), and a risk free rate of 3.5%. What is the expected return on the stock? A. 8.7% B. 11.2% C. 13.8% D. 15.2%
A. 8.7%
A technical analyst is most likely to be affiliated with which investment philosophy? A. Active management B. Buy and hold C. Passive investment D. Index funds
A. Active management
Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which advisor was the better stock picker? A. Advisor A was better because he generated a larger alpha B. Advisor B was better because he generated a larger alpha C. Advisor A was better because he generated a higher return D. Advisor B was better because he achieved a good return with a lower beta
A. Advisor A was better because he generated a larger alpha
Which of the following is not a topic related to the debate over market efficiency? A. IPO results B. Lucky event issue C. Magnitude issue D. Selection bias
A. IPO results
The weak form of the EMH states that ________ must be reflected in the current stock price. A. all past information, including security price and volume data B. all publicly available information C. all information, including inside information D. all costless information
A. all past information, including security price and volume data
Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________. A. an abnormal price change immediately after the announcement B. an abnormal price increase before the announcement C. an abnormal price decrease after the announcement D. no abnormal price change before or after the announcement
A. an abnormal price change immediately after the announcement
Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1.00. Portfolio Y has an expected return of 9.5% and a beta of 0.25. In this situation, you would conclude that portfolios X and Y _________. A. are in equilibrium B. offer an arbitrage opportunity C. are both underpriced D. are both fairly priced
A. are in equilibrium
The small-firm-in-January effect is strongest ________. A. early in the month B. in the middle of the month C. late in the month D. in even-numbered years
A. early in the month
Liquidity is a risk factor that __________. 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
In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher. A. higher B. lower C. unaffected D. more skewed
A. higher
. A stock has a beta of 1.3. The unsystematic risk of this stock is ____________ the stock market as a whole. A. higher than B. lower than C. equal to D. indeterminable compared to
A. higher than
One type of passive portfolio management is ________. A. investing in a well-diversified portfolio without attempting to search out mispriced securities B. investing in a well-diversified portfolio while only seeking out passively mispriced securities C. investing an equal dollar amount in index stocks D. investing in an equal amount of shares in each of the index stocks
A. investing in a well-diversified portfolio without attempting to search out mispriced securities
According to results by Seyhun, __________. A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public B. investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public C. investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public D. investors cannot earn abnormal returns by trading before insiders
A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public
In his famous critique of the CAPM, Roll argued that the CAPM ______________. A. is not testable because the true market portfolio can never be observed B. is of limited use because systematic risk can never be entirely eliminated C. should be replaced by the APT D. should be replaced by the Fama French 3 factor model
A. is not testable because the true market portfolio can never be observed
Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios. A. low; low B. low; high C. high; low D. high; high
A. low; low
"Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. allocation
A. magnitude
In a single factor market model the beta of a stock ________. A. measures the stock's contribution to the standard deviation of the market portfolio B. measures the stock's unsystematic risk C. changes with the variance of the residuals D. measures the stock's contribution to the standard deviation of the stock
A. measures the stock's contribution to the standard deviation of the market portfolio
When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns. A. positive; positive B. positive; negative C. negative; positive D. positive; zero
A. positive; positive
Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak-form and semistrong-form efficient B. strong-form efficient C. reasonably weak-form but not semistrong- or strong-form efficient D. neither weak-, semistrong-, nor strong-form efficient
A. reasonably weak-form and semistrong-form efficient
The measure of unsystematic risk can be found from an index model as _________. A. residual standard deviation B. R-square C. degrees of freedom D. sum of squares of the regression
A. residual standard deviation
If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A. semistrong B. strong C. weak D. perfect
A. semistrong
When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time. A. survivorship bias B. lucky event bias C. magnitude bias D. mean reversion bias
A. survivorship bias
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 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
A. the covariance between the security and market returns divided by the variance of the market's returns
If the U.S. capital markets are not informationally efficient, ______. A. the markets cannot be allocationally efficient B. systematic risk does not matter C. no type of analysis can be used to generate abnormal returns D. returns must follow a random walk
A. the markets cannot be allocationally efficient
Small firms have tended to earn abnormal returns primarily in __________. A. the month of January B. the month July C. the trough of the business cycle D. the peak of the business cycle
A. the month of January
In a 1953 study of stock prices, Maurice Kendall found that ________. A. there were no predictable patterns in stock prices B. stock prices exhibited strong serial autocorrelation C. day-to-day stock prices followed consistent trends D. fundamental analysis could be used to generate abnormal returns
A. there were no predictable patterns in stock prices
Standard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative non-systematic risk D. relative business risk
A. total risk
"Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a _________________. A. trading rule B. market anomaly C. fundamental approach D. passive trading strategy
A. trading rule
Banz found that, on average, the risk-adjusted returns of small firms __________. A. were higher than the risk-adjusted returns of large firms B. were the same as the risk-adjusted returns of large firms C. were lower than the risk-adjusted returns of large firms D. were negative
A. were higher than the risk-adjusted returns of large firms
The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect. A. worst; best B. worst; worst C. best; worst D. best; best
A. worst; best
A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated through diversification, it is called __________. A. firm specific risk B. systematic risk C. unique risk D. none of the above
B
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up, right B. up, left C. down, right D. down, left
B
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is _________. A. 0% B. 5% C. 7% D. 20%
B
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is _________. A. 14% B. 16% C. 18% D. 19%
B
An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The expected return on stock A is 20% while on stock B it is 10%. The correlation coefficient between the return on A and B is 0%. The expected return on the minimum variance portfolio is approximately _________. A. 10.00% B. 13.60% C. 15.00% D. 19.41%
B
As you lengthen the time horizon of your investment period and decide to invest for multiple years you will find that ________. I. the average risk per year may be smaller over longer investment horizons II. the overall risk of your investment will compound over time III. your overall risk on the investment will fall A. I only B. I and II only C. III only D. I, II and III
B
Harry Markowitz is best known for his Nobel prize winning work on _____________. A. strategies for active securities trading B. techniques used to identify efficient portfolios of risky assets C. techniques used to measure the systematic risk of securities D. techniques used in valuing securities options
B
Market risk is also called __________ and _________. A. systematic risk, diversifiable risk B. systematic risk, nondiversifiable risk C. unique risk, nondiversifiable risk D. unique risk, diversifiable risk
B
Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0
B
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolio tend to move inversely B. the returns on the stock and bond portfolio tend to vary independently of each other C. the returns on the stock and bond portfolio tend to move together D. the covariance of the stock and bond portfolio will be positive
B
The ________ is equal to the square root of the systematic variance divided by the total variance. A. covariance B. correlation coefficient C. standard deviation D. reward-to-variability ratio
B
The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation is 12.0%, what is the reward to variability ratio of the portfolio? A. 0.0 B. 0.45 C. 0.74 D. 1.35
B
You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate an additional one-tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis? A. $12,000,000 B. $6,000,000 C. $3,000,000 D. $0
B. $6,000,000
. If the beta of the market index is 1.0 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? A. 0.8 B. 1.0 C. 1.2 D. 1.5
B. 1.0
Using the index model, the alpha of a stock is 3.0%, the beta if 1.1 and the market return is 10%. What is the residual given an actual return of 15%? A. 0.0% B. 1.0% C. 2.0% D. 3.0%
B. 1.0%
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 is that has a beta of 1.2 on the industrial production factor and 0.5 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? A. 15.9% B. 12.9% C. 13.2% D. 12.0%
B. 12.9%
What is the expected return on a stock with a beta of 0.8, given a risk free rate of 3.5% and an expected market return of 15.5%? A. 3.8% B. 13.1% C. 15.6% D. 19.1%
B. 13.1%
The variance of the return on the market portfolio is .0400 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________. A. 0.5 B. 2.5 C. 3.5 D. 5.0
B. 2.5
Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is _________. A. -1.7% B. 3.7% C. 5.5% D. 8.7%
B. 3.7%
What is the expected return for a portfolio with a beta of 0.5? A. 5% B. 7.5% C. 12.5% D. 15%
B. 7.5%
Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A, A B. A, B C. B, A D. B, B
B. A, B
In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager? A. Accounting for results B. Diversification C. Identifying undervalued stocks D. No need for a portfolio manager
B. Diversification
Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index A. I only B. I and II only C. II and III only D. I, II, and III
B. I and II only
The effect of liquidity on stock returns might be related to: I. The small-firm effect II The book-to-market effect III The neglected-firm effect IV. The P/E effect A. I and II only B. I and III only C. II and IV only D. I, II, and III only
B. I and III only
In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by _____________. I. including the unsystematic risk of a stock II. including human capital in the market portfolio III. allowing for changes in beta over time A. I and II only B. II and III only C. I and III only D. I, II and III
B. II and III only
Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock? A. January effect B. Neglected-firm effect C. P/E effect D. Reversal effect
B. Neglected-firm effect
Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets? A. Jeff Vinik B. Peter Lynch C. Robert Stansky D. William Hayes
B. Peter Lynch
Which of the following is not a method employed by fundamental analysts? A. Analyzing the Fed's next interest rate move B. Relative strength analysis C. Earnings forecasting D. Estimating the economic growth rate
B. Relative strength analysis
. In a world where the CAPM holds which one of the following is not a true statement regarding the capital market 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. The capital market line is also called the security market line
Which of the following is not an issue that is central to the debate regarding market efficiency? A. The magnitude issue B. The tax-loss selling issue C. The lucky event issue D. The selection bias issue
B. The tax-loss selling issue
A stock's alpha measures the stock's ____________________. A. expected return B. abnormal return C. excess return D. residual return
B. abnormal return
Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________. A. about 30 seconds B. about 10 minutes C. 6 months D. 2 years
B. about 10 minutes
The semistrong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information, including inside information D. all costless information
B. all publicly available information
According to the capital asset pricing model, _________. A. all securities' returns must lie on the capital market line B. all securities' returns must lie on the security market line C. the slope of the security market line must be less than the market risk premium D. any security with a beta of 1 must have an excess return of zero
B. all securities' returns must lie on the security market line
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should _________. A. buy stock X because it is overpriced B. buy stock X because it is underpriced C. sell short stock X because it is overpriced D. sell short stock X because it is underpriced
B. buy stock X because it is underpriced
The expected return on the market is the risk free rate plus the _____________. A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic return
B. equilibrium risk premium
When the market risk premium rises, stock prices will ________. A. rise B. fall C. recover D. have excess volatility
B. fall
According to the semistrong form of the efficient markets hypothesis, ____________. A. stock prices do not rapidly adjust to new information B. future changes in stock prices cannot be predicted from any information that is publicly available C. corporate insiders should have no better investment performance than other investors even if allowed to trade freely D. arbitrage between futures and cash markets should not produce extraordinary profits
B. future changes in stock prices cannot be predicted from any information that is publicly available
DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period. A. good; good B. good; poor C. poor; good D. poor; poor
B. good; poor
A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund. A. stock B. index C. hedge D. money market
B. index
Stock prices that are stable over time _______. A. indicate that prices are useful indicators of true economic value B. indicate that the market is not incorporating new information into current stock prices C. ensure that an economy allocates its resources efficiently D. indicates that returns follow a random-walk process
B. indicate that the market is not incorporating new information into current stock prices
The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________. A. January effect B. liquidity effect C. neglected-firm effect D. P/E effect
B. liquidity effect
The possibility of arbitrage arises when ____________. A. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily B. mis-pricing among securities creates opportunities for riskless profits C. two identically risky securities carry the same expected returns D. investors do not diversify
B. mis-pricing among securities creates opportunities for riskless profits
The four-factor model used to construct performance benchmarks for mutual funds uses the three Fama and French factors and one additional factor related to _________. A. the tenure of the fund manager B. momentum C. fees D. the age of the fund manager
B. momentum
Fundamental analysis is likely to yield best results for _______. A. NYSE stocks B. neglected stocks C. stocks that are frequently in the news D. fast-growing companies
B. neglected stocks
Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A. fairly priced B. overpriced C. underpriced D. None of the above
B. overpriced
Stock market analysts have tended to be ___________ in their recommendations to investors. A. slightly overly optimistic B. overwhelmingly optimistic C. slightly overly pessimistic D. overwhelmingly pessimistic
B. overwhelmingly optimistic
Beta is a measure of ______________. A. total risk B. relative systematic risk C. relative non-systematic risk D. relative business risk
B. relative systematic risk
If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders. A. semistrong B. strong C. weak D. perfect
B. strong
Choosing stocks by searching for predictable patterns in stock prices is called ________. A. fundamental analysis B. technical analysis C. index management D. random-walk investing
B. technical analysis
Arbitrage is __________________________. A. is an example of the law of one price B. the creation of riskless profits made possible by relative mispricing among securities C. is a common opportunity in modern markets D. an example of a risky trading strategy based on market forecasting
B. the creation of riskless profits made possible by relative mispricing among securities
According to capital asset pricing theory, the key determinant of portfolio returns is _________. A. the degree of diversification B. the systematic risk of the portfolio C. the firm specific risk of the portfolio D. economic factors
B. the systematic risk of the portfolio
Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict _______. A. the strong-form EMH B. the weak-form EMH C. technical analysis D. the semistrong-form EMH
B. the weak-form EMH
According to results by Seyhun, the main reason that investors cannot earn excess returns by following inside trades after they become public is that ______________. A. the information isn't available for at least 2 weeks B. transaction costs offset abnormal returns C. the SEC late-disclosure rule doesn't apply to insiders D. insiders don't have to disclose their trades
B. transaction costs offset abnormal returns
You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the most you can afford to spend on your research? A. $4,000 B. $8,000 C. $12,000 D. $16,000
C. $12,000
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 this portfolio is _________. A. 1.14 B. 1.20 C. 1.26 D. 1.50
C. 1.26
. What is the beta for a portfolio with an expected return of 12.5%? A. 0 B. 1 C. 1.5 D. 2
C. 1.5
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 _________. A. 0.60 B. 1.00 C. 1.67 D. 3.20
C. 1.67
What is the expected return on the market? A. 0% B. 5% C. 10% D. 15%
C. 10%
Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is _________. A. 6.75% B. 9.0% C. 10.75% D. 12.0%
C. 10.75%
The risk premium for exposure to aluminum commodity prices is 4% and the firm has a beta relative to aluminum commodity prices of 0.6. 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 4.0%, what is the expected return on this stock? A. 10.0% B. 11.5% C. 13.6% D. 14.0%
C. 13.6%
Consider the multi-factor APT with two factors. Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A. 13.5% B. 15.0% C. 16.25% D. 23.0%
C. 16.25%
The risk-free rate and the expected market rate of return are 6% and 16% respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to _________. A. 12% B. 17% C. 18% D. 23%
C. 18%
__________ is the return on a stock beyond what would be predicted from market movements alone. A. A normal return B. A subliminal return C. An abnormal return D. None of these options
C. An abnormal return
Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A, A B. A, B C. B, A D. B, B
C. B, A
Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy because _________. A. A, it offers an expected excess return of 0.2% 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. B, it offers an expected excess return of 1.8%
Which of the following is not a method employed by followers of technical analysis? A. Charting B. Relative strength analysis C. Earnings forecasting D. Trading around support and resistance levels
C. Earnings forecasting
Which of the following contradicts the proposition that the stock market is weakly efficient? A. Over 25% of mutual funds outperform the market on average. B. Insiders earn abnormal trading profits. C. Every January, the stock market earns above-normal returns. D. Applications of technical trading rules fail to earn abnormal returns.
C. Every January, the stock market earns above-normal returns.
The _________ reward-to-variability ratio is found on the ________ capital market line. A. lowest; steepest B. highest; flattest C. highest; steepest D. lowest; flattest
C. Highest; Steepest.
. Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book to market ratio II. Unexpected change in industrial production III. Firm size A. I only B. I and II only C. I and III only D. I, II and III
C. I and III only
Which of the following would violate the efficient market hypothesis? A. Intel has consistently generated large profits for years. B. Prices for stocks before stock splits show, on average, consistently positive abnormal returns. C. Investors earn abnormal returns months after a firm announces surprise earnings. D. High-earnings growth stocks fail to generate higher returns for investors than do low earnings growth stocks.
C. Investors earn abnormal returns months after a firm announces surprise earnings.
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
C. It is always the minimum variance portfolio on the efficient frontier
The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________. A. SDA Corp. stock is underpriced B. SDA Corp. stock is fairly priced C. SDA Corp. stock's alpha is -0.75% D. SDA Corp. stock alpha is 0.75%
C. SDA Corp. stock's alpha is -0.75%
You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you? A. Stock A B. Stock B C. Stock C D. The answer cannot be determined from the information given.
C. Stock C
Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? A. Weak-form efficiency B. Semistrong-form efficiency C. Strong-form efficiency D. Technical analysis
C. Strong-form efficiency
Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the market return one week and the return the following week is zero. C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.
C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.
Proponents of the EMH typically advocate __________. A. a conservative investment strategy B. a liberal investment strategy C. a passive investment strategy D. an aggressive investment strategy
C. a passive investment strategy
The strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information, including inside information D. all costless information
C. all information, including inside information
An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 D. closer to 0
C. closer to 1
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 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
C. directly related to the beta of the stock
Basu found that firms with high P/E ratios __________. A. earned higher average returns than firms with low P/E ratios B. earned the same average returns as firms with low P/E ratios C. earned lower average returns than firms with low P/E ratios D. had higher dividend yields than firms with low P/E ratios
C. earned lower average returns than firms with low P/E ratios
The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that _________. A. high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor B. low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor C. either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor D. high book-to-market firms have more post-earnings drift
C. either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor
In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds ______. A. had negative alphas before fees were considered. B. had positive alphas after fees were considered. C. had negative alphas after fees were considered. D. had negative alphas before fees were considered and had negative alphas after fees were considered.
C. had negative alphas after fees were considered.
. 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 A. earned a positive alpha that is statistically significantly different from zero B. has a beta precisely equal to 0.890 C. has a beta that could be anything between 0.6541 and 1.465 inclusive D. has no systematic risk
C. has a beta that could be anything between 0.6541 and 1.465 inclusive
If all investors become more risk averse the SML will _______________ and stock prices will _______________. A. shift upward; rise B. shift downward; fall C. have the same intercept with a steeper slope; fall D. have the same intercept with a flatter slope; rise
C. have the same intercept with a steeper slope; fall
Jaffe found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares. A. decreased; decreased B. decreased; increased C. increased; decreased D. increased; increased
C. increased; decreased
J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. small firm
C. lucky event
The primary objective of fundamental analysis is to identify __________. A. well-run firms B. poorly run firms C. mispriced stocks D. high P/E stocks
C. mispriced stocks
The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________. A. fad effect B. martingale effect C. momentum effect D. reversal effect
C. momentum effect
An implication of the efficient market hypothesis is that __________. A. high-beta stocks are consistently overpriced B. low-beta stocks are consistently overpriced C. nonzero alphas will quickly disappear D. growth stocks are better buys than value stocks
C. nonzero alphas will quickly disappear
The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________. 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
C. recognizes only one systematic risk factor
The term random walk is used in investments to refer to ______________. A. stock price changes that are random but predictable B. stock prices that respond slowly to both old and new information C. stock price changes that are random and unpredictable D. stock prices changes that follow the pattern of past price changes
C. stock price changes that are random and unpredictable
The broadest information set is included in the _____. A. weak-form efficiency argument B. semistrong-form efficiency argument C. strong-form efficiency argument D. technical analysis trading method
C. strong-form efficiency argument
Most people would readily agree that the stock market is not _________. A. weak-form efficient B. semistrong-form efficient C. strong-form efficient D. efficient at all
C. strong-form efficient
An important characteristic of market equilibrium is _______________. A. the presence of many opportunities for creating zero-investment portfolios B. all investors exhibit the same degree of risk aversion C. the absence of arbitrage opportunities D. the a lack of liquidity in the market
C. the absence of arbitrage opportunities
Evidence supporting semistrong-form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securities B. rely on fundamental analysis to select securities C. use a passive trading strategy such as purchasing an index fund or an ETF D. select securities by throwing darts at the financial pages of the newspaper
C. use a passive trading strategy such as purchasing an index fund or an ETF
You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH. A. semistrong B. strong C. weak D. perfect
C. weak
Which risk can be diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm specific risk A. I only B. I and II only C. I, II, and III D. I and III
D
You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's _______. I. expected return II. standard deviation III. correlation with your portfolio A. I only B. I and II only C. I and III only D. I, II and III
D
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 5.0%? A. 5.0% B. 9.0% C. 13.0% D. 14.0%
D. 14.0%
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 4.0%. What is the expected return on the stock? A. 11.6% B. 13.0% C. 15.3% D. 19.5%
D. 19.5%
According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk free interest rate of 4.0%? A. 4.0% B. 4.8% C. 6.6% D. 8.0%
D. 8.0%
There are two independent economic factors M1 and M2. The risk-free rate is 5% and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below which equation provides the correct pricing model? a. E(rP) = 5 + 1.12bP1 + 11.86bP2 b. E(rP) = 5 + 4.96bP1 + 13.26bP2 c. E(rP) = 5 + 3.23bP1 + 8.46bP2 D. E(rP) = 5 + 8.71bP1 + 9.68bP2
D. E(rP) = 5 + 8.71P1 + 9.68P2
According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits? A. Diversifying B. Investing in Treasury bills C. Investing in stocks of utility companies D. Engaging in active portfolio management to enhance returns
D. Engaging in active portfolio management to enhance returns
Among the important characteristics of market efficiency is (are) that: I. There are no arbitrage opportunities. II. Security prices react quickly to new information. III. Active trading strategies will not consistently outperform passive strategies. A. I only B. II only C. I and III only D. I, II, and III
D. I, II, and III
The _________ effect may explain much of the small-firm anomaly. I. January II. neglected III. liquidity A. I only B. II only C. II and III only D. I, II, and III
D. I, II, and III
Value stocks may provide investors with better returns than growth stocks if: I. Value stocks are out of favor with investors. II. Prices of growth stocks include premiums for overly optimistic growth levels. III. Value stocks are likely to generate positive-earnings surprises. A. I only B. II only C. I and III only D. I, II, and III
D. I, II, and III
Which of the following statements is (are) correct? A. If a market is weak-form efficient, it is also semistrong- and strong-form efficient. B. If a market is semistrong-form efficient, it is also strong-form efficient. C. If a market is strong-form efficient, it is also semistrong- but not weak-form efficient. D. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.
D. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.
. If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below are possible? Consider each situation independently and assume the risk free rate is 5%. A) Portfolio Expected Return Beta A 11 % 1.2 Market 11 % 1.0 B) Portfolio Expected Return Standard Deviation A 14 % 12 % Market 9 % 20 % C) Portfolio Expected Return Beta A 14 % 1.2 Market 9 % 1.0 D) Portfolio Expected Return Beta A 18.8 % 2.3 Market 11 % 1.0
D. Opiton D
Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach? A. Active management B. Arbitrage C. Fundamental analysis D. Passive investment
D. Passive investment
Which of the following is not a concept related to explaining abnormal excess stock returns? A. January effect B. Neglected-firm effect C. P/E effect D. Preferred stock effect
D. Preferred stock effect
According to the CAPM, investors are compensated for all but which of the following? A. Expected inflation B. Systematic risk C. Time value of money D. Residual risk
D. Residual risk
Which of the following beliefs would not preclude charting as a method of portfolio management? A. The market is strong-form efficient. B. The market is semistrong-form efficient. C. The market is weak-form efficient. D. Stock prices follow recurring patterns.
D. Stock prices follow recurring patterns.
A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy? A. EMH B. Fundamental analysis C. Strong-form market efficiency D. Technical analysis
D. Technical analysis
The expected return of the risky asset portfolio with minimum variance is _________. A. the market rate of return B. zero C. the risk-free rate D. There is not enough information to answer this question
D. There is not enough information to answer this question
Proponents of the EMH think technical analysts __________. A. should focus on relative strength B. should focus on resistance levels C. should focus on support levels D. are wasting their time
D. are wasting their time
The measure of risk used in the Capital Asset Pricing Model is ___________. A. specific risk B. the standard deviation of returns C. reinvestment risk D. beta
D. beta
The SML is valid for _______________ and the CML is valid for ______________. A. only individual assets; well diversified portfolios only B. only well diversified portfolios; only individual assets C. both well diversified portfolios and individual assets; both well diversified portfolios and individual assets D. both well diversified portfolios and individual assets; well diversified portfolios only
D. both well diversified portfolios and individual assets; well diversified portfolios only
Building a zero-investment portfolio will always involve _____________. A. an unknown mixture of short and long positions B. only short positions C. only long positions D. equal investments in a short and a long position
D. equal investments in a short and a long position
According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______. A. instantly B. in 1 day C. in 1 week D. gradually over time
D. gradually over time
Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios. A. low; low B. low; high C. high; low D. high; high
D. high; high
Most tests of semistrong efficiency are _________. A. designed to test whether inside information can be used to generate abnormal returns B. based on technical trading rules C. unable to generate any evidence of market anomalies D. joint tests of market efficiency and the risk-adjustment measure
D. joint tests of market efficiency and the risk-adjustment measure
Market anomaly refers to _______. A. an exogenous shock to the market that is sharp but not persistent B. a price or volume event that is inconsistent with historical price or volume trends C. a trading or pricing structure that interferes with efficient buying and selling of securities D. price behavior that differs from the behavior predicted by the efficient market hypothesis
D. price behavior that differs from the behavior predicted by the efficient market hypothesis
Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior. A. short-run; short-run B. long-run; long-run C. long-run; short-run D. short-run; long run
D. short-run; long run
The semistrong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns. A. technical analysis cannot; fundamental analysis can B. technical analysis can; fundamental analysis can C. technical analysis can; fundamental analysis cannot D. technical analysis cannot; fundamental analysis cannot
D. technical analysis cannot; fundamental analysis cannot
Random price movements indicate ________. A. irrational markets B. that prices cannot equal fundamental values C. that technical analysis to uncover trends can be quite useful D. that markets are functioning efficiently
D. that markets are functioning efficiently
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 relationship B. the introduction of non-systematic risk as a key factor in the risk-return relationship C. that the APT requires an even larger number of unrealistic assumptions than the CAPM D. the model fails to identify the key macroeconomic variables in the risk-return relationship
D. the model fails to identify the key macroeconomic variables in the risk-return relationship
Evidence by Blake, Elton, and Gruber indicates that, on average, actively managed bond funds ______. A. outperform passive fixed-income indexes B. underperform passive fixed-income indexes by a wide margin C. perform as well as passive fixed-income indexes D. underperform passive fixed-income indexes by an amount equal to fund expenses
D. underperform passive fixed-income indexes by an amount equal to fund expenses
Fama and French have suggested that many market anomalies can be explained as manifestations of ____________. A. regulatory effects B. high trading costs C. information asymmetry D. varying risk premiums
D. varying risk premiums
Based on the outcomes in the following table, choose which of the statements below is (are) correct? Case A B C Rec. r>E(r) =Er <E(r) NO =E(r) =Er =Er Bo <E(r) =Er >Er I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive.
I. Covariance of security A and B is zero II. Correlation coefficient between securities A and C is negative. I and II only
Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. A. increase the systematic risk of the portfolio B. increase the unsystematic risk of the portfolio C. increase the return of the portfolio D. decrease the variation in returns the investor faces in any one year
b. Increase the unsystematic risk of the portfolio.
What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500? A. -1.0 B. 0.0 C. 1.0 D. 0.5
C
10. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is the reward-to-variability ratio? A. .40 B. .50 C. .75 D. .80
A
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24% while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is A. 0.583 B. 0.225 C. 0.327 D. 0.128
A
A security's beta coefficient will be negative if ____________. A. its returns are negatively correlated with market index returns B. its returns are positively correlated with market index returns C. its stock price has historically been very stable D. market demand for the firm's shares is very low
A
If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the ________. A. stock's standard deviation B. variance of the market C. stock's beta D. covariance with the market index
A
Arbitrage is based on the idea that _________. A. assets with identical risks must have the same expected rate of return B. securities with similar risk should sell at different prices C. the expected returns from equally risky assets are different D. markets are perfectly efficient
A. assets with identical risks must have the same expected rate of return
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 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
. Diversification is most effective when security returns are _________. A. high B. negatively correlated C. positively correlated D. uncorrelated
B
. Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. located on the capital market line to those located on the efficient frontier C. at or near the minimum variance point on the efficient frontier D. that are risk-free to all other asset choices
B
A measure of the riskiness of an asset held in isolation is ____________. A. beta B. standard deviation C. covariance D. semi-variance
B
A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half your money. What is the expected return on this investment project? A. 0% B. 25% C. 50% D. 75%
B
The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market A. I only B. I and II only C. II and III only D. I, II and III
B
The risk that can be diversified away is __________. A. beta B. firm specific risk C. market risk D. systematic risk
B
The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________. A. -.0447 B. -.0020 C. .0020 D. .0447
B
The term excess-return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security which represents tax liability and therefore cannot be reinvested
B
What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A and the correlation coefficient between the two stocks is -1.0. A. 0.0% B. 10.8% C. 18.0% D. 24.0%
B
Which of the following correlation coefficients will produce the most diversification benefits? A. -0.6 B. -0.9 C. 0.0 D. 0.4
B
Which of the following statistics cannot be negative? A. Covariance B. Variance C. E[r] D. Correlation coefficient
B
You are constructing a scatter plot of excess returns for Stock A versus the market index. If the correlation coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram ______________________ and the line of best fit has a ______________. A. all fall on the line of best fit; positive slope B. all fall on the line of best fit; negative slope C. are widely scattered around the line; positive slope D. are widely scattered around the line; negative slope
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 only B. I, II and III only C. II, III and IV only D. I, II, III and IV
B. I, II and III only
Fama and French claim that after controlling for firm size and the ratio of 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 firm's specific risk A. I only B. II only C. I and III only D. I, II and III
B. II only
According to the capital asset pricing model, a fairly priced security will plot _________. A. above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line
B. along the security market line
In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. A. unique risk B. beta C. standard deviation of returns D. variance of returns
B. beta
. Beta is a measure of security responsiveness to _________. A. firm specific risk B. diversifiable risk C. market risk D. unique risk
C
. If you want to know the portfolio standard deviation for a three stock portfolio you will have to A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks
C
. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ___. A. they had to pay huge fines for obstruction of justice B. their 401k accounts were held outside the company C. their 401k accounts were not well diversified D. none of the above
C
Diversification can reduce or eliminate __________ risk. A. all B. systematic C. non-systematic D. only an insignificant
C
Which of the following provides the best example of a systematic risk event? A. A strike by union workers hurts a firm's quarterly earnings. B. Mad Cow disease in Montana hurts local ranchers and buyers of beef. C. The Federal Reserve increases interest rates 50 basis points. D. A senior executive at a firm embezzles $10 million and escapes to South America.
C
Which one of the following stock return statistics fluctuates the most over time? A. Covariance of returns B. Variance of returns C. Average return D. Correlation coefficient
C
You are recalculating the risk of ACE stock in relation to the market index and you find the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. A. covariance between ACE and the market has fallen B. correlation coefficient between ACE and the market has fallen C. correlation coefficient between ACE and the market has risen D. unsystematic risk of ACE has risen
C
You find that the annual standard deviation of a stock's returns is equal to 25%. For a 3 year holding period the standard deviation of your total return would equal _______. A. 75% B. 25% C. 43% D. 55%
C
You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be ________________. A. more than 18% but less than 24% B. equal to 18% C. more than 12% but less than 18% D. equal to 12%
C
Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A. 2% B. 6% C. 8% D. 12%
C. 8%
The graph of the relationship between expected return and beta in the CAPM context is called the _________. A. CML B. CAL C. SML D. SCL
C. SML
According to the capital asset pricing model, a security with a _________. 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
C. positive alpha is considered underpriced
. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk? A. Market risk B. Unique risk C. Unsystematic risk D. With a correlation of 1.0, no risk will be reduced
D
11. The correlation coefficient between two assets equals to _________. A. their covariance divided by the product of their variances B. the product of their variances divided by their covariance C. the sum of their expected returns divided by their covariance D. their covariance divided by the product of their standard deviations
D
A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your money. What is the standard deviation of this investment? A. 25% B. 50% C. 62% D. 73%
D
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. 37. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________. A. 29% B. 44% C. 56% D. 71%
D
Firm specific risk is also called __________ and __________. A. systematic risk, diversifiable risk B. systematic risk, non-diversifiable risk C. unique risk, non-diversifiable risk D. unique risk, diversifiable risk
D
In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1.0 B. 0.5 C. 0 D. -1.0
D
Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk? A. Market risk B. Non-diversifiable risk C. Systematic risk D. Unique risk
D
Which of the following correlations coefficients will produce the least diversification benefit? A. -0.6 B. -0.3 C. 0.0 D. 0.8
D
The market portfolio has a beta of _________. A. -1.0 B. 0 C. 0.5 D. 1.0
D. 1.0
Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A. .5 B. .7 C. 1 D. 1.2
D. 1.2
Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? A. 6% B. 15.6% C. 18% D. 21.6%
D. 21.6%
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 only B. II, III and IV only C. I, III and IV only D. I, II, III and IV
D. I, II, III and IV
When all investors analyze securities in the same way and share the same economic view of the world we say they have ____________________. A. heterogeneous expectations B. equal risk aversion C. asymmetric information D. homogeneous expectations
D. homogeneous expectations
Empirical results estimated from historical data indicate that betas _________. A. are always close to zero B. are constant over time C. of all securities are always between zero and one D. seem to regress toward one over time
D. seem to regress toward one over time
Investors require a risk premium as compensation for bearing ______________. A. unsystematic risk B. alpha risk C. residual risk D. systematic risk
D. systematic risk
In a well diversified portfolio, __________ risk is negligible. A. nondiversifiable B. market C. systematic D. unsystematic
D. unsystematic
According to the capital asset pricing model, fairly priced securities have _________. A. negative betas B. positive alphas C. positive betas D. zero alphas
D. zero alphas
The arbitrage pricing theory was developed by _________. A. Henry Markowitz B. Stephen Ross C. William Sharpe D. Eugene Fama
B. Stephen Ross
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is _________. A. 14.0% B. 15.6% C. 16.4% D. 18.0%
A
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. 34. The proportion of the optimal risky portfolio that should be invested in stock A is _________. A. 0% B. 40% C. 60% D. 100%
A
Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______. A. asset A B. asset B C. no risky asset D. can't tell from the data given
A
On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. A. left and above B. left and below C. right and above D. right and below
A
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. A. 23.00% B. 19.76% C. 18.45% D. 17.67%
B
A stock has a correlation with the market of 0.45. The standard deviation of the market is 21% and the standard deviation of the stock is 35%. What is the stock's beta? A. 1.00 B. 0.75 C. 0.60 D. 0.55
B
. The market value weighted average beta of firms included in the market index will always be _____________. A. 0 B. between 0 and 1 C. 1 D. There is no particular rule concerning the average beta of firms included in the market index
C
13. The expected rate of return of a portfolio of risky securities is _________. A. the sum of the securities' covariances B. the sum of the securities' variances C. the weighted sum of the securities' expected returns D. the weighted sum of the securities' variances
C
According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion D. choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate
C
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________. A. 25.5% B. 22.3% C. 21.4% D. 20.7%
C
An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The correlation coefficient between the return on A and B is 0%. The standard deviation of return on the minimum variance portfolio is _________. A. 0% B. 6% C. 12% D. 17%
C
An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24% while the standard deviation on stock B is 14%. The correlation coefficient between the return on A and B is 0.35. The expected return on stock A is 25% while on stock B it is 11%. The proportion of the minimum variance portfolio that would be invested in stock B is approximately _________. A. 45% B. 67% C. 85% D. 92%
C
An investor's degree of risk aversion will determine his or her ______. A. optimal risky portfolio B. risk-free rate C. optimal mix of the risk-free asset and risky asset D. capital allocation line
C
Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always _________. A. equal to the sum of the securities standard deviations B. equal to -1 C. equal to 0 D. greater than 0
C
Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum variance portfolio is _________. A. 10% B. 20% C. 40% D. 60%
C
Semitool Corp has an expected excess return of 6% for next year. However for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information what was Semitool's actual excess return? A. 7.00% B. 8.50% C. 8.80% D. 9.25%
C
The optimal risky portfolio can be identified by finding ____________. I. the minimum variance point on the efficient frontier II. the maximum return point on the efficient frontier the minimum variance point on the efficient frontier III. the tangency point of the capital market line and the efficient frontier IV. the line with the steepest slope that connects the risk free rate to the efficient frontier A. I and II only B. II and III only C. III and IV only D. I and IV only
C
The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________. A. .12 B. .36 C. .60 D. .77
C
Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of the above
D
The values of beta coefficients of securities are __________. A. always positive B. always negative C. always between positive 1 and negative 1 D. usually positive, but are not restricted in any particular way
D
Which of the following statements is true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the one-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I only B. II only C. II and III only D. I, II and III E. None of the statements are correct
D
