investment management
Which of the following correlation coefficients will produce the least diversification benefit? −0.6 −0.3 0.0 0.8
0.8
Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? 1. Book-to-market ratio 2. Unexpected change in industrial production 3. Firm size
1 and 3 only
You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: Expected return Standard deviation Correlation with your portfolio
1, 2, and 3
What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?
1.0
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 than are the returns of stock B.
20% more
If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the __________.
stock's standard deviation
A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.
systematic risk
what type of risk does a diversified portfolio mostly consist of
systematic risk
One can profit from an arbitrage opportunity by:
taking a long position in the cheaper market and a short position in the expensive market.
One of the main problems with the arbitrage pricing theory is __________.
the model fails to identify the key macroeconomic variables in the risk-return relationship
The complete portfolio refers to the investment in __________.
the risk-free asset and the risky portfolio combined
The reward-to-volatility ratio is given by __________. Multiple Choice
the slope of the capital allocation line
The values of beta coefficients of securities are __________.
usually positive but are not restricted in any particular way
To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of __________.
-1.0
An investor should do which of the following for stocks with negative alphas?
Sell short
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? The equilibrium expected rate of return is higher for Kaskin than for Quinn. The stock of Kaskin has more total risk than Quinn. The stock of Quinn has more systematic risk than that of Kaskin.
The equilibrium expected rate of return is higher for Kaskin than for Quinn.
Risk that can be eliminated through diversification is called __________ risk. unique firm-specific diversifiable All of these options are correct.
all of these options are correct
The CAPM __________. predicts the relationship between risk and expected return of an asset provides a benchmark rate of return for evaluating possible investments helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace All of the options are correct. Correct
all of these options are correct
Arbitrage is based on the idea that __________.
assets with identical risks must have the same expected rate of return
In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the __________.
capital allocation line
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 __________. Multiple Choice
equal to 0
True or false: Stocks with a beta of zero offer an expected rate of return of zero.
false
true or false: The CAPM implies that investors require a higher return to hold highly volatile securities.
false
true or false: You can construct a portfolio with a beta of 0.75 by investing 0.75 of the investment budget in T-bills and the remainder in the market portfolio.
false
what type of risk does a undiversified investor mostly hold
firm-specific risk
The portfolio with the lowest standard deviation for any risk premium is called the __________.
global minimum variance portfolio
The __________ reward-to-variability ratio is found on the __________ capital market line.
highest; steepest
Decreasing the number of stocks in a portfolio from 50 to 10 would likely __________.
increase the unsystematic risk of the portfolio
In his famous critique of the CAPM, Roll argued that the CAPM __________.
is not testable because the true market portfolio can never be observed
steeper SCL does what to systematic risk
makes it greater
Beta is a measure of security responsiveness to __________.
market risk
The efficient frontier represents a set of portfolios that:
maximize expected return for a given level of risk.
The possibility of arbitrage arises when __________.
mispricing among securities creates opportunities for riskless profits
According to the capital asset pricing model, a fairly priced security will plot __________.
on the security market line
According to the capital asset pricing model, a security with a __________.
positive alpha is considered underpriced
The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM __________.
recognizes only one systematic risk factor
Empirical results estimated from historical data indicate that betas __________.
seem to regress toward 1 over time
According to the capital asset pricing model, fairly priced securities have __________.
zero alphas
