MBA Finance 611 Chapter 25

Treynor Ratio

(average return % - risk free rate %)/ beta

fundamental beta

A beta with an extended adjustment process to include such risk variables as financial leverage and sales volatility is the:

1.0

Adjusted betas grew largely out of the work of Marshall E. Blume, who showed that true betas tend to move toward _____ over time.

the highest expected return for any specified level of risk or the lowest degree of risk for any specified level of return.

Efficient portfolios are defined as those portfolios that provide:

A value of wA that is negative means that Security A is sold short.

FIGURE

only 1 to 3 years

Most analysts use _____ of past data to estimate beta.

historical returns (%) of the stock

On a graph plotting a stock's beta, the y-axis is for the:

Single securities

Referring to the graph of an efficient set of a portfolio of two assets, the points A, H, G, and E represent: (GRAPH)

The errors in individual securities' betas tend to offset one another in a portfolio.

Robert Levy calculated betas for individual securities, as well as for portfolios of securities, over a range of time intervals. Which of the following is one of his conclusions?

average return (in excess of the risk-free rate) divided by its standard deviation.

Sharpe's reward-to-variability ratio is defined as the portfolio's:

When bonds are introduced into the analysis, they do not plot on the SML.

Tests of the CAPM show all of the following EXCEPT: -The slope usually is smaller than that predicted by the CAPM. -The intercept usually is a bit higher than predicted by the CAPM. -The relationship between risk and return appears to be linear. -When bonds are introduced into the analysis, they do not plot on the SML. T-here is a significant positive relationship between realized returns and beta.

true

The APT faces several major hurdles in implementation, the most severe of which is that the theory does not actually identify the relevant factors.

the covariance between Stock i and the market divided by the variance of market returns.

The CAPM defines Company i's beta coefficient as:

optimal portfolio

The _____ for each investor is found at the tangency point between the efficient set of portfolios and one of the investor's indifference curves.

true

The inputs to the CAPM should all be ex ante, but only ex post data are available.

market model

The method of estimating beta that regresses the stock's return against the market's return is called the:

1.5 (.55/.15)/.40 = 1.5

The standard deviation of stock returns of Park Corporation is 55%. The standard deviation of the market return is 15%. If the correlation between Park and the market is 0.40, what is Park's beta?

on the vertical axis

When a riskless asset is included in the mix of market portfolios and graphed, the riskless asset will be plotted:

Each investor will have unique estimates of the expected returns, variances, and covariances among all assets.

Which of the following basic assumptions of the Capital Asset Pricing Model (CAPM) is NOT stated correctly? -All investors can borrow or lend an unlimited amount at a given risk-free rate of interest. -All investors seek to maximize the expected utility of their terminal wealth by choosing among alternative portfolios on the basis of each portfolio's expected return and standard deviation. -There are no restrictions on short sales of any asset. -Each investor will have unique estimates of the expected returns, variances, and covariances among all assets. All investors focus on a single holding period.

the market is in disequilibrium

Which of the following basic assumptions of the Capital Asset Pricing Model (CAPM) is NOT stated correctly? -There are no taxes. -There are no transaction costs. -The market is in disequilibrium. -The quantities of all assets are given and fixed. -All assets are perfectly divisible and perfectly liquid.

All investors are price takers (assuming that their own buying and selling activity will not affect stock prices)

Which of the following basic assumptions of the Capital Asset Pricing Model (CAPM) is stated correctly?

Stocks with high betas have high market risk.

Which of the following statements regarding beta is accurate?

The APT includes precisely three risk factors - The APT can include any number of risk factors, so the required return could be a function of two, three, four, or more factors.

Which of the following statements regarding the Arbitrage Pricing Theory (APT) is NOT accurate? -The APT is based on complex mathematical and statistical theory. -The APT includes precisely three risk factors. -The APT model is widely discussed in academic literature. -Practical usage of APT to date has been limited. -Arbitrage Pricing Theory (APT) is an approach proposed by Stephen Ross.

true

in general, an indifference curve with a steeper slope means that the investor is more risk averse.