Chapter 8

Theoretically, the correlation coefficient between a completely diversified portfolio and the market portfolio should be -1.0. +1.0. 0.0. -0.5. +0.5.

+1.0

The betas for the market portfolio and risk-free security are: Market Risk-free Answer 0 1 1 0 -1 1 1 -1 2 1

1,0

In the presence of transactions costs, the SML will be A single straight line. A kinked line. A set of lines rather than a single straight line. A curve rather than a single straight line. Impossible to determine.

A set of lines rather than a single straight line.

Which of the following is not an assumption of the Capital Market Theory? All investors are Markowitz efficient investors. All investors have homogeneous expectations. There are no taxes or transaction costs in buying or selling assets. All investments are indivisible so it is impossible to buy or sell fractional shares. All investors have the same one period time horizon.

All investments are indivisible so it is impossible to buy or sell fractional shares.

When identifying undervalued and overvalued assets, which of the following statements is false? An asset is properly valued if its estimated rate of return is equal to its required rate of return. An asset is considered overvalued if its estimated rate of return is below its required rate of return. An asset is considered undervalued if its estimated rate of return is above its required rate of return. An asset is considered overvalued if its required rate of return is below its estimated rate of return. None of the above (that is, all are true statements)

An asset is considered overvalued if its required rate of return is below its estimated rate of return.

If the assumption that there are no transaction costs is relaxed, the SML will be a Straight line. Band of securities. Convex curve. Concave curve. Parabolic curve.

Band of securities.

A portfolio manager uses two different proxies for the market portfolio, the S&P 500 index and the MSCI World index. Differences in the manager's portfolio performance resulting from the different market portfolios is referred to as The size effect The market effect Measurement error Benchmark error Manager's performance error

Benchmark error

The error caused by not using the true market portfolio has become known as the Portfolio deviation. CAPM shift. Benchmark error. Market error. Beta error.

Benchmark error

The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the Security market line. Capital asset pricing model. Characteristic line. Line of least resistance. Market line.

Characteristic line.

Which of the following variables were found to be important in explaining return based upon a study of Fama and French (covering the period 1963 to 1990)? Size Book-to-market value Beta Choices a and b only All of the above

Choices A and B only

Beta is a measure of: Company specific risk Industry risk Diversifiable risk Systematic risk Unique risk

Diversifiable risk

A completely diversified portfolio would have a correlation with the market portfolio that is Equal to zero because it has only unsystematic risk. Equal to one because it has only systematic risk. Less than zero because it has only systematic risk. Less than one because it has only unsystematic risk. Less than one because it has only systematic risk.

Equal to one because it has only systematic risk.

Which of the following is not a relaxation of the assumptions for the CAPM? Differential lending and borrowing rates A zero beta model Transaction costs Taxes Homogeneous expectations and fixed planning periods

Homogeneous expectations and fixed planning periods

The separation theorem divides decisions on ____ from decisions on ____. Lending, borrowing Risk, return Investing, financing Risky assets, risk free assets Buying stocks, buying bonds

Investing, financing

All of the following are assumptions of the Capital Asset Pricing Model (CAPM) except Investors can borrow and lend any amount at the risk-free rate. Investors all have homogeneous expectations regarding expected returns. Investors can have different time horizons, daily, weekly, annual, or some other period. All investments are infinitely divisible. Capital markets are in equilibrium.

Investors can have different time horizons, daily, weekly, annual, or some other period.

The ____ the number of stocks in a portfolio and the ____ the time period the ____ the portfolio beta. Larger, longer, less stable Larger, longer, more stable Larger, shorter, less stable Larger, shorter, more stable Smaller, longer, more stable

Larger, longer, more stable

The rate of return on a risk free asset should equal the Long run real growth rate of the economy. Long run nominal growth rate of the economy. Short run real growth rate of the economy. Short run nominal growth rate of the economy. Prime rate of interest.

Long run real growth rate of the economy.

Which of the following is not a major difference between the capital market line (CML) and the capital asset pricing model (CAPM)? Definitions of portfolio risk are based on systematic and total risk One is related to the market portfolio, the other does not The number of calculations to determine risk is significantly greater for one method One requires a tangency point on the efficient frontier, the other does not All of the above

One is related to the market portfolio, the other does not

All portfolios on the capital market line are Perfectly positively correlated. Perfectly negatively correlated. Unique from each other. Weakly correlated. Unrelated except that they contain the risk free asset.

Perfectly positively correlated.

As the number of securities in a portfolio increases, the amount of systematic risk Remains constant. Decreases. Increases. Changes. None of the above

Remains Constant

Utilizing the security market line an investor owning a stock with a beta of -2 would expect the stock's return to ____ in a market that was expected to decline 15 percent Rise or fall an indeterminate amount Fall by 3% Fall by 30% Rise by 13% Rise by 30%

Rise by 30%

The market portfolio consists of all New York Stock Exchange stocks. High grade stocks and bonds. Stocks and bonds. U.S. and non-U.S. stocks and bonds. Risky assets.

Risky assets.

If an individual owns only one security the most appropriate measure of risk is: Standard deviation Correlation Beta Covariance All of the above are equally important

Standard Deviation

The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing model (CAPM) uses ____. Beta; total risk Standard deviation; total risk Standard deviation; systematic risk Unsystematic risk; total risk Systematic risk; beta

Standard deviation; systematic risk

Which of the following would most closely resemble the true market portfolio? Stocks Stocks and bonds Stocks, bonds and foreign securities Stocks, bonds, foreign securities and options Stocks, bonds, foreign securities options and coins

Stocks, bonds, foreign securities options and coins

What does WRF = -0.50 mean? The investor can borrow money at the risk-free rate. The investor can lend money at the current market rate. The investor can borrow money at the current market rate. The investor can borrow money at the prime rate of interest. The investor can lend money at the prime rate of interest.

The investor can borrow money at the risk-free rate.

Which of the following statements about the risk-free asset is correct? The risk-free asset is defined as an asset for which there is uncertainty regarding the expected rate of return. The standard deviation of return for the risk-free asset is equal to zero. The standard deviation of return for the risk-free asset cannot be zero, since division by zero is undefined. Choices a and b. Choices a and c.

The standard deviation of return for the risk-free asset is equal to zero.

All of the following questions remain to be answered in the real world except What is a good proxy for the market portfolio? What happens when you cannot borrow or lend at the risk free rate? How good is the capital asset model as a predictor? What is the beta of the market portfolio of risky assets? What is the stability of beta for individual stocks?

What is the beta of the market portfolio of risky assets?

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n) Zero beta model. unstable beta or a higher borrowing rate. Zero beta model or a higher borrowing rate. higher borrowing rate. unstable beta.

Zero beta model or a higher borrowing rate.

If the wrong benchmark (or market portfolio) is selected then Computed betas would be wrong. The SML would be wrong. Computed betas would be correct. a and b. b and c.

a and b

The Efficient Frontier refers to a set of portfolios that Have the highest expected return for a given level of risk. Have the lowest risk for a given level of return. Are dominant to all other portfolios. a, b, and c above are correct. None of the answers above are correct.

a, b, and c above are correct.

The correlation coefficient between the market return and a risk-free asset would be +¥. be -¥. be +1. be -1. be Zero.

be Zero.