FIN 3630 TEST 4

The market value weighted-average beta of firms included in the market index will always be _____________. 0 between 0 and 1 1 none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

1

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 slightly more 20% less slightly less

20% more sens to change in mkt

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile 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 choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

IDing opt risky port., constructing complete portfolio from t bills and optimal risky port based on investors degree of risk aversion

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 ______________. all fall on the line of best fit; positive slope all fall on the line of best fit; negative slope are widely scattered around the line; positive slope are widely scattered around the line; negative slope

all fall on line of best fit, neg slope

5 conditions of CAPM equilibrium

all investors will hold same port of risky assets- mkt port, mkt port contains all secs and porportion of each sec is its mkt val as a perce of mkt val, mkt port on efficient frontier and will be opt risky port (so tangency pt of CAL to effic frontier), risk premium on mkt port depends on avg risk aversion of all mkt part., risk premium on an individ sec is a function of cov w mkt port

2. 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 systematic 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

all of above

7. 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

along sml

3. 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

beta

13. 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

both well divers and indivd assets, well divers ports only

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. covariance between ACE and the market has fallen correlation coefficient between ACE and the market has fallen correlation coefficient between ACE and the market has risen unsystematic risk of ACE has risen

correl coeff btwn ace and mkt has risen

8. 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

covar betwn sec and mkt rets divided by var of mkt rets

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. increase the systematic risk of the portfolio increase the unsystematic risk of the portfolio increase the return of the portfolio decrease the variation in returns the investor faces in any one year

dec UNSYSTEM. risk of port

11. 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

dir rel to beta of stock

4. 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

expect rets to fall, risk prems to fall

Which of the following provides the best example of a systematic-risk event? A strike by union workers hurts a firm's quarterly earnings. Mad Cow disease in Montana hurts local ranchers and buyers of beef. The Federal Reserve increases interest rates 50 basis points. A senior executive at a firm embezzles $10 million and escapes to South America.

fed res increases int rates 50 bp

17. 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

higher than

12. 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

i and iii

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: I. Expected return II. Standard deviation III. Correlation with your portfolio I only I and II only I and III only I, II, and III

i,ii,andiii

9. 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

it is always the MVP on effic frontier

beta of less than 1

less risky than avg/ less sens to changes in mkt

Rational risk-averse investors will always prefer portfolios _____________. located on the risky asset efficient frontier to those located on the capital market line located on the capital market line to those located on the risky asset efficient frontier at or near the minimum-variance point on the risky asset efficient frontier that are risk-free to all other asset choices

located on cap mkt line rather than risky asset frontier

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? market risk unique risk unsystematic risk none of these options (With a correlation of 1, no risk will be reduced.)

none of options

18. In a CAPM world, 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 the market portfolio D. capital allocation line

opt mix of risk free asset and mkt port

1. 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

rel useless in predicting fut stock rets

14. 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

resid risk

15. 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

resid sd

beta of greater than 1 is

riskier than average/ more sens to changes in mkt

w CAPM risk premium for each unit of risk must be ________ and therefore the risk premium on mkt port tells us hw much we get for one unit of syst. risk or in other words the _____

same for all assets, beta

5. 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

steeper slope, stock prices fall

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 variance of the market stock's beta covariance with the market index

stocks SD

6. Investors require a risk premium as compensation for bearing ______________. A. unsystematic risk B. alpha risk C. residual risk D. systematic risk

syst risk

Which risk can NOT be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

syst risk

10. 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

the cal is also called the sml

16. 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

total risk

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

total risk, fs

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. up; right up; left down; right down; left

up, left

the values of beta coefficients of securities are __________. always positive always negative always between positive 1 and negative 1 usually positive but are not restricted in any particular way

usually pos but not restricted in any way

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 I only I and II only II and III only I, II, and III

volatility in excess rets of stock mkt, senst of stocks rets to changes in stock mkt