FINA 3500 Exam 1

above the security market line

An underpriced security will plot

βk, βL, standard deviation market (all the above)

If the index model is valid, _____ would be helpful in determining the covariance between assets K and L

the average degree of risk aversion of the investor population and the risk of the market portfolio as a measure by its variance

The risk premium on the market portfolio will be proportional to

sell short the stock X because it is overpriced

The risk-free rate is 4%, The expected market rate of return is 12%. If you expect stock X with a beta of 1.0 to offer a rate of return or 10% you should

the square root of the weighted sum of the securities variances and covariances

The standard deviation of a portfolio of risky securities

I,II, and III

When borrowing and lending at a risk-free rate are allowed, which capital allocation line (CAL) should the investor choose to combine with the efficient frontier

Top-down

Which of the following portfolio construction methods starts with asset allocation

Collateralized debt obligations

_____were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investments in to pool relatively protected from that risk

a market index, such as S&P 500

A single market index model uses ______ as a proxy for the systematic risk factor

due to the influence of a single common factor represented by the market index return and usually positive

According to the index model, covariances among security pairs are

0

As diversification increases, the firm specific risk of a portfolio approaches

the variance of the market portfolio

As diversification increases, the total variance of a portfolio approaches

drives the interest rate down

Ceteris paribus, a decrease in the demand for loanable funds

equal to the marginal price of risk for the market porfolio

In equilibrium, the marginal price of risk for a risky security must be

all investors are price takers, have the same holding period, and have homogeneous expectations

The CAPM asset pricing model assumes