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Finance Practice questions - Bodie Ch 6 7 18

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FIN 341

Chapter 6

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.

84. Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well diversified portfolio of

common stock?

A. Stock A

B. Stock B

C. There is no difference between A or B

D. You cannot tell from the information given.

60. Which of the following provides the best example of a systematic risk event?

A. A strike by union workers hurts a firm's quarterly earnings.

B. Mad Cow disease in Montana hurts local ranchers and buyers of beef.

C. The Federal Reserve increases interest rates 50 basis points.

D. A senior executive at a firm embezzles $10 million and escapes to South America.

52. A stock has a correlation with the market of 0.45. The standard deviation of the market is 21% and the standard deviation of the

stock is 35%. What is the stock's beta?

A. 1.00

B. 0.75

C. 0.60

D. 0.55

49. 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

______________.

A. all fall on the line of best fit; positive slope

B. all fall on the line of best fit; negative slope

C. are widely scattered around the line; positive slope

D. are widely scattered around the line; negative slope

1. A single-index model uses __________ as a proxy for the systematic risk factor.

A) a market index, such as the S&P 500

B) the current account deficit

C) the growth rate in GNP

D) the unemployment rate

E) none of the above

2. Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the

regression line is an estimate of ______________.

A) the of the asset

B) the of the asset

C) the of the asset

D) the of the asset

E) none of the above

3. Security returns

A) are based on both macro events and firm-specific events.

B) are based on firm-specific events only.

C) are usually positively correlated with each other.

D) a and b.

E) a and c.

4. The single-index model

A) greatly reduces the number of required calculations, relative to those required by the Markowitz model.

B) enhances the understanding of systematic versus nonsystematic risk.

C) greatly increases the number of required calculations, relative to those required by the Markowitz model.

D) a and b.

E) b and c.

Chapter 7

22. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con

Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta?

A. 1.048

B. 1.033

C. 1.000

D. 1.037

42. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return

of 12 percent, then you should _________.

A. buy stock X because it is overpriced

B. buy stock X because it is underpriced

C. sell short stock X because it is overpriced

D. sell short stock X because it is underpriced

50. 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

63. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is

16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________.

A. SDA Corp. stock is underpriced

B. SDA Corp. stock is fairly priced

C. SDA Corp. stock's alpha is -0.75%

D. SDA Corp. stock alpha is 0.75%

70. Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B

averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%,

which advisor was the better stock picker?

A. Advisor A was better because he generated a larger alpha

B. Advisor B was better because he generated a larger alpha

C. Advisor A was better because he generated a higher return

D. Advisor B was better because he achieved a good return with a lower beta

72. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year and your

advisory service tells you that you can expect to sell the stock in one year for $28. The stock's beta is 1.1, rf is 6% and E[rm]

= 16%. What is the stock's abnormal return?

A. 1%

B. 2%

C. -1%

D. -2%

53. According to capital asset pricing theory, the key determinant of portfolio returns is _________.

A. the degree of diversification

B. the systematic risk of the portfolio

C. the firm specific risk of the portfolio

D. economic factors

Chapter 18

1. A mutual fund with a beta of 1.1 has outperformed the S&P500 over the last 20 years. We know that this mutual fund manager

_______________________.

A. must have had superior stock selection ability

B. must have had superior asset allocation ability

C. must have had superior timing ability

D. may or may not have outperformed the S&P500 on a risk adjusted basis

5. A managed portfolio has a standard deviation equal to 22% and a beta of 0.9 when the market portfolio's standard deviation is 26%.

The adjusted portfolio P* needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in Tbills.

A. 84.6%

B. 118%

C. 18%

D. 15.4%

27. The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.

A. Sharpe measure

B. Treynor measure

C. Jensen measure

D. appraisal ratio

41. Active portfolio management consists of __________.

I. market timing

II. security selection

III. sector selection within given markets

IV. indexing

A. I and II only

B. II and III only

C. I, II and III only

D. I, II, III and IV

73. A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and

has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk free rate is 5%?

A. .1143; B. .1233; C. .1354; D. .1477

77. A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and

has a standard deviation of 21%. What is Jensen's alpha of the portfolio if the risk free rate is 5%?

A. .017; B. .034; C. .067; D. .078

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to

each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in

column 4.

A. -0.15%

B. 0.15%

C. -0.3%

D. 0.3%

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