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Question 1
Correct
The ________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the ________ implies that this
relationship holds for all but perhaps a small number of securities.
Select one:
A. CAPM; APT The CAPM is an asset-pricing model based on the risk/return relationship of all
assets. The APT implies that this relationship holds for all well-diversified
portfolios, and for all but perhaps a few individual securities.
B. APT; CAPM
C. APT; OPM
D. CAPM; OPM
The CAPM is an asset-pricing model based on the risk/return relationship of all assets. The APT implies that this relationship holds for all well-
diversified portfolios, and for all but perhaps a few individual securities.
The CAPM is an asset-pricing model based on the risk/return relationship of all assets. The APT implies that this relationship holds for all well-
diversified portfolios, and for all but perhaps a few individual securities.
The correct answer is: CAPM; APT
Question 2
Correct
Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%. Portfolio B has a beta of 0.8 and an expected return of 12%.
The risk-free rate of return is 6%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio ________
and a long position in portfolio ________.
Select one:
A. A; the riskless asset
B. A; B
C. B; B
D. A; A
E. B; A A: 16% = 1.0F + 6%; F = 10%; B: 12% = 0.8F + 6%: F =
7.5%; thus, short B and take a long position in A.
A: 16% = 1.0F + 6%; F = 10%; B: 12% = 0.8F + 6%: F = 7.5%; thus, short B and take a long position in A.
A: 16% = 1.0F + 6%; F = 10%; B: 12% = 0.8F + 6%: F = 7.5%; thus, short B and take a long position in A.
The correct answer is: B; A
Question 3
Correct
Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on
the factor-1 and factor-2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is ________ if no
arbitrage opportunities exist.
Select one:
A. 15.0%
B. 13.5%
C. 23.0%
D. 16.5% 7% + 0.75(1%) + 1.25(7%)
= 16.5%.
Consider the multifactor APT with two factors. The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%, respectively. Stock A has a
beta of 1.2 on factor-1, and a beta of 0.7 on factor-2. The expected return on stock A is 17%. If no arbitrage opportunities exist, the risk-free rate of
return is
Select one:
A. 6.0%.
B. 7.4%.
C. 6.8%. 17% = x% + 1.2(5%) +
0.7(6%); x = 6.8%.
D. 6.5%.
Question 5
Correct
In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger, its nonsystematic risk approaches
Select one:
A. one.
B. zero. As the number of securities, n, increases, the
nonsystematic risk of a well-diversified portfolio
approaches zero.
C. negative one.
D. infinity.
As the number of securities, n, increases, the nonsystematic risk of a well-diversified portfolio approaches zero.
As the number of securities, n, increases, the nonsystematic risk of a well-diversified portfolio approaches zero.
The correct answer is: zero.
Question 6
Correct
Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements?
I) The expected return-beta relationship is maintained for all but a small number of well-diversified portfolios.
II) The expected return-beta relationship is maintained for all well-diversified portfolios.
III) The expected return-beta relationship is maintained for all but a small number of individual securities.
IV) The expected return-beta relationship is maintained for all individual securities.
Select one:
A. II and IV
B. I and III
C. II and III The expected return-beta relationship must hold for all well-diversified
portfolios and for all but a few individual securities; otherwise arbitrage
opportunities will be available.
D. Only I is correct.
E. I and IV
The expected return-beta relationship must hold for all well-diversified portfolios and for all but a few individual securities; otherwise arbitrage
opportunities will be available.
The expected return-beta relationship must hold for all well-diversified portfolios and for all but a few individual securities; otherwise arbitrage
opportunities will be available.
The correct answer is: II and III
Question 7
Correct
Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4%, and the
risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor, what is its expected
return?
Select one:
A. 7.0%
B. 8.0%
C. 13.2% 0.06 + 1.2 (0.04) + 0.8
(0.03) = 0.132.
D. 9.2%
E. 13.0%
Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?
Select one:
A. The multifactor APT The multifactor APT provides no guidance as to the determination of the risk
premium on the various factors. The CAPM assumes that the excess market return
over the risk-free rate is the market premium in the single factor CAPM.
The multifactor APT provides no guidance as to the determination of the risk premium on the various factors. The CAPM assumes that the excess
market return over the risk-free rate is the market premium in the single factor CAPM.
The multifactor APT provides no guidance as to the determination of the risk premium on the various factors. The CAPM assumes that the excess
market return over the risk-free rate is the market premium in the single factor CAPM.
The correct answer is: The multifactor APT
Question 9
Correct
An arbitrage opportunity exists if an investor can construct a ________ investment portfolio that will yield a sure profit.
Select one:
A. zero If the investor can construct a portfolio without the use of the
investor's own funds and the portfolio yields a positive profit,
arbitrage opportunities exist.
B. positive
C. negative
D. All of the options.
E. None of the options are correct.
If the investor can construct a portfolio without the use of the investor's own funds and the portfolio yields a positive profit, arbitrage opportunities
exist.
If the investor can construct a portfolio without the use of the investor's own funds and the portfolio yields a positive profit, arbitrage opportunities
exist.
The correct answer is: zero
Question 10
Correct
Select one:
A. Modigliani and Miller.
B. Ross. Ross developed this
model in 1976.
C. Lintner.
D. Sharpe.
Question 11
Correct
A ________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.
Select one:
A. factor A factor model portfolio has a beta of 1 one
factor, with zero betas on other factors.
B. market
C. factor, market, and index
D. factor and market
E. index
A factor model portfolio has a beta of 1 one factor, with zero betas on other factors.
A factor model portfolio has a beta of 1 one factor, with zero betas on other factors.
The correct answer is: factor
Question 12
Correct
The beta of Exxon stock has been estimated as 1.6 using regression analysis on a sample of historical returns. A commonly-used adjustment
technique would provide an adjusted beta of
Select one:
A. 1.32.
B. 1.20.
C. 1.13.
D. 1.40. Adjusted beta = 2/3 sample beta + 1/3(1);
= 2/3(1.6) + 1/3 = 1.40.
Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 16%. The risk-free rate of return is 5%. The stock earns
a return that exceeds the risk-free rate by 11%, and there are no firm-specific events affecting the stock performance. The β of the stock is
Select one:
A. 1.0. 11% = 0% + b(11%);
b = 1.0.
B. 1.33.
C. 0.67.
D. 1.50.
E. 0.75.
Question 14
Incorrect
The index model has been estimated for stock A with the following results:
Select one:
A. 0.6400.
B. 0.1600. σB = [(0.8)2(0.2)2 + (0.1)2]1/2
= 0.1887.
C. 0.0356.
D. 0.1887.
Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 10%. The risk-free rate of return is 3%. The stock earns
a return that exceeds the risk-free rate by 11%, and there are no firm-specific events affecting the stock performance. The β of the stock is
Select one:
A. 1.57. 11% = 0% + b(7%); b
= 1.571.
B. 1.33.
C. 1.50.
D. 0.75.
E. 1.17.
Question 16
Correct
Select one:
A. It is the tangency point between the capital market line and the The tangency point between the capital market line and the
indifference curve. indifference curve is the optimal portfolio for a particular
investor.
B. All securities in the market portfolio are held in proportion to their market values.
C. It includes all publicly-traded financial assets.
D. It lies on the efficient frontier.
E. All of the options are true.
The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.
The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.
The correct answer is: It is the tangency point between the capital market line and the indifference curve.
Question 17
Correct
III) All securities in the market portfolio are held in proportion to their market values.
IV) It is the tangency point between the capital market line and the indifference curve.
Select one:
A. I, II, and III The tangency point between the capital market line and the
indifference curve is the optimal portfolio for a particular
investor.
B. IV only
C. I only
D. II only
E. III only
The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.
The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor.
The correct answer is: I, II, and III
Question 18
Correct
Which statement is not true regarding the capital market line (CML)?
Select one:
A. The CML is also called the security market Both the capital market line and the security market line depict risk/return relationships.
line. However, the risk measure for the CML is standard deviation and the risk measure for the
SML is beta (thus the CML is not also called the security market line; the other statements
are true).
Both the capital market line and the security market line depict risk/return relationships. However, the risk measure for the CML is standard deviation
and the risk measure for the SML is beta (thus the CML is not also called the security market line; the other statements are true).
Both the capital market line and the security market line depict risk/return relationships. However, the risk measure for the CML is standard deviation
and the risk measure for the SML is beta (thus the CML is not also called the security market line; the other statements are true).
The correct answer is: The CML is also called the security market line.
Question 19
Correct
Select one:
A. the covariance between the security and market returns divided by the standard deviation of the market's returns.
B. the variance of the security's returns divided by the variance 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 covariance between the security's return and the market return divided Beta is a measure of how a security's return covaries with
by the variance of the market's returns. the market returns, normalized by the market variance.
Beta is a measure of how a security's return covaries with the market returns, normalized by the market variance.
Beta is a measure of how a security's return covaries with the market returns, normalized by the market variance.
The correct answer is: the covariance between the security's return and the market return divided by the variance of the market's returns.
Question 20
Correct
Select one:
A. negative alpha is considered to be a good buy.
B. positive alpha is considered overpriced.
C. zero alpha is considered to be a good buy.
D. positive alpha is considered to be underpriced. A security with a positive alpha is one that is expected to yield an
abnormal positive rate of return, based on the perceived risk of the
security, and thus is underpriced.
A security with a positive alpha is one that is expected to yield an abnormal positive rate of return, based on the perceived risk of the security, and
thus is underpriced.
A security with a positive alpha is one that is expected to yield an abnormal positive rate of return, based on the perceived risk of the security, and
thus is underpriced.
The correct answer is: positive alpha is considered to be underpriced.
Question 21
Correct
According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false?
Select one:
A. The expected rate of return on a security increases as its beta increases.
B. A fairly priced security has an alpha of zero.
C. The expected rate of return on a security increases in direct proportion to "The expected rate of return on a security increases in
a decrease in the risk-free rate. direct proportion to a decrease in the risk-free rate" is false.
"The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate" is false.
"The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate" is false.
The correct answer is: The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate.
Question 22
Correct
In a well-diversified portfolio,
Select one:
A. systematic risk is negligible.
B. nondiversifiable risk is negligible.
C. market risk is negligible.
D. unsystematic risk is negligible. Market, systematic, or nondiversifiable, risk is present in a
diversified portfolio; the unsystematic risk has been
eliminated.
Market, systematic, or nondiversifiable, risk is present in a diversified portfolio; the unsystematic risk has been eliminated.
Market, systematic, or nondiversifiable, risk is present in a diversified portfolio; the unsystematic risk has been eliminated.
The correct answer is: unsystematic risk is negligible.
Question 23
Correct
Empirical results regarding betas estimated from historical data indicate that betas
Select one:
A. are always positive.
B. are constant over time.
C. appear to regress toward one over time. Betas vary over time, betas may be negative or less than one, and
betas are not always near zero; however, betas do appear to regress
toward one over time.
Betas vary over time, betas may be negative or less than one, and betas are not always near zero; however, betas do appear to regress toward one
over time.
Betas vary over time, betas may be negative or less than one, and betas are not always near zero; however, betas do appear to regress toward one
over time.
The correct answer is: appear to regress toward one over time.
Question 24
Correct
Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected
rate of return is 0.09. According to the Capital Asset Pricing Model, this security is
Select one:
A. overpriced.
B. underpriced.
C. fairly priced. 11% = 5% + 1.5(9% – 5%) = 11.0%;
therefore, the security is fairly priced.
The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should
Select one:
A. sell the stock short because it is underpriced.
B. buy the stock because it is underpriced.
C. buy the stock because it is overpriced.
D. sell short the stock because it is overpriced. 12% < 7% + 1.3(15% – 7%) = 17.40%; therefore,
stock is overpriced and should be shorted.
12% < 7% + 1.3(15% – 7%) = 17.40%; therefore, stock is overpriced and should be shorted.
12% < 7% + 1.3(15% – 7%) = 17.40%; therefore, stock is overpriced and should be shorted.
The correct answer is: sell short the stock because it is overpriced.
Question 26
Correct
You invest $600 in a security with a beta of 1.2 and $400 in another security with a beta of 0.90. The beta of the resulting portfolio is
Select one:
A. 1.40.
B. 1.08. 0.6(1.2) + 0.4(0.90)
= 1.08.
C. 1.00.
D. 0.80.
E. 0.36.
A security has an expected rate of return of 0.10 and a beta of 1.1. The market expected rate of return is 0.08, and the risk-free rate is 0.05. The alpha
of the stock is
Select one:
A. 8.3%.
B. –1.7%.
C. 1.7%. 10% – [5% +1.1(8% –
5%)] = 1.7%.
D. 5.5%.
Question 28
Correct
Your opinion is that CSCO has an expected rate of return of 0.13. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return
is 0.115. According to the Capital Asset Pricing Model, this security is
Select one:
A. overpriced. 13% – [4% + 1.3(11.5% – 4%)] = –0.75%;
therefore, the security is overpriced.
B. fairly priced.
C. underpriced.
D. Cannot be determined from data provided.
Question 29
Correct
Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of
return is 0.115. According to the Capital Asset Pricing Model, this security is
Select one:
A. overpriced.
B. underpriced.
C. fairly priced. 13.75% – [4% + 1.3(11.5% – 4%)] = 0.0%;
therefore, the security is fairly priced.
13.75% – [4% + 1.3(11.5% – 4%)] = 0.0%; therefore, the security is fairly priced.
13.75% – [4% + 1.3(11.5% – 4%)] = 0.0%; therefore, the security is fairly priced.
The correct answer is: fairly priced.
Question 30
Correct
Your opinion is that CSCO has an expected rate of return of 0.15. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return
is 0.115. According to the Capital Asset Pricing Model, this security is
Select one:
A. underpriced. 15% – [4% + 1.3(11.5% – 4%)] = 1.25%;
therefore, the security is underpriced.
B. fairly priced.
C. overpriced.
D. Cannot be determined from data provided.
E. None of the options are correct.
Question 31
Correct
Your opinion is that Boeing has an expected rate of return of 0.112. It has a beta of 0.92. The risk-free rate is 0.04 and the market expected rate of
return is 0.10. According to the Capital Asset Pricing Model, this security is
Select one:
A. fairly priced.
B. underpriced. 11.2% – [4% + 0.92(10% – 4%)] = 1.68%;
therefore, the security is underpriced.
C. overpriced.
D. Cannot be determined from data provided.
You invest 55% of your money in security A with a beta of 0.9 and the rest of your money in security B with a beta of 1.4. The beta of the resulting
portfolio is
Select one:
A. 1.175.
B. 1.466.
C. 0.968.
D. 1.082.
E. 1.125.
Question 33
Correct
Expected Rate of
Security return Beta
A 0.12 1.2
B 0.14 1.8
If the expected market rate of return is 0.09, and the risk-free rate is 0.05, which security would be considered the better buy, and why?
Select one:
A. B because it offers an expected excess return of 1.8%.
B. A because it offers an expected excess return of 1.2%.
C. B because it offers an expected return of 14%.
D. B because it has a higher beta.
E. A because it offers an expected excess return of 2.2%. A's excess return is expected to be 12% – [5% + 1.2(9% – 5%)] =
2.2%. B's excess return is expected to be 14% – [5% + 1.8(9% –
5%)] = 1.8%.
A's excess return is expected to be 12% – [5% + 1.2(9% – 5%)] = 2.2%. B's excess return is expected to be 14% – [5% + 1.8(9% – 5%)] = 1.8%.
A's excess return is expected to be 12% – [5% + 1.2(9% – 5%)] = 2.2%. B's excess return is expected to be 14% – [5% + 1.8(9% – 5%)] = 1.8%.
The correct answer is: A because it offers an expected excess return of 2.2%.
Question 34
Correct
Select one:
A. A negative rate of return
B. The market rate of return
C. The risk-free rate E(RS) = rf + 0(RM –
rf) = rf.
Question 35
Correct
Select one:
A. can be portrayed graphically as the expected return-beta relationship.
B. provides a benchmark for evaluation of investment performance.
C. can be portrayed graphically as the expected return-standard deviation of market-returns relationship.
D. can be portrayed graphically as The SML is a measure of the expected return-beta relationship (the CML is a measure of expected
the expected return-beta return - standard deviation of market returns). The SML provides the expected return-beta
relationship and provides a relationship for "fairly priced" securities; thus if a portfolio manager selects securities that are
benchmark for evaluation of underpriced and produces a portfolio with a positive alpha, this portfolio manager would receive a
investment performance. positive evaluation.
E. can be portrayed graphically as the expected return-standard deviation of market-returns relationship and provides a benchmark for
evaluation of investment performance.
The SML is a measure of the expected return-beta relationship (the CML is a measure of expected return - standard deviation of market returns). The
SML provides the expected return-beta relationship for "fairly priced" securities; thus if a portfolio manager selects securities that are underpriced
and produces a portfolio with a positive alpha, this portfolio manager would receive a positive evaluation.
The SML is a measure of the expected return-beta relationship (the CML is a measure of expected return - standard deviation of market returns). The
SML provides the expected return-beta relationship for "fairly priced" securities; thus if a portfolio manager selects securities that are underpriced
and produces a portfolio with a positive alpha, this portfolio manager would receive a positive evaluation.
The correct answer is: can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment
performance.
Question 36
Correct
You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3. The beta of the resulting portfolio is
Select one:
A. 1.40.
B. 0.80.
C. 1.00.
D. 1.08.
E. 0.52. 0.2(1.4) + 0.8(0.3) =
0.52.
Question 37
Correct
Security A has an expected rate of return of 0.10 and a beta of 1.3. The market expected rate of return is 0.10, and the risk-free rate is 0.04. The alpha
of the stock is
Select one:
A. 8.3%.
B. 5.5%.
C. 1.7%.
D. –1.8%. 10% – [4% + 1.3(10% –
4%)] = –1.8%.