Question 1

If a firm's beta was calculated as 1.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  less than 0.6 but greater than zero. 
B)  between 0.6 and 1.0. 
C)  between 1.0 and 1.6. 
D)  greater than 1.6. 
E)  zero or less. 
A)  less than 0.6 but greater than zero. 
B)  between 0.6 and 1.0. 
C)  between 1.0 and 1.6. 
D)  greater than 1.6. 
E)  zero or less. C

Question 2

Suppose the following equation best describes the evolution of β over time:βt = 0.4 + 0.6βt − 1.If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A)  0.45 
B)  0.60 
C)  0.70 
D)  0.94 
A)  0.45 
B)  0.60 
C)  0.70 
D)  0.94 D

Question 3

If a firm's beta was calculated as 0.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  less than 0.6 but greater than zero. 
B)  between 0.6 and 1.0. 
C)  between 1.0 and 1.6. 
D)  greater than 1.6. 
E)  zero or less. 
A)  less than 0.6 but greater than zero. 
B)  between 0.6 and 1.0. 
C)  between 1.0 and 1.6. 
D)  greater than 1.6. 
E)  zero or less. B

Question 4

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 5%. The stock earns a return that exceeds the risk-free rate by 5%, and there are no firm-specific events affecting the stock performance. The β of the stock is

Accepted Answer

A)  0.67. 
B)  0.75. 
C)  1.0. 
D)  1.33. 
E)  1.50. 
A)  0.67. 
B)  0.75. 
C)  1.0. 
D)  1.33. 
E)  1.50.

Question 5

If a firm's beta was calculated as 0.8 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  less than 0.8 but greater than zero. 
B)  between 1.0 and 1.8. 
C)  between 0.8 and 1.0. 
D)  greater than 1.8. 
E)  zero or less. 
A)  less than 0.8 but greater than zero. 
B)  between 1.0 and 1.8. 
C)  between 0.8 and 1.0. 
D)  greater than 1.8. 
E)  zero or less.

Question 6

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.

Accepted Answer

A)  100; 100 
B)  100; 4950 
C)  4950; 100 
D)  4950; 4950 
A)  100; 100 
B)  100; 4950 
C)  4950; 100 
D)  4950; 4950

Question 7

Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE. Using a single-index model rather than the Markowitz model

Accepted Answer

A)  increases the number of inputs needed from about 1,400 to more than 1.4 million. 
B)  increases the number of inputs needed from about 10,000 to more than 125,000. 
C)  reduces the number of inputs needed from more than 125,000 to about 10,000. 
D)  reduces the number of inputs needed from more than 5 million to about 10,000. 
E)  increases the number of inputs needed from about 150 to more than 1,500. 
A)  increases the number of inputs needed from about 1,400 to more than 1.4 million. 
B)  increases the number of inputs needed from about 10,000 to more than 125,000. 
C)  reduces the number of inputs needed from more than 125,000 to about 10,000. 
D)  reduces the number of inputs needed from more than 5 million to about 10,000. 
E)  increases the number of inputs needed from about 150 to more than 1,500.

Question 8

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio was 0.14 and σM was 0.19, the β of the portfolio would be approximately

Accepted Answer

A)  0.74. 
B)  0.80. 
C)  1.25. 
D)  1.56. 
A)  0.74. 
B)  0.80. 
C)  1.25. 
D)  1.56.

Question 9

Covariances between security returns tend to be

Accepted Answer

A)  positive because of SEC regulations. 
B)  positive because of Exchange regulations. 
C)  positive because of economic forces that affect many firms. 
D)  negative because of SEC regulations. 
E)  negative because of economic forces that affect many firms. 
A)  positive because of SEC regulations. 
B)  positive because of Exchange regulations. 
C)  positive because of economic forces that affect many firms. 
D)  negative because of SEC regulations. 
E)  negative because of economic forces that affect many firms.

Question 10

The expected impact of unanticipated macroeconomic events on a security's return during the period is

Accepted Answer

A)  included in the security's expected return. 
B)  zero. 
C)  equal to the risk-free rate. 
D)  proportional to the firm's beta. 
E)  infinite. 
A)  included in the security's expected return. 
B)  zero. 
C)  equal to the risk-free rate. 
D)  proportional to the firm's beta. 
E)  infinite.

Question 11

Suppose the following equation best describes the evolution of β over time:t = 0.15 + 0.72βt − 1.If a stock had a β of 1.05 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A)  0.91 
B)  0.18 
C)  0.63 
D)  0.81 
A)  0.91 
B)  0.18 
C)  0.63 
D)  0.81

Question 12

The single-index model

Accepted Answer

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)  greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk. 
E)  enhances the understanding of systematic versus nonsystematic risk and greatly increases the number of required calculations relative to those required by the Markowitz 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)  greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk. 
E)  enhances the understanding of systematic versus nonsystematic risk and greatly increases the number of required calculations relative to those required by the Markowitz model.

Question 13

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio was 0.18 and σM was 0.22, the β of the portfolio would be approximately

Accepted Answer

A)  0.64. 
B)  1.19. 
C)  0.82. 
D)  1.56. 
A)  0.64. 
B)  1.19. 
C)  0.82. 
D)  1.56.

Question 14

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained by 200 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A)  200; 19,900 
B)  200; 200 
C)  19,900; 200 
D)  19,900; 19.900 
A)  200; 19,900 
B)  200; 200 
C)  19,900; 200 
D)  19,900; 19.900

Question 15

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.

Accepted Answer

A)  100; 100 
B)  40; 40 
C)  4950; 100 
D)  4950; 4950 
E)  None of the options are correct. 
A)  100; 100 
B)  40; 40 
C)  4950; 100 
D)  4950; 4950 
E)  None of the options are correct.

Question 16

The index model has been estimated for stocks A and B with the following results:RA = 0.03 + 0.7RM + eA. RB = 0.01 + 0.9RM + eB.
ΣM = 0.35; σ(eA) = 0.20; σ(eB) = 0.10.
The covariance between the returns on stocks A and B is

Accepted Answer

A)  0.0384. 
B)  0.0406. 
C)  0.1920. 
D)  0.0772. 
E)  0.4000. 
A)  0.0384. 
B)  0.0406. 
C)  0.1920. 
D)  0.0772. 
E)  0.4000.

Question 17

In their study about predicting beta coefficients, which of the following did Rosenberg and Guy find to be factors that influence beta?I) Industry groupII) Variance of cash flowIII) Dividend yieldIV) Growth in earnings per share

Accepted Answer

A)  I and II 
B)  I and III 
C)  I, II, and III 
D)  I, II, and IV 
E)  I, II, III, and IV 
A)  I and II 
B)  I and III 
C)  I, II, and III 
D)  I, II, and IV 
E)  I, II, III, and IV

Question 18

The index model was first suggested by

Accepted Answer

A)  Graham. 
B)  Markowitz. 
C)  Miller. 
D)  Sharpe. 
A)  Graham. 
B)  Markowitz. 
C)  Miller. 
D)  Sharpe.

Question 19

One "cost" of the single-index model is that it

Accepted Answer

A)  is virtually impossible to apply. 
B)  prohibits specialization of efforts within the security analysis industry. 
C)  requires forecasts of the money supply. 
D)  is legally prohibited by the SEC. 
E)  allows for only two kinds of risk-macro risk and micro risk. 
A)  is virtually impossible to apply. 
B)  prohibits specialization of efforts within the security analysis industry. 
C)  requires forecasts of the money supply. 
D)  is legally prohibited by the SEC. 
E)  allows for only two kinds of risk-macro risk and micro risk.

Question 20

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments. They will need to calculate ____________ covariances.

Accepted Answer

A)  12 
B)  150 
C)  22,500 
D)  11,175 
A)  12 
B)  150 
C)  22,500 
D)  11,175

Exam 8: Index Models

If a firm's beta was calculated as 1.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

Suppose the following equation best describes the evolution of β over time:βt = 0.4 + 0.6βt − 1.If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.

If a firm's beta was calculated as 0.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

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 5%. The stock earns a return that exceeds the risk-free rate by 5%, and there are no firm-specific events affecting the stock performance. The β of the stock is

If a firm's beta was calculated as 0.8 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE. Using a single-index model rather than the Markowitz model

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio was 0.14 and σM was 0.19, the β of the portfolio would be approximately

Covariances between security returns tend to be

The expected impact of unanticipated macroeconomic events on a security's return during the period is

Suppose the following equation best describes the evolution of β over time:t = 0.15 + 0.72βt − 1.If a stock had a β of 1.05 last year, you would forecast the β to be _______ in the coming year.

The single-index model

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio was 0.18 and σM was 0.22, the β of the portfolio would be approximately

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.

The index model has been estimated for stocks A and B with the following results:RA = 0.03 + 0.7RM + eA. RB = 0.01 + 0.9RM + eB. ΣM = 0.35; σ(eA) = 0.20; σ(eB) = 0.10. The covariance between the returns on stocks A and B is

In their study about predicting beta coefficients, which of the following did Rosenberg and Guy find to be factors that influence beta?I) Industry groupII) Variance of cash flowIII) Dividend yieldIV) Growth in earnings per share

The index model was first suggested by

One "cost" of the single-index model is that it

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments. They will need to calculate ____________ covariances.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Suppose the following equation best describes the evolution of β over time:β_t = 0.4 + 0.6β_t ₋₁.If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio was 0.14 and σ_M was 0.19, the β of the portfolio would be approximately

Suppose the following equation best describes the evolution of β over time:_t = 0.15 + 0.72β_t ₋₁.If a stock had a β of 1.05 last year, you would forecast the β to be _______ in the coming year.

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio was 0.18 and σ_M was 0.22, the β of the portfolio would be approximately

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate ___ expected returns and _ variances of returns.

The index model has been estimated for stocks A and B with the following results:R_A = 0.03 + 0.7R_M + e_A. R_B = 0.01 + 0.9R_M + e_B. Σ_M = 0.35; σ(e_A) = 0.20; σ(e_B) = 0.10. The covariance between the returns on stocks A and B is