Exam 8: Index Models

The index model has been estimated for stock A with the following results: R_A = 0.01 + 1.2R_M + e_A. Σ_M = 0.15; σ(e_A) = 0.10. The standard deviation of the return for stock A is

If a firm's beta was calculated as 1.3 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted β of Mobil stock is 1.50. A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.

The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

As diversification increases, the unique risk of a portfolio approaches

If a firm's beta was calculated as 1.35 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

The beta of a stock has been estimated as 1.8 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

The beta of Boeing stock has been estimated as 0.72 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP.

The index model for stock B has been estimated with the following result:R_B = 0.01 + 1.1R_M + e_B.If σ_M = 0.20 and R²_B = 0.50, the standard deviation of the return on stock B is

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

KMW Inc. has an estimated beta of 1.45. Given a forecasted market return of 12% and a T-bill rate 3%, using the index model and the adjusted beta, what is the forecasted return?

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 ____________ covariances.

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 217 stocks in order to construct a mean-variance efficient portfolio constrained by 217 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

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

The index model has been estimated for stocks A and B with the following results:R_A = 0.01 + 0.8R_M + e_A. R_B = 0.02 + 1.2R_M + e_B. Σ_M = 0.30; σ(e_A) = 0.20; σ(e_B) = 0.10.The covariance between the returns on stocks A and B is

The beta of Amazon stock has been estimated as 2.6 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 60 stocks in order to construct a mean-variance efficient portfolio constrained by 60 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Analysts may use regression analysis to estimate the index model for a stock. When doing so, the intercept of the regression line is an estimate of

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 0.25 and σ_M was 0.21, the β of the portfolio would be approximately ________.