Question 1

The index model for stock A has been estimated with the following result:RA = 0.01 + 0.9RM + eA.If σM = 0.25 and R2A = 0.25, the standard deviation of return of stock A is

Accepted Answer

A)  0.2025. 
B)  0.2500. 
C)  0.4500. 
D)  0.8100. 
A)  0.2025. 
B)  0.2500. 
C)  0.4500. 
D)  0.8100.

Question 2

The security characteristic line (SCL) associated with the single-index model is a plot of

Accepted Answer

A)  the security's returns on the vertical axis and the market index's returns on the horizontal axis. 
B)  the market index's returns on the vertical axis and the security's returns on the horizontal axis. 
C)  the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis. 
D)  the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis. 
E)  the security's returns on the vertical axis and Beta on the horizontal axis. 
A)  the security's returns on the vertical axis and the market index's returns on the horizontal axis. 
B)  the market index's returns on the vertical axis and the security's returns on the horizontal axis. 
C)  the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis. 
D)  the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis. 
E)  the security's returns on the vertical axis and Beta on the horizontal axis.

Question 3

Rosenberg and Guy found that ___________ helped to predict firms' betas.

Accepted Answer

A)  debt/asset ratios 
B)  market capitalization 
C)  variance of earnings 
D)  all of the options 
E)  None of the options are correct. 
A)  debt/asset ratios 
B)  market capitalization 
C)  variance of earnings 
D)  all of the options 
E)  None of the options are correct.

Question 4

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

Accepted Answer

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. 
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.

Question 5

Using the single index model, what is the alpha of a stock with beta of 1.3, a market return of 14%, risk free rate of 4% and the actual return of the stock is 14%?

Accepted Answer

A)  −1.37% 
B)  0.75% 
C)  1.80% 
D)  2.11% 
E)  −3.00% 
A)  −1.37% 
B)  0.75% 
C)  1.80% 
D)  2.11% 
E)  −3.00%

Question 6

Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters.

Accepted Answer

A)  12 
B)  36 
C)  60 
D)  120 
A)  12 
B)  36 
C)  60 
D)  120

Question 7

As diversification increases, the unsystematic risk of a portfolio approaches

Accepted Answer

A)  1. 
B)  0. 
C)  infinity. 
D)  (n −1) × n. 
A)  1. 
B)  0. 
C)  infinity. 
D)  (n −1) × n.

Question 8

Suppose the following equation best describes the evolution of β over time:βt = 0.30 + 0.70βt − 1If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A)  0.91 
B)  0.77 
C)  0.63 
D)  0.87 
A)  0.91 
B)  0.77 
C)  0.63 
D)  0.87

Question 9

The idea that there is a limit to the reduction of portfolio risk due to diversification is

Accepted Answer

A)  contradicted by both the CAPM and the single-index model. 
B)  contradicted by the CAPM. 
C)  contradicted by the single-index model. 
D)  supported in theory, but not supported empirically. 
E)  supported both in theory and by empirical evidence. 
A)  contradicted by both the CAPM and the single-index model. 
B)  contradicted by the CAPM. 
C)  contradicted by the single-index model. 
D)  supported in theory, but not supported empirically. 
E)  supported both in theory and by empirical evidence.

Question 10

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 ____________ covariances.

Accepted Answer

A)  45 
B)  780 
C)  4,950 
D)  10,000 
A)  45 
B)  780 
C)  4,950 
D)  10,000

Question 11

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.8RM + eA.
RB = 0.02 + 1.1RM + eB.
ΣM = 0.30; 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)  0.0050. 
E)  0.0792. 
A)  0.0384. 
B)  0.0406. 
C)  0.1920. 
D)  0.0050. 
E)  0.0792.

Question 12

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)  0.82. 
B)  0.56. 
C)  0.07. 
D)  1.03. 
A)  0.82. 
B)  0.56. 
C)  0.07. 
D)  1.03.

Question 13

The intercept in the regression equations calculated by beta books is equal to

Accepted Answer

A)  α in the CAPM. 
B)  α + rf(1 + β). 
C)  α + rf(1 − β). 
D)  1 − α. 
A)  α in the CAPM. 
B)  α + rf(1 + β). 
C)  α + rf(1 − β). 
D)  1 − α.

Question 14

According to the index model, covariances among security pairs are

Accepted Answer

A)  due to the influence of a single common factor represented by the market index return. 
B)  extremely difficult to calculate. 
C)  related to industry-specific events. 
D)  usually positive. 
E)  due to the influence of a single common factor represented by the market index return and usually positive. 
A)  due to the influence of a single common factor represented by the market index return. 
B)  extremely difficult to calculate. 
C)  related to industry-specific events. 
D)  usually positive. 
E)  due to the influence of a single common factor represented by the market index return and usually positive.

Question 15

Rosenberg and Guy found that __________ helped to predict a firm's beta.

Accepted Answer

A)  the firm's financial characteristics 
B)  the firm's industry group 
C)  firm size 
D)  the firm's financial characteristics and the firm's industry group 
E)  All of the options are correct. 
A)  the firm's financial characteristics 
B)  the firm's industry group 
C)  firm size 
D)  the firm's financial characteristics and the firm's industry group 
E)  All of the options are correct.

Question 16

The index model for stock A has been estimated with the following result:RA = 0.01 + 0.94RM + eAIf σM = 0.30 and R2A = 0.28, the standard deviation of return of stock A is

Accepted Answer

A)  0.2025. 
B)  0.2500. 
C)  0.4500. 
D)  0.5329. 
A)  0.2025. 
B)  0.2500. 
C)  0.4500. 
D)  0.5329.

Question 17

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

Accepted Answer

A)  βk 
B)  βL 
C)  σM 
D)  all of the options 
E)  None of the options are correct. 
A)  βk 
B)  βL 
C)  σM 
D)  all of the options 
E)  None of the options are correct.

Question 18

VM Inc. has an estimated beta of 1.08. Given a forecasted market return of 10% and a T-bill rate 2%, using the index model and the adjusted beta, what is the forecasted return?

Accepted Answer

A)  12.7% 
B)  10.4% 
C)  9.5% 
D)  7.8% 
A)  12.7% 
B)  10.4% 
C)  9.5% 
D)  7.8%

Question 19

As diversification increases, the standard deviation of a portfolio approaches

Accepted Answer

A)  0. 
B)  1. 
C)  infinity. 
D)  the standard deviation of the market portfolio. 
E)  None of the options are correct. 
A)  0. 
B)  1. 
C)  infinity. 
D)  the standard deviation of the market portfolio. 
E)  None of the options are correct.

Question 20

An analyst estimates the index model for a stock using regression analysis involving total returns. The estimated intercept in the regression equation is 6% and the β is 0.5. The risk-free rate of return is 12%. The true β of the stock is

Accepted Answer

A)  0%. 
B)  3%. 
C)  6%. 
D)  9%. 
A)  0%. 
B)  3%. 
C)  6%. 
D)  9%.

Exam 8: Index Models

The index model for stock A has been estimated with the following result:RA = 0.01 + 0.9RM + eA.If σM = 0.25 and R2A = 0.25, the standard deviation of return of stock A is

The security characteristic line (SCL) associated with the single-index model is a plot of

Rosenberg and Guy found that ___________ helped to predict firms' betas.

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

Using the single index model, what is the alpha of a stock with beta of 1.3, a market return of 14%, risk free rate of 4% and the actual return of the stock is 14%?

Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters.

As diversification increases, the unsystematic risk of a portfolio approaches

Suppose the following equation best describes the evolution of β over time:βt = 0.30 + 0.70βt − 1If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

The idea that there is a limit to the reduction of portfolio risk due to diversification is

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 ____________ covariances.

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.8RM + eA. RB = 0.02 + 1.1RM + eB. ΣM = 0.30; σ(eA) = 0.20; σ(eB) = 0.10. The covariance between the returns on stocks A and B is

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

The intercept in the regression equations calculated by beta books is equal to

According to the index model, covariances among security pairs are

Rosenberg and Guy found that __________ helped to predict a firm's beta.

The index model for stock A has been estimated with the following result:RA = 0.01 + 0.94RM + eAIf σM = 0.30 and R2A = 0.28, the standard deviation of return of stock A is

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

VM Inc. has an estimated beta of 1.08. Given a forecasted market return of 10% and a T-bill rate 2%, using the index model and the adjusted beta, what is the forecasted return?

As diversification increases, the standard deviation of a portfolio approaches

An analyst estimates the index model for a stock using regression analysis involving total returns. The estimated intercept in the regression equation is 6% and the β is 0.5. The risk-free rate of return is 12%. The true β of the stock is

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

The index model for stock A has been estimated with the following result:R_A = 0.01 + 0.9R_M + e_A.If σ_M = 0.25 and R²A = 0.25, the standard deviation of return of stock A is

Suppose the following equation best describes the evolution of β over time:β_t = 0.30 + 0.70β_t− ₁If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

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 + 1.1R_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

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

The index model for stock A has been estimated with the following result:R_A = 0.01 + 0.94R_M + e_AIf σ_M = 0.30 and R²_A = 0.28, the standard deviation of return of stock A is