Question 1

Tobin's separation theory states that the market is a separate investment from the risk-free security.

Accepted Answer

A) True 
 B)False  False

Question 2

The planning period for the CAPM is the same length of time for every investor.

Accepted Answer

A) True 
 B)False  False

Question 3

Recently you have received a tip that the stock of Buttercup Industries is going to rise from $76.00 to $85.00 per share over the next year. You know that the annual return on the S&P 500 has been 13% and the 90-day T-bill rate has been yielding 3% per year over the past 10 years. If beta for Buttercup is 1.0, will you purchase the stock?

Accepted Answer

A) Yes, because it is overvalued. 
B) Yes, because it is undervalued. 
C) No, because it is undervalued. 
D) No, because it is overvalued. 
E) Yes, because the expected return equals the estimated return. 
A) Yes, because it is overvalued. 
B) Yes, because it is undervalued. 
C) No, because it is undervalued. 
D) No, because it is overvalued. 
E) Yes, because the expected return equals the estimated return. D

Question 4

Recently you have received a tip that the stock of Bubbly Incorporated is going to rise from $57 to $61 per share over the next year. You know that the annual return on the S&P 500 has been 9.25% and the 90-day T-bill rate has been yielding 3.75% per year over the past 10 years. If beta for Bubbly is 0.85, will you purchase the stock?

Accepted Answer

A) Yes, because it is overvalued. 
B) No, because it is overvalued. 
C) No, because it is undervalued. 
D) Yes, because it is undervalued. 
E) Yes, because the expected return equals the estimated return. 
A) Yes, because it is overvalued. 
B) No, because it is overvalued. 
C) No, because it is undervalued. 
D) Yes, because it is undervalued. 
E) Yes, because the expected return equals the estimated return.

Question 5

Assume that as a portfolio manager the beta of your portfolio is 1.2 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

A) 2% lower 
B) 1% lower 
C) 5% lower 
D) 1% higher 
E) 2% higher 
A) 2% lower 
B) 1% lower 
C) 5% lower 
D) 1% higher 
E) 2% higher

Question 6

Studies have shown the beta is more stable for portfolios than for individual securities.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 8.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 8.1. Compute the beta for RA Computer using the historic returns presented above.

Accepted Answer

A) 0.7715 
B) 1.2195 
C) 1.3893 
D) 1.1023 
E) -0.7715 
A) 0.7715 
B) 1.2195 
C) 1.3893 
D) 1.1023 
E) -0.7715

Question 8

Exhibit 8.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
  
-Refer to Exhibit 8.2. What are the expected (required) rates of return for the three stocks (in the order X, Y, Z)?

Accepted Answer

A) 16.50%, 5.50%, 22.00% 
B) 9.25%, 10.5%, 7.5% 
C) 21.25%, 8.33%, 11.43% 
D) 6.20%, 2.20%, 8.20% 
E) 15.00%, 3.50%, 7.30% 
A) 16.50%, 5.50%, 22.00% 
B) 9.25%, 10.5%, 7.5% 
C) 21.25%, 8.33%, 11.43% 
D) 6.20%, 2.20%, 8.20% 
E) 15.00%, 3.50%, 7.30%

Question 9

Assume that as a portfolio manager the beta of your portfolio is 1.1 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

A) 3.2% lower 
B) 6.4% lower 
C) 4.9% lower 
D) 3.2% higher 
E) 6.4% higher 
A) 3.2% lower 
B) 6.4% lower 
C) 4.9% lower 
D) 3.2% higher 
E) 6.4% higher

Question 10

The betas of those companies compiled by Value Line Investment Services tend to be almost identical to those compiled by Merrill Lynch.

Accepted Answer

A) True 
 B)False

Question 11

Studies have shown that a well-diversified investor needs as few as five stocks.

Accepted Answer

A) True 
 B)False

Question 12

The Capital Market Line (CML) refers only to those portfolios that lie on the line segment that extends from the risk-free asset to the point of tangency on the efficient frontier known as the market portfolio.

Accepted Answer

A) True 
 B)False

Question 13

A friend has information that the stock of Zip Incorporated is going to rise from $62.00 to $65.00 per share over the next year. You know that the annual return on the S&P 500 has been 10% and the 90-day T-bill rate has been yielding 6% per year over the past 10 years. If beta for Zip is 0.9, will you purchase the stock?

Accepted Answer

A) Yes, because it is overvalued. 
B) Yes, because it is undervalued. 
C) No, because it is undervalued. 
D) No, because it is overvalued. 
E) Yes, because the expected return equals the estimated return. 
A) Yes, because it is overvalued. 
B) Yes, because it is undervalued. 
C) No, because it is undervalued. 
D) No, because it is overvalued. 
E) Yes, because the expected return equals the estimated return.

Question 14

Which of the following is not a major difference between the capital market line (CML) and the capital asset pricing model (CAPM)?

Accepted Answer

A) Definitions of portfolio risk are based on systematic and total risk 
B) One is related to the market portfolio, the other does not 
C) The number of calculations to determine risk is significantly greater for one method 
D) One requires a tangency point on the efficient frontier, the other does not 
E) All of the above 
A) Definitions of portfolio risk are based on systematic and total risk 
B) One is related to the market portfolio, the other does not 
C) The number of calculations to determine risk is significantly greater for one method 
D) One requires a tangency point on the efficient frontier, the other does not 
E) All of the above

Question 15

Securities with returns that lie below the security market line are undervalued.

Accepted Answer

A) True 
 B)False

Question 16

Under the CAPM framework, the introduction of lending and borrowing at differential rates leads to a non-linear capital market line.

Accepted Answer

A) True 
 B)False

Question 17

Assume that the risk-free rate of return is 3% and the market portfolio on the Capital Market Line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8%?

Accepted Answer

A) Invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate. 
B) Invest $80,000 in the market portfolio and the remainder in the risk-free security. 
C) Invest $63,636.36 in the market portfolio and the remainder in the risk-free security. 
D) Invest $36,363.64 in the market portfolio and the remainder in the risk-free security. 
E) Invest $100,000 on another portfolio on the CML that does not contain any of the market portfolio or the risk-free security, but has a standard deviation of 8%. 
A) Invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate. 
B) Invest $80,000 in the market portfolio and the remainder in the risk-free security. 
C) Invest $63,636.36 in the market portfolio and the remainder in the risk-free security. 
D) Invest $36,363.64 in the market portfolio and the remainder in the risk-free security. 
E) Invest $100,000 on another portfolio on the CML that does not contain any of the market portfolio or the risk-free security, but has a standard deviation of 8%.

Question 18

The Efficient Frontier refers to a set of portfolios that

Accepted Answer

A) Have the highest expected return for a given level of risk. 
B) Have the lowest risk for a given level of return. 
C) Are dominant to all other portfolios. 
D) a, b, and c above are correct. 
E) None of the answers above are correct. 
A) Have the highest expected return for a given level of risk. 
B) Have the lowest risk for a given level of return. 
C) Are dominant to all other portfolios. 
D) a, b, and c above are correct. 
E) None of the answers above are correct.

Question 19

Assume that as a portfolio manager the beta of your portfolio is 0.85 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

A) 1.33% higher 
B) 2.35% lower 
C) 8% lower 
D) 1.33% lower 
E) 2.35% higher 
A) 1.33% higher 
B) 2.35% lower 
C) 8% lower 
D) 1.33% lower 
E) 2.35% higher

Question 20

All portfolios on the capital market line are

Accepted Answer

A) Perfectly positively correlated. 
B) Perfectly negatively correlated. 
C) Unique from each other. 
D) Weakly correlated. 
E) Unrelated except that they contain the risk free asset. 
A) Perfectly positively correlated. 
B) Perfectly negatively correlated. 
C) Unique from each other. 
D) Weakly correlated. 
E) Unrelated except that they contain the risk free asset.

Exam 8: An Introduction to Asset Pricing Models

Tobin's separation theory states that the market is a separate investment from the risk-free security.

The planning period for the CAPM is the same length of time for every investor.

Assume that as a portfolio manager the beta of your portfolio is 1.2 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Studies have shown the beta is more stable for portfolios than for individual securities.

Exhibit 8.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.1. Compute the beta for RA Computer using the historic returns presented above.

Assume that as a portfolio manager the beta of your portfolio is 1.1 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

The betas of those companies compiled by Value Line Investment Services tend to be almost identical to those compiled by Merrill Lynch.

Studies have shown that a well-diversified investor needs as few as five stocks.

The Capital Market Line (CML) refers only to those portfolios that lie on the line segment that extends from the risk-free asset to the point of tangency on the efficient frontier known as the market portfolio.

Which of the following is not a major difference between the capital market line (CML) and the capital asset pricing model (CAPM)?

Securities with returns that lie below the security market line are undervalued.

Under the CAPM framework, the introduction of lending and borrowing at differential rates leads to a non-linear capital market line.

Assume that the risk-free rate of return is 3% and the market portfolio on the Capital Market Line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8%?

The Efficient Frontier refers to a set of portfolios that

Assume that as a portfolio manager the beta of your portfolio is 0.85 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

All portfolios on the capital market line are

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

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