Exam 8: An Introduction to Asset Pricing Models

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. The standard deviation of returns on the stock index is 6%. Calculate the expected standard deviation of the portfolio.

Exhibit 8.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6% with a standard deviation of 13% and a beta of 1.3. The market risk premium for this period of time was 6% and the risk-free rate of return was 5%. -Refer to Exhibit 8.6. How does Jonathan Crowley's portfolio compare to the market portfolio?

The error caused by not using the true market portfolio has become known as the

Exhibit 8.4 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.4. Which of the following statements is correct?

A portfolio manager uses two different proxies for the market portfolio, the S&P 500 index and the MSCI World index. Differences in the manager's portfolio performance resulting from the different market portfolios is referred to as

The only way to estimate a beta for a security is to calculate the covariance of the security with the market.

The variance of returns for a risky asset is 25%. The variance of the error term, Var(e), is 8%. What portion of the total risk of the asset, as measured by variance, is systematic?

Calculate the expected return for F Inc. which has a beta of 1.3 when the risk free rate is 0.06 and you expect the market return to be 0.125.

The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing model (CAPM) uses ____.

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. The average return for Radtron is

Exhibit 8.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6% with a standard deviation of 13% and a beta of 1.3. The market risk premium for this period of time was 6% and the risk-free rate of return was 5%. -Refer to Exhibit 8.6. Based on the Capital Asset Pricing Model (CAPM), what is the required rate of return for this portfolio?

Which of the following variables were found to be important in explaining return based upon a study of Fama and French (covering the period 1963 to 1990)?

Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5% and the expected return on the stock index is 15%. The estimated return on the asset is 20%. Calculate the alpha for the asset.

Utilizing the security market line an investor owning a stock with a beta of -2 would expect the stock's return to ____ in a market that was expected to decline 15 percent.

Assume that as a portfolio manager the beta of your portfolio is 1.15 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?

When identifying undervalued and overvalued assets, which of the following statements is false?

An investor constructs a portfolio with a 75% allocation to a stock index and a 25% allocation to a risk free asset. The expected returns on the risk-free asset and the stock index are 3% and 10%, respectively. The standard deviation of returns on the stock index is 14%. Calculate the expected standard deviation of the portfolio.

The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors.

The market portfolio consists of all

Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.