Question 1

Compare the security market line model and the arbitrage pricing theory.

Accepted Answer

SML is a one-factor model, the factor being the market risk premium. The APT accommodates more factors (often three to five are used), such as unanticipated changes in inflation, industrial production, etc. Unlike the CAPM, the APT does not assume a single-period investment horizon, any taxes, borrowing and lending at RF, investor selection on basis of expected return and variance. Both CAPM and APT assume homogeneous beliefs, risk-averse utility maximizers, perfect markets, and returns generated by a factor model.

Question 2

Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate.

Accepted Answer

A) True 
 B)False  True

Question 3

Why is market risk sometimes said to be the "relevant" risk for a portfolio manager? What is the measure of market risk?

Accepted Answer

Market risk, measured by beta, is non-diversifiable and must be dealt with by the portfolio manager. Diversifiable risk should be diversified away and should not pose a problem. Market risk, therefore, is considered to be relevant to the portfolio manager's job of balancing risk and return.

Question 4

When markets are in equilibrium, the CML is upward sloping because:

Accepted Answer

A)  it shows the optimum combination of risky securities. 
B)  the price of risk must always be positive. 
C)  it contains all securities weighted by their market values. 
D)  investors expect returns to increase over time. 
A)  it shows the optimum combination of risky securities. 
B)  the price of risk must always be positive. 
C)  it contains all securities weighted by their market values. 
D)  investors expect returns to increase over time.

Question 5

Given an expected return for the market of 12 percent, with a standard deviation of 20 percent, and a risk-free rate of 8 percent, consider the following data:
 $\begin{array}{lll}
\underline {Stock}&\underline { Beta }&\underline { \mathrm{R}_{\mathrm{i}}(\%) }\
1 & 0.8 & 12 \
2 & 1.2 & 13 \
3 & 0.6 & 11
\end{array}$ (a) Calculate the required return for each stock using the SML.
(b) Assume that an analyst, using fundamental analysis, develops the estimates labeled Ri for these stocks. Which stock would be recommended for purchase?

Accepted Answer

(a) Stock 1 8 + 0.8(4) = 11.2 percent
St

Question 6

What are the three factors in the three-factor model?

Accepted Answer

A)  Term premium, default premium, and dividend yield 
B)  Monetary policy, fiscal policy, and beta 
C)  Market risk premium, SMB and HML 
D)  P/E, P/B, and P/S 
A)  Term premium, default premium, and dividend yield 
B)  Monetary policy, fiscal policy, and beta 
C)  Market risk premium, SMB and HML 
D)  P/E, P/B, and P/S

Question 7

Which of the following statements about the difference between the SML and the CML is true?

Accepted Answer

A)  The intercept of the CML is the origin, whereas the intercept of the SML is RF. 
B)  The CML applies to efficient portfolios, whereas the SML applies to all portfolios or securities. 
C)  The CML can be downward sloping, whereas that is impossible for the SML. 
D)  The CML and the SML are essentially the same except for the price of risk. 
A)  The intercept of the CML is the origin, whereas the intercept of the SML is RF. 
B)  The CML applies to efficient portfolios, whereas the SML applies to all portfolios or securities. 
C)  The CML can be downward sloping, whereas that is impossible for the SML. 
D)  The CML and the SML are essentially the same except for the price of risk.

Question 8

What does it mean when the CAPM is called "robust?"

Accepted Answer

A)  The CAPM requires no assumptions. 
B)  Even if the CAPM's major assumptions are relaxed, most of its conclusions still hold. 
C)  The CAPM is based on realistic assumptions. 
D)  No other model can represent stock returns better than the CAPM. 
A)  The CAPM requires no assumptions. 
B)  Even if the CAPM's major assumptions are relaxed, most of its conclusions still hold. 
C)  The CAPM is based on realistic assumptions. 
D)  No other model can represent stock returns better than the CAPM.

Question 9

Two points define a straight line. What two points could be most readily identified to estimate the SML?

Accepted Answer

The risk-free rate because the

Question 10

The CML indicates the required return for each portfolio risk level.

Accepted Answer

A) True 
 B)False

Question 11

Delbert plans to invest $1,000,000 in the stock market. He plans to invest $215,000 in stock A, $250,000 in stock B, 165,000 in stock C, 242,500 in stock D and the rest in stock E. The stocks have the following betas:
 $$\begin{array}{l}
\text { Beta }
\begin{array} { c c c c c } 
\text { Stock A } & \text { Stock B } & \text { Stock C } & \text { Stock D } & \text { Stock E } \
\hline 1.8 & 0.6 & 1.4 & 0.95 & 1.6
\end{array}
\end{array}$$ The S&P 500 is expected to return 10.4% next year and T-bonds are yielding 5.1%. Based on the CAPM, what is the expected return on Delbert's portfolio?

Accepted Answer

First find the beta of Sam's portfolio b

Question 12

Using the separation theorem, it is necessary to match each investor's indifference curves with a particular efficient portfolio.

Accepted Answer

A) True 
 B)False

Question 13

The expected market return is 9 percent. The risk-free rate is 1 percent, and XYZ Co. has a beta of 1.4. XYZ's risk premium is:
A)8 percent.
B)11.2 percent.
C)12.2 percent.
D)10.3 percent

Accepted Answer

The answer of The expected market return is 9 percent....

Question 14

The beta of HSR's stock is 1.15, the expected return on the S&P500 is 7.4%, and T-bonds are yielding 2.4%. What is the required return on HSR stock?

Accepted Answer

A)  5.75% 
B)  8.15% 
C)  8.51% 
D)  10.91% 
A)  5.75% 
B)  8.15% 
C)  8.51% 
D)  10.91%

Question 15

In a declining market, a portfolio manager should attempt to increase the overall beta of the portfolio.

Accepted Answer

A) True 
 B)False

Question 16

What are the assumptions in the CAPM? Can these be relaxed without destroying the conclusions of the model?

Accepted Answer

(1) homogeneous expectations, (2) one-pe

Question 17

Which of the following is the correct calculation for the required return under the CAPM?

Accepted Answer

A)  Beta × (market risk premium) 
B)  Beta + market risk premium 
C)  Risk-free rate + risk premium 
D)  Risk-free rate × (market risk premium) 
A)  Beta × (market risk premium) 
B)  Beta + market risk premium 
C)  Risk-free rate + risk premium 
D)  Risk-free rate × (market risk premium)

Question 18

For the past two quarters the risk-free rate has exceeded the return on the market portfolio. Does this information disprove the CML?

Accepted Answer

No, it merely shows that actua

Question 19

What is the formula for the slope of the CML? What does it represent?

Accepted Answer

The slope is [E(R_M)

Question 20

Which of the following is not one of the assumptions of the CMT?

Accepted Answer

A)  All investors have the same one-period time horizon. 
B)  There are no personal income taxes. 
C)  There is no interest rate charged on borrowing. 
D)  There are no transaction costs. 
A)  All investors have the same one-period time horizon. 
B)  There are no personal income taxes. 
C)  There is no interest rate charged on borrowing. 
D)  There are no transaction costs.

Compare the security market line model and the arbitrage pricing theory.

Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate.

Why is market risk sometimes said to be the "relevant" risk for a portfolio manager? What is the measure of market risk?

When markets are in equilibrium, the CML is upward sloping because:

What are the three factors in the three-factor model?

Which of the following statements about the difference between the SML and the CML is true?

What does it mean when the CAPM is called "robust?"

Two points define a straight line. What two points could be most readily identified to estimate the SML?

The CML indicates the required return for each portfolio risk level.

Using the separation theorem, it is necessary to match each investor's indifference curves with a particular efficient portfolio.

The expected market return is 9 percent. The risk-free rate is 1 percent, and XYZ Co. has a beta of 1.4. XYZ's risk premium is: A)8 percent. B)11.2 percent. C)12.2 percent. D)10.3 percent

The beta of HSR's stock is 1.15, the expected return on the S&P500 is 7.4%, and T-bonds are yielding 2.4%. What is the required return on HSR stock?

In a declining market, a portfolio manager should attempt to increase the overall beta of the portfolio.

What are the assumptions in the CAPM? Can these be relaxed without destroying the conclusions of the model?

Which of the following is the correct calculation for the required return under the CAPM?

For the past two quarters the risk-free rate has exceeded the return on the market portfolio. Does this information disprove the CML?

What is the formula for the slope of the CML? What does it represent?

Which of the following is not one of the assumptions of the CMT?

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

Portfolio Selection and Asset Allocation

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

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Exam 9: Capital Market Theory and Asset Pricing Models

Compare the security market line model and the arbitrage pricing theory.

Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate.

Why is market risk sometimes said to be the "relevant" risk for a portfolio manager? What is the measure of market risk?

When markets are in equilibrium, the CML is upward sloping because:

What are the three factors in the three-factor model?

Which of the following statements about the difference between the SML and the CML is true?

What does it mean when the CAPM is called "robust?"

Two points define a straight line. What two points could be most readily identified to estimate the SML?

The CML indicates the required return for each portfolio risk level.

Using the separation theorem, it is necessary to match each investor's indifference curves with a particular efficient portfolio.

The expected market return is 9 percent. The risk-free rate is 1 percent, and XYZ Co. has a beta of 1.4. XYZ's risk premium is: A)8 percent. B)11.2 percent. C)12.2 percent. D)10.3 percent

The beta of HSR's stock is 1.15, the expected return on the S&P500 is 7.4%, and T-bonds are yielding 2.4%. What is the required return on HSR stock?

In a declining market, a portfolio manager should attempt to increase the overall beta of the portfolio.

What are the assumptions in the CAPM? Can these be relaxed without destroying the conclusions of the model?

Which of the following is the correct calculation for the required return under the CAPM?

For the past two quarters the risk-free rate has exceeded the return on the market portfolio. Does this information disprove the CML?

What is the formula for the slope of the CML? What does it represent?

Which of the following is not one of the assumptions of the CMT?

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

Portfolio Selection and Asset Allocation

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

Filters