Question 1

Consider a risky asset that has a standard deviation of returns of 15.Calculate the correlation between the risky asset and a risk free asset.

Accepted Answer

A)  1.0 
B)  0.0 
C)  -1.0 
D)  0.5 
E)  -0.5 
A)  1.0 
B)  0.0 
C)  -1.0 
D)  0.5 
E)  -0.5 B

Question 2

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)?

Accepted Answer

A)  Size 
B)  Book-to-market value 
C)  Beta 
D)  Choices a and b only 
E)  All of the above 
A)  Size 
B)  Book-to-market value 
C)  Beta 
D)  Choices a and b only 
E)  All of the above D

Question 3

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

Accepted Answer

A)  Zero beta model. 
B)  unstable beta or a higher borrowing rate. 
C)  Zero beta model or a higher borrowing rate. 
D)  higher borrowing rate. 
E)  unstable beta. 
A)  Zero beta model. 
B)  unstable beta or a higher borrowing rate. 
C)  Zero beta model or a higher borrowing rate. 
D)  higher borrowing rate. 
E)  unstable beta. C

Question 4

Beta is a measure of:

Accepted Answer

A)  Company specific risk 
B)  Industry risk 
C)  Diversifiable risk 
D)  Systematic risk 
E)  Unique risk 
A)  Company specific risk 
B)  Industry risk 
C)  Diversifiable risk 
D)  Systematic risk 
E)  Unique risk

Question 5

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.

Question 6

The betas for the market portfolio and risk-free security are:
$\begin{array}{c}
\begin{array}{c}
\
a.\
b.\
c.\
d.\
e.\
\end{array}
\begin{array}{c}
\text { Market } \
\hline 0 \
1 \
-1 \
1 \
2
\end{array}
&
\begin{array}{c}
\text { Risk-free} \
\hline
1 \
0 \
1 \
-1 \
1
\end{array}
\end{array}$

Accepted Answer

The answer of The betas for the market portfolio and...

Question 7

Using the S&P index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) The size effect 
B) The market effect 
C) Measurement error 
D) Benchmark error 
E) Manager's performance error 
A) The size effect 
B) The market effect 
C) Measurement error 
D) Benchmark error 
E) Manager's performance error

Question 9

The "true" market portfolio is unknown.

Accepted Answer

A) True 
 B)False

Question 10

Exhibit 8.3
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c c } 
\text { Periad } & \begin{array} { c } 
\text { Return } \
\text { of Radtran } \
\text { (Percent) }
\end{array} & \begin{array} { c } 
\text { Praxy } \
\text { Epecific Index } \
\text { (Percent) }
\end{array} & \begin{array} { c } 
\text { True } \
\text { Ceneral Index } \
\text { (Percent) }
\end{array} \
\hline 1 & 10 & 12 & 15 \
2 & 12 & 10 & 13 \
3 & - 10 & - 8 & - 8 \
4 & - 4 & - 10 & 0
\end{array}$$
-Refer to Exhibit 8.3.What is the beta for Radtron using the true index?

Accepted Answer

A)  0.87 
B)  0.97 
C)  1.02 
D)  1.15 
E)  1.28 
A)  0.87 
B)  0.97 
C)  1.02 
D)  1.15 
E)  1.28

Question 11

The portfolios on the capital market line are combinations of the risk-free asset and the market portfolio.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 8.7
Use the Information Below for the Following Problem(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
 $\begin{array}{ccccc}
\text { Stock } & \text { Beta } & \begin{array}{c}
\text { Current } \
\text { Price }
\end{array} & \begin{array}{c}
\text { Expected } \
\text { Price }
\end{array} & \begin{array}{c}
\text { Expected } \
\text { Dividend }
\end{array} \
\hline \mathrm{A} & 1.5 & \$ 10 & \$ 11.50 & \$ 1.00 \
\mathrm{~B} & 1.1 & \$ 27 & \$ 30 & \$ 0.00 \
\mathrm{C} & 0.8 & \$ 35 & \$ 36 & \$ 1.50
\end{array}$

-Refer to Exhibit 8.7.What are the estimated rates of return for the three stocks (in the order A,B,C)?

Accepted Answer

A)  13.0%, 10.6%, 8.8% 
B)  15.0%, 11.1%, 2.9% 
C)  18.7%, 11.1%, 8.8% 
D)  21.7%, 10.0%, 6.9% 
E)  25.0%, 11.1%, 7.1% 
A)  13.0%, 10.6%, 8.8% 
B)  15.0%, 11.1%, 2.9% 
C)  18.7%, 11.1%, 8.8% 
D)  21.7%, 10.0%, 6.9% 
E)  25.0%, 11.1%, 7.1%

Question 13

What does WRF = -0.50 mean?

Accepted Answer

A)  The investor can borrow money at the risk-free rate. 
B)  The investor can lend money at the current market rate. 
C)  The investor can borrow money at the current market rate. 
D)  The investor can borrow money at the prime rate of interest. 
E)  The investor can lend money at the prime rate of interest. 
A)  The investor can borrow money at the risk-free rate. 
B)  The investor can lend money at the current market rate. 
C)  The investor can borrow money at the current market rate. 
D)  The investor can borrow money at the prime rate of interest. 
E)  The investor can lend money at the prime rate of interest.

Question 14

One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A)  11.13% 
B)  14.97% 
C)  16.25% 
D)  22.25% 
E)  17.0% 
A)  11.13% 
B)  14.97% 
C)  16.25% 
D)  22.25% 
E)  17.0%

Question 16

The expected return for a stock,calculated using the CAPM,is 25%.The risk free rate is 7.5% and the beta of the stock is 0.80.Calculate the implied return on the market.

Accepted Answer

A)  7.50% 
B)  13.91% 
C)  17.50% 
D)  21.88% 
E)  14.38% 
A)  7.50% 
B)  13.91% 
C)  17.50% 
D)  21.88% 
E)  14.38%

Question 17

Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is 0.05 and you expect the market return to be 0.11.

Accepted Answer

A)  10.6% 
B)  12.1% 
C)  13.6% 
D)  14.0% 
E)  16.2% 
A)  10.6% 
B)  12.1% 
C)  13.6% 
D)  14.0% 
E)  16.2%

Question 18

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.

Accepted Answer

A)  4.20% 
B)  25.20% 
C)  3.29% 
D)  10.80% 
E)  5.02% 
A)  4.20% 
B)  25.20% 
C)  3.29% 
D)  10.80% 
E)  5.02%

Question 19

Exhibit 8.3
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c c } 
\text { Periad } & \begin{array} { c } 
\text { Return } \
\text { of Radtran } \
\text { (Percent) }
\end{array} & \begin{array} { c } 
\text { Praxy } \
\text { Epecific Index } \
\text { (Percent) }
\end{array} & \begin{array} { c } 
\text { True } \
\text { Ceneral Index } \
\text { (Percent) }
\end{array} \
\hline 1 & 10 & 12 & 15 \
2 & 12 & 10 & 13 \
3 & - 10 & - 8 & - 8 \
4 & - 4 & - 10 & 0
\end{array}$$
-Refer to Exhibit 8.3.The average true return is

Accepted Answer

A)  1% 
B)  2% 
C)  3% 
D)  4% 
E)  5% 
A)  1% 
B)  2% 
C)  3% 
D)  4% 
E)  5%

Question 20

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.
 $$\begin{array} { c c c c c } 
\text { Stack } & \text { Eeta } & \begin{array} { c } 
\text { Current } \
\text { Price }
\end{array} & \begin{array} { c } 
\text { Expected } \
\text { Price }
\end{array} & \begin{array} { c } 
\text { Experted } \
\text { Dividend }
\end{array} \
\hline \mathbf { X } & 1.25 & \$ 20 & \$ 23 & \$ 1.25 \
\mathbf { Y } & 1.50 & \$ 27 & \$ 29 & \$ 0.25 \
\mathbf { Z } & 0.90 & \$ 35 & \$ 38 & \$ 1.00
\end{array}$$
-Refer to Exhibit 8.2.What are the estimated rates of return for the three stocks (in the order X,Y,Z)?

Accepted Answer

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

Exam 8: An Introduction to Asset Pricing Models

Consider a risky asset that has a standard deviation of returns of 15.Calculate the correlation between the risky asset and a risk free asset.

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)?

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)

Beta is a measure of:

The betas for the market portfolio and risk-free security are: a. b. c. d. e. Market 0 1 -1 1 2 Risk-free 1 0 1 -1 1

Using the S&P index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

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

The "true" market portfolio is unknown.

Exhibit 8.3 Use the Information Below for the Following Problem(S) Periad Return of Radtran (Percent) Praxy Epecific Index (Percent) True Ceneral Index (Percent) 1 10 12 15 2 12 10 13 3 -10 -8 -8 4 -4 -10 0 -Refer to Exhibit 8.3.What is the beta for Radtron using the true index?

The portfolios on the capital market line are combinations of the risk-free asset and the market portfolio.

What does WRF = -0.50 mean?

One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate.

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.

The expected return for a stock,calculated using the CAPM,is 25%.The risk free rate is 7.5% and the beta of the stock is 0.80.Calculate the implied return on the market.

Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is 0.05 and you expect the market return to be 0.11.

Exhibit 8.3 Use the Information Below for the Following Problem(S) Periad Return of Radtran (Percent) Praxy Epecific Index (Percent) True Ceneral Index (Percent) 1 10 12 15 2 12 10 13 3 -10 -8 -8 4 -4 -10 0 -Refer to Exhibit 8.3.The average true return is

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

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

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

Filters

What does W_RF = -0.50 mean?