Question 1

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.

Question 2

Exhibit 8.1
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c } 
&  { \text { Rates of Return } } \
\text { Year } & \text { RA Computer } & \text { Markat Index } \
\hline 1 & 13 & 17 \
2 & 9 & 15 \
3 & - 11 & 6 \
4 & 10 & 8 \
5 & 11 & 10 \
6 & 6 & 12
\end{array}$$
-Refer to Exhibit 8.1.Compute the correlation coefficient between RA Computer and the Market Index.

Accepted Answer

A)  -0.32 
B)  0.78 
C)  0.66 
D)  0.58 
E)  0.32 
A)  -0.32 
B)  0.78 
C)  0.66 
D)  0.58 
E)  0.32

Question 3

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

Accepted Answer

A)  Portfolio deviation. 
B)  CAPM shift. 
C)  Benchmark error. 
D)  Market error. 
E)  Beta error. 
A)  Portfolio deviation. 
B)  CAPM shift. 
C)  Benchmark error. 
D)  Market error. 
E)  Beta error.

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

An investor wishes to construct a portfolio by borrowing 30% of his initial wealth at the risk-free rate of 3% and investing all the money in a stock index.The expected return on the stock index is 12%.Calculate the expected return on the portfolio.

Accepted Answer

A)  14.7% 
B)  15.6% 
C)  17.1% 
D)  18.9% 
E)  19.7% 
A)  14.7% 
B)  15.6% 
C)  17.1% 
D)  18.9% 
E)  19.7%

Question 7

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%.Calculate the expected return on the portfolio.

Accepted Answer

A)  8.25% 
B)  16.50% 
C)  17.50% 
D)  9.75% 
E)  14.38% 
A)  8.25% 
B)  16.50% 
C)  17.50% 
D)  9.75% 
E)  14.38%

Question 8

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 covariance between Radtron and the proxy index is

Accepted Answer

A)  57.30 
B)  86.50 
C)  88.00 
D)  92.50 
E)  107.90 
A)  57.30 
B)  86.50 
C)  88.00 
D)  92.50 
E)  107.90

Question 9

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 10

If you borrow money at the RFR and invest the money in the market portfolio,the rate of return on your portfolio will be higher than the market rate of return.

Accepted Answer

A) True 
 B)False

Question 11

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 12

Overall the correlation coefficients of industries to the market portfolio vary widely,which is expected due to the wide variance of industry Betas.

Accepted Answer

A) True 
 B)False

Question 13

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 required 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 14

A completely diversified portfolio would have a correlation with the market portfolio that is

Accepted Answer

A)  Equal to zero because it has only unsystematic risk. 
B)  Equal to one because it has only systematic risk. 
C)  Less than zero because it has only systematic risk. 
D)  Less than one because it has only unsystematic risk. 
E)  Less than one because it has only systematic risk. 
A)  Equal to zero because it has only unsystematic risk. 
B)  Equal to one because it has only systematic risk. 
C)  Less than zero because it has only systematic risk. 
D)  Less than one because it has only unsystematic risk. 
E)  Less than one because it has only systematic risk.

Question 15

Theoretically,the correlation coefficient between a completely diversified portfolio and the market portfolio should be

Accepted Answer

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

Question 16

Exhibit 8.5
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c c } 
\text { Partiolio } & \text { Expected Return } & \text { Standard Devintion } \
\hline \text { A } & 9.8 \% & 14.0 \% \
\text { B } & 6.7 \% & 9.8 \% \
\text { C } & 11.2 \% & 18.5 \%
\end{array}$$
-Refer to Exhibit 8.5.Calculate the risk premium per unit of risk for the three portfolios above assuming the risk-free rate is 4.0%.
$\begin{array}{c}
\begin{array}{lll}
\
a.\
b.\
c.\
d.\
e.
\end{array}
\begin{array}{r}
\underline{\text{A}}\
0.068 \
0.414 \
0.700 \
0.300 \
0.650
\end{array}
\begin{array}{r}
\underline{\text{B}}\
0.027 \
0.276 \
0.680 \
0.280 \
0.580
\end{array}
\begin{array}{r}
\underline{\text{C}}\
0.072 \
0.389 \
0.605 \
0.205 \
0.480
\end{array}
\end{array}$

Accepted Answer

B
A: (.098 - .04)/.1

Question 17

The separation theorem divides decisions on ____ from decisions on ____.

Accepted Answer

A)  Lending, borrowing 
B)  Risk, return 
C)  Investing, financing 
D)  Risky assets, risk free assets 
E)  Buying stocks, buying bonds 
A)  Lending, borrowing 
B)  Risk, return 
C)  Investing, financing 
D)  Risky assets, risk free assets 
E)  Buying stocks, buying bonds

Question 18

Assume that as a portfolio manager the beta of your portfolio is 1.3 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?
$\begin{array}{c}
\begin{array}{c}
(1)\
(2)
\end{array}
\begin{array}{l}
\mathrm{RFR}=.08 \
\mathrm{R}_{\mathrm{K}}=.07
\end{array}
\begin{array}{l}
\mathrm{R}_{\mathrm{m}}(\text { proxy })=0.11 \
\mathrm{R}_{\mathrm{m}}(\text { true })=0.14
\end{array}
\end{array}$

Accepted Answer

A)  4.2% lower 
B)  3.6% lower 
C)  3.8% lower 
D)  4.2% higher 
E)  3.6% higher 
A)  4.2% lower 
B)  3.6% lower 
C)  3.8% lower 
D)  4.2% higher 
E)  3.6% higher

Question 19

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.

Accepted Answer

A)  12.65% 
B)  13.55% 
C)  14.45% 
D)  15.05% 
E)  16.34% 
A)  12.65% 
B)  13.55% 
C)  14.45% 
D)  15.05% 
E)  16.34%

Question 20

Beta is a measure of unsystematic risk.

Accepted Answer

A) True 
 B)False

Exam 8: An Introduction to Asset Pricing Models

All portfolios on the capital market line are

Exhibit 8.1 Use the Information Below for the Following Problem(S) Rates of Return Year RA Computer Markat Index 1 13 17 2 9 15 3 -11 6 4 10 8 5 11 10 6 6 12 -Refer to Exhibit 8.1.Compute the correlation coefficient between RA Computer and the Market Index.

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

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

An investor wishes to construct a portfolio by borrowing 30% of his initial wealth at the risk-free rate of 3% and investing all the money in a stock index.The expected return on the stock index is 12%.Calculate the expected return on the portfolio.

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%.Calculate the expected return on the portfolio.

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 covariance between Radtron and the proxy index is

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.

If you borrow money at the RFR and invest the money in the market portfolio,the rate of return on your portfolio will be higher than the market rate of return.

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

Overall the correlation coefficients of industries to the market portfolio vary widely,which is expected due to the wide variance of industry Betas.

A completely diversified portfolio would have a correlation with the market portfolio that is

Theoretically,the correlation coefficient between a completely diversified portfolio and the market portfolio should be

The separation theorem divides decisions on ____ from decisions on ____.

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.

Beta is a measure of unsystematic risk.

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

The separation theorem divides decisions on from decisions on .