Question 1

The introduction of lending and borrowing severely limits the available risk/return opportunities.

Accepted Answer

A) True 
 B)False

Question 2

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.Which of the three portfolios are most likely to be the market portfolio?

Accepted Answer

A)  Portfolio A 
B)  Portfolio B 
C)  Portfolio C 
D)  All of the portfolios are equally likely to be the market portfolio 
E)  There is insufficient information to differentiate between the three portfolios 
A)  Portfolio A 
B)  Portfolio B 
C)  Portfolio C 
D)  All of the portfolios are equally likely to be the market portfolio 
E)  There is insufficient information to differentiate between the three portfolios

Question 3

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

Accepted Answer

A)  Beta; total risk 
B)  Standard deviation; total risk 
C)  Standard deviation; systematic risk 
D)  Unsystematic risk; total risk 
E)  Systematic risk; beta 
A)  Beta; total risk 
B)  Standard deviation; total risk 
C)  Standard deviation; systematic risk 
D)  Unsystematic risk; total risk 
E)  Systematic risk; beta

Question 4

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?
$\begin{array}{c}
\begin{array}{lll}
(1)\
(2)
\end{array}
\begin{array}{lll}
\mathrm{RFR}=.09 \
\mathrm{R}_{\mathrm{K}}=.10
\end{array}
\begin{array}{lll}
\mathrm{R}_{\mathrm{m}}(\mathrm{proxy})=.12 \
\left.\mathrm{R}_{\mathrm{m}} \text { (true }\right)=.13
\end{array}
\end{array}$

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 5

A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty.

Accepted Answer

A) True 
 B)False

Question 6

All of the following are assumptions of the Capital Asset Pricing Model (CAPM)except

Accepted Answer

A)  Investors can borrow and lend any amount at the risk-free rate. 
B)  Investors all have homogeneous expectations regarding expected returns. 
C)  Investors can have different time horizons, daily, weekly, annual, or some other period. 
D)  All investments are infinitely divisible. 
E)  Capital markets are in equilibrium. 
A)  Investors can borrow and lend any amount at the risk-free rate. 
B)  Investors all have homogeneous expectations regarding expected returns. 
C)  Investors can have different time horizons, daily, weekly, annual, or some other period. 
D)  All investments are infinitely divisible. 
E)  Capital markets are in equilibrium.

Question 7

If the assumption that there are no transaction costs is relaxed,the SML will be a

Accepted Answer

A)  Straight line. 
B)  Band of securities. 
C)  Convex curve. 
D)  Concave curve. 
E)  Parabolic curve. 
A)  Straight line. 
B)  Band of securities. 
C)  Convex curve. 
D)  Concave curve. 
E)  Parabolic curve.

Question 8

If an incorrect proxy market portfolio such as the S&P index is used when developing the security market line,the slope of the line will tend to be underestimated.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 is your investment strategy concerning the three stocks?

Accepted Answer

A)  Buy  A  and B,  sell C. 
B)  Sell  A,  B and  C. 
C)  Sell  A and  B, buy  C. 
D)  Buy A , B and  C. 
E)  Buy  A and C , sell  B. 
A)  Buy  A  and B,  sell C. 
B)  Sell  A,  B and  C. 
C)  Sell  A and  B, buy  C. 
D)  Buy A , B and  C. 
E)  Buy  A and C , sell  B.

Question 11

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?
$\begin{array}{c}
\begin{array}{c}
(1)\
(2)
\end{array}
\begin{array}{l}
\mathrm{RFR}=0.0625 \
\mathrm{R}_{\mathrm{K}}=0.078
\end{array}
\begin{array}{l}
\mathrm{R}_{\mathrm{m}}(\text { proxy })=0.12 \
\mathrm{R}_{\mathrm{m}}(\text { true })=0.10
\end{array}
\end{array}$

Accepted Answer

A)  2.53% lower 
B)  3.85% lower 
C)  2.53% higher 
D)  4.4% higher 
E)  3.85% higher 
A)  2.53% lower 
B)  3.85% lower 
C)  2.53% higher 
D)  4.4% higher 
E)  3.85% higher

Question 12

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?
$$\begin{array} { l l l } 
\text { (1) } & R F R = 0.0475 & R _ { m } ( 0 r a x y ) = 0 .0975 \
\text { (2) } & R _ { R } = 0.0325 & R _ { m } ( t u e ) = 0 .0845
\end{array}$$

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 13

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

Accepted Answer

A)  An asset is properly valued if its estimated rate of return is equal to its required rate of return. 
B)  An asset is considered overvalued if its estimated rate of return is below its required rate of return. 
C)  An asset is considered undervalued if its estimated rate of return is above its required rate of return. 
D)  An asset is considered overvalued if its required rate of return is below its estimated rate of return. 
E)  None of the above (that is, all are true statements) 
A)  An asset is properly valued if its estimated rate of return is equal to its required rate of return. 
B)  An asset is considered overvalued if its estimated rate of return is below its required rate of return. 
C)  An asset is considered undervalued if its estimated rate of return is above its required rate of return. 
D)  An asset is considered overvalued if its required rate of return is below its estimated rate of return. 
E)  None of the above (that is, all are true statements)

Question 14

All of the following questions remain to be answered in the real world except

Accepted Answer

A)  What is a good proxy for the market portfolio? 
B)  What happens when you cannot borrow or lend at the risk free rate? 
C)  How good is the capital asset model as a predictor? 
D)  What is the beta of the market portfolio of risky assets? 
E)  What is the stability of beta for individual stocks? 
A)  What is a good proxy for the market portfolio? 
B)  What happens when you cannot borrow or lend at the risk free rate? 
C)  How good is the capital asset model as a predictor? 
D)  What is the beta of the market portfolio of risky assets? 
E)  What is the stability of beta for individual stocks?

Question 15

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 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 16

The market portfolio consists of all

Accepted Answer

A)  New York Stock Exchange stocks. 
B)  High grade stocks and bonds. 
C)  Stocks and bonds. 
D)  U.S. and non-U.S. stocks and bonds. 
E)  Risky assets. 
A)  New York Stock Exchange stocks. 
B)  High grade stocks and bonds. 
C)  Stocks and bonds. 
D)  U.S. and non-U.S. stocks and bonds. 
E)  Risky assets.

Question 17

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 18

The usefulness of CAPM theory is limited in practice due to benchmark error.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements about the risk-free asset is correct?

Accepted Answer

A)  The risk-free asset is defined as an asset for which there is uncertainty regarding the expected rate of return. 
B)  The standard deviation of return for the risk-free asset is equal to zero. 
C)  The standard deviation of return for the risk-free asset cannot be zero, since division by zero is undefined. 
D)  Choices a and b. 
E)  Choices a and c. 
A)  The risk-free asset is defined as an asset for which there is uncertainty regarding the expected rate of return. 
B)  The standard deviation of return for the risk-free asset is equal to zero. 
C)  The standard deviation of return for the risk-free asset cannot be zero, since division by zero is undefined. 
D)  Choices a and b. 
E)  Choices a and c.

Question 20

The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the

Accepted Answer

A)  Security market line. 
B)  Capital asset pricing model. 
C)  Characteristic line. 
D)  Line of least resistance. 
E)  Market line. 
A)  Security market line. 
B)  Capital asset pricing model. 
C)  Characteristic line. 
D)  Line of least resistance. 
E)  Market line.

Exam 8: An Introduction to Asset Pricing Models

The introduction of lending and borrowing severely limits the available risk/return opportunities.

Exhibit 8.5 Use the Information Below for the Following Problem(S) Partiolio Expected Return Standard Devintion A 9.8\% 14.0\% B 6.7\% 9.8\% C 11.2\% 18.5\% -Refer to Exhibit 8.5.Which of the three portfolios are most likely to be the market portfolio?

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

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? (1) (2) =.09 =.10 ()=.12 (true =.13

A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty.

All of the following are assumptions of the Capital Asset Pricing Model (CAPM)except

If the assumption that there are no transaction costs is relaxed,the SML will be a

If an incorrect proxy market portfolio such as the S&P index is used when developing the security market line,the slope of the line will tend to be underestimated.

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

All of the following questions remain to be answered in the real world except

The market portfolio consists of all

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

The usefulness of CAPM theory is limited in practice due to benchmark error.

Which of the following statements about the risk-free asset is correct?

The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the

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