Question 1

The intercept calculated by BMO Nesbitt Burns in the regression equations is equal to

Accepted Answer

A)  α in the CAPM 
B)  α + rf(1 + β) 
C)  α + rf(1 - β) 
D)  1 - α 
E)  none of these 
A)  α in the CAPM 
B)  α + rf(1 + β) 
C)  α + rf(1 - β) 
D)  1 - α 
E)  none of these C

Question 2

BMO Nesbitt Burns estimates the index model for a stock using regression analysis involving total returns.They estimated the intercept in the regression equation at 6% and the β at 0.5.The risk-free rate of return is 12%.The true α of the stock is ________.

Accepted Answer

A)  0% 
B)  3% 
C)  6% 
D)  9% 
E)  none of these 
A)  0% 
B)  3% 
C)  6% 
D)  9% 
E)  none of these A

Question 3

An important difference between CAPM and APT is

Accepted Answer

A)  CAPM depends on risk-return dominance;APT depends on a no arbitrage condition. 
B)  CAPM assumes many small changes are required to bring the market back to equilibrium;APT assumes a few large changes are required to bring the market back to equilibrium. 
C)  implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. 
D)  all of these are true. 
E)  both a and b are true. 
A)  CAPM depends on risk-return dominance;APT depends on a no arbitrage condition. 
B)  CAPM assumes many small changes are required to bring the market back to equilibrium;APT assumes a few large changes are required to bring the market back to equilibrium. 
C)  implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. 
D)  all of these are true. 
E)  both a and b are true. E

Question 4

An investor will take as large a position as possible when an equilibrium price relationship is violated.This is an example of ______________.

Accepted Answer

A)  a dominance argument 
B)  the mean-variance efficiency frontier 
C)  a risk-free arbitrage 
D)  the capital asset pricing model 
E)  none of these 
A)  a dominance argument 
B)  the mean-variance efficiency frontier 
C)  a risk-free arbitrage 
D)  the capital asset pricing model 
E)  none of these

Question 5

The index model has been estimated for stocks A and B with the following results:
RA = 0.01 + 0.5RM + eA
RB = 0.02 + 1.3RM + eB
ΣM = 0.25 σ(eA)= 0.20 σ(eB)= 0.10
The covariance between the returns on stocks A and B is ___________.

Accepted Answer

A)  0.0384 
B)  0.0406 
C)  0.1920 
D)  0.0050 
E)  0.4000 
A)  0.0384 
B)  0.0406 
C)  0.1920 
D)  0.0050 
E)  0.4000

Question 6

Discuss the "adjusted betas" published by Merrill Lynch in Security Risk Evaluation.

Accepted Answer

Over time,security betas move toward 1,a

Question 7

The term "arbitrage" refers to

Accepted Answer

A)  buying low and selling high. 
B)  short selling high and buying low. 
C)  earning risk-free economic profits. 
D)  negotiating for favorable brokerage fees. 
E)  hedging your portfolio through the use of options. 
A)  buying low and selling high. 
B)  short selling high and buying low. 
C)  earning risk-free economic profits. 
D)  negotiating for favorable brokerage fees. 
E)  hedging your portfolio through the use of options.

Question 8

Which of the following is(are)true regarding the APT?
I.The Security Market Line does not apply to the APT.
II.More than one factor can be important in determining returns.
III.Almost all individual securities satisfy the APT relationship.
IV.It doesn't rely on the market portfolio that contains all assets.

Accepted Answer

A)  II,III,and IV 
B)  II and IV 
C)  II and III 
D)  I,II,and IV 
E)  I,II,III,and IV 
A)  II,III,and IV 
B)  II and IV 
C)  II and III 
D)  I,II,and IV 
E)  I,II,III,and IV

Question 9

Discuss the similarities and the differences between the CAPM and the single-factor model.

Accepted Answer

Both models relate security returns to r

Question 10

The feature of the APT that offers the greatest potential advantage over the CAPM is the ______________.

Accepted Answer

A)  use of several factors instead of a single market index to explain the risk-return relationship 
B)  identification of anticipated changes in production,inflation and term structure as key factors in explaining the risk-return relationship 
C)  superior measurement of the risk-free rate of return over historical time periods 
D)  variability of coefficients of sensitivity to the APT factors for a given asset over time 
E)  none of these 
A)  use of several factors instead of a single market index to explain the risk-return relationship 
B)  identification of anticipated changes in production,inflation and term structure as key factors in explaining the risk-return relationship 
C)  superior measurement of the risk-free rate of return over historical time periods 
D)  variability of coefficients of sensitivity to the APT factors for a given asset over time 
E)  none of these

Question 11

A single-index model uses ___________ as a proxy for the systematic risk factor.

Accepted Answer

A)  a market index,such as the S&P 500 or the S&P/TSX Composite 
B)  the current account deficit 
C)  the growth rate in GNP 
D)  the unemployment rate 
E)  none of these 
A)  a market index,such as the S&P 500 or the S&P/TSX Composite 
B)  the current account deficit 
C)  the growth rate in GNP 
D)  the unemployment rate 
E)  none of these

Question 12

If a firm's beta was calculated as 0.6 in a regression equation,Merrill Lynch would state the adjusted beta at a number

Accepted Answer

A)  less than 0.6 but greater than zero. 
B)  between 0.6 and 1.0. 
C)  between 1.0 and 1.6. 
D)  greater than 1.6. 
E)  zero or less. 
A)  less than 0.6 but greater than zero. 
B)  between 0.6 and 1.0. 
C)  between 1.0 and 1.6. 
D)  greater than 1.6. 
E)  zero or less.

Question 13

A zero-investment portfolio with a positive expected return arises when _________.

Accepted Answer

A)  an investor has downside risk only 
B)  the law of prices is not violated 
C)  the opportunity set is not tangent to the capital allocation line 
D)  a risk-free arbitrage opportunity exists 
E)  none of these 
A)  an investor has downside risk only 
B)  the law of prices is not violated 
C)  the opportunity set is not tangent to the capital allocation line 
D)  a risk-free arbitrage opportunity exists 
E)  none of these

Question 14

If the index model is valid,_________ would be helpful in determining the covariance between assets K and L.

Accepted Answer

A)  βk 
B)  βL 
C)  σM 
D)  all of these 
E)  none of these 
A)  βk 
B)  βL 
C)  σM 
D)  all of these 
E)  none of these

Question 15

In the single-index model represented by the equation ri= E(ri)+ βiF + ei,the term ei represents

Accepted Answer

A)  the impact of unanticipated macroeconomic events on security i's return. 
B)  the impact of unanticipated firm-specific events on security i's return. 
C)  the impact of anticipated macroeconomic events on security i's return. 
D)  the impact of anticipated firm-specific events on security i's return. 
E)  the impact of changes in the market on security i's return. 
A)  the impact of unanticipated macroeconomic events on security i's return. 
B)  the impact of unanticipated firm-specific events on security i's return. 
C)  the impact of anticipated macroeconomic events on security i's return. 
D)  the impact of anticipated firm-specific events on security i's return. 
E)  the impact of changes in the market on security i's return.

Question 16

The index model was first suggested by ____________.

Accepted Answer

A)  Graham 
B)  Markowitz 
C)  Miller 
D)  Sharpe 
E)  none of these 
A)  Graham 
B)  Markowitz 
C)  Miller 
D)  Sharpe 
E)  none of these

Question 17

The single-index model

Accepted Answer

A)  greatly reduces the number of required calculations,relative to those required by the Markowitz model. 
B)  enhances the understanding of systematic versus nonsystematic risk. 
C)  greatly increases the number of required calculations,relative to those required by the Markowitz model. 
D)  a and b. 
E)  b and c. 
A)  greatly reduces the number of required calculations,relative to those required by the Markowitz model. 
B)  enhances the understanding of systematic versus nonsystematic risk. 
C)  greatly increases the number of required calculations,relative to those required by the Markowitz model. 
D)  a and b. 
E)  b and c.

Question 18

Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%.The unadjusted β of Mobil stock is 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use Merrill Lynch adjusted betas.

Accepted Answer

A)  15.0% 
B)  15.5% 
C)  16.0% 
D)  16.8% 
E)  none of these 
A)  15.0% 
B)  15.5% 
C)  16.0% 
D)  16.8% 
E)  none of these

Question 19

In a factor model,the return on a stock in a particular period will be related to _________.

Accepted Answer

A)  firm-specific events 
B)  macroeconomic events 
C)  the error term 
D)  both a and b 
E)  neither a nor b 
A)  firm-specific events 
B)  macroeconomic events 
C)  the error term 
D)  both a and b 
E)  neither a nor b

Question 20

Advantage(s)of the APT is(are)

Accepted Answer

A)  that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios. 
B)  that the model does not require a specific benchmark market portfolio. 
C)  that risk need not be considered. 
D)  a and b. 
E)  b and c. 
A)  that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios. 
B)  that the model does not require a specific benchmark market portfolio. 
C)  that risk need not be considered. 
D)  a and b. 
E)  b and c.

Exam 8: The Efficient Market Hypothesis

The intercept calculated by BMO Nesbitt Burns in the regression equations is equal to

BMO Nesbitt Burns estimates the index model for a stock using regression analysis involving total returns.They estimated the intercept in the regression equation at 6% and the β at 0.5.The risk-free rate of return is 12%.The true α of the stock is ________.

An important difference between CAPM and APT is

An investor will take as large a position as possible when an equilibrium price relationship is violated.This is an example of ______________.

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.5RM + eA RB = 0.02 + 1.3RM + eB ΣM = 0.25 σ(eA)= 0.20 σ(eB)= 0.10 The covariance between the returns on stocks A and B is ___________.

Discuss the "adjusted betas" published by Merrill Lynch in Security Risk Evaluation.

The term "arbitrage" refers to

Discuss the similarities and the differences between the CAPM and the single-factor model.

The feature of the APT that offers the greatest potential advantage over the CAPM is the ______________.

A single-index model uses ___________ as a proxy for the systematic risk factor.

If a firm's beta was calculated as 0.6 in a regression equation,Merrill Lynch would state the adjusted beta at a number

A zero-investment portfolio with a positive expected return arises when _________.

If the index model is valid,_________ would be helpful in determining the covariance between assets K and L.

In the single-index model represented by the equation ri= E(ri)+ βiF + ei,the term ei represents

The index model was first suggested by ____________.

The single-index model

Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%.The unadjusted β of Mobil stock is 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use Merrill Lynch adjusted betas.

In a factor model,the return on a stock in a particular period will be related to _________.

Advantage(s)of the APT is(are)

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

The index model has been estimated for stocks A and B with the following results: R_A = 0.01 + 0.5R_M + e_A R_B = 0.02 + 1.3R_M + e_B Σ_M = 0.25 σ(e_A)= 0.20 σ(e_B)= 0.10 The covariance between the returns on stocks A and B is ___________.

In the single-index model represented by the equation ri= E(r_i)+ β_iF + e_i,the term e_i represents