Question 1

An arbitrage opportunity exists if an investor can construct a _________ investment portfolio that will yield a sure profit.

Accepted Answer

A)  positive 
B)  negative 
C)  zero 
D)  all of these 
E)  none of these 
A)  positive 
B)  negative 
C)  zero 
D)  all of these 
E)  none of these

Question 2

A well-diversified portfolio is defined as

Accepted Answer

A)  one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. 
B)  one that contains securities from at least three different industry sectors. 
C)  a portfolio whose factor beta equals 1.0. 
D)  a portfolio that is equally weighted. 
E)  all of these. 
A)  one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. 
B)  one that contains securities from at least three different industry sectors. 
C)  a portfolio whose factor beta equals 1.0. 
D)  a portfolio that is equally weighted. 
E)  all of these.

Question 3

Name three variables that Chen,Roll,and Ross used to measure the impact of macroeconomic factors on security returns.Briefly explain the reasoning behind their model.

Accepted Answer

The factors they considered were IP (the

Question 4

Covariances between security returns tend to be

Accepted Answer

A)  positive because of SEC regulations. 
B)  positive because of Exchange regulations. 
C)  positive because of economic forces that affect many firms. 
D)  negative because of SEC regulations 
E)  negative because of economic forces that affect many firms. 
A)  positive because of SEC regulations. 
B)  positive because of Exchange regulations. 
C)  positive because of economic forces that affect many firms. 
D)  negative because of SEC regulations 
E)  negative because of economic forces that affect many firms.

Question 5

The factor F in the APT model represents

Accepted Answer

A)  firm-specific risk. 
B)  the sensitivity of the firm to that factor. 
C)  a factor that affects all security returns. 
D)  the deviation from its expected value of a factor that affects all security returns. 
E)  a random amount of return attributable to firm events. 
A)  firm-specific risk. 
B)  the sensitivity of the firm to that factor. 
C)  a factor that affects all security returns. 
D)  the deviation from its expected value of a factor that affects all security returns. 
E)  a random amount of return attributable to firm events.

Question 6

To take advantage of an arbitrage opportunity,an investor would
I.construct a zero investment portfolio that will yield a sure profit.
II.construct a zero beta investment portfolio that will yield a sure profit.
III.make simultaneous trades in two markets without any net investment.
IV.short sell the asset in the low-priced market and buy it in the high-priced market.

Accepted Answer

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

Question 7

Consider the one-factor APT.The variance of returns on the factor portfolio is 6%.The beta of a well-diversified portfolio on the factor is 1.1.The variance of returns on the well-diversified portfolio is approximately __________.

Accepted Answer

A)  3.6% 
B)  6.0% 
C)  7.3% 
D)  10.1% 
E)  none of these 
A)  3.6% 
B)  6.0% 
C)  7.3% 
D)  10.1% 
E)  none of these

Question 8

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.

Accepted Answer

A)  100,100 
B)  100,4950 
C)  4950,100 
D)  4950,4950 
E)  none of these 
A)  100,100 
B)  100,4950 
C)  4950,100 
D)  4950,4950 
E)  none of these

Question 9

In the context of the Arbitrage Pricing Theory,as a well-diversified portfolio becomes larger its nonsystematic risk approaches

Accepted Answer

A)  one. 
B)  infinity. 
C)  zero. 
D)  negative one. 
E)  none of these. 
A)  one. 
B)  infinity. 
C)  zero. 
D)  negative one. 
E)  none of these.

Question 10

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the σ of your portfolio was 0.20 and σM was 0.16,the β of the portfolio would be approximately ________.

Accepted Answer

A)  0.64 
B)  0.80 
C)  1.25 
D)  1.56 
E)  none of these 
A)  0.64 
B)  0.80 
C)  1.25 
D)  1.56 
E)  none of these

Question 11

___________ a relationship between expected return and risk.

Accepted Answer

A)  APT stipulates 
B)  CAPM stipulates 
C)  Both CAPM and APT stipulate 
D)  Neither CAPM nor APT stipulate 
E)  No pricing model has found 
A)  APT stipulates 
B)  CAPM stipulates 
C)  Both CAPM and APT stipulate 
D)  Neither CAPM nor APT stipulate 
E)  No pricing model has found

Question 12

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 18%.The standard deviation on the factor portfolio is 16%.The beta of the well-diversified portfolio is approximately __________.

Accepted Answer

A)  0.80 
B)  1.13 
C)  1.25 
D)  1.56 
E)  none of these 
A)  0.80 
B)  1.13 
C)  1.25 
D)  1.56 
E)  none of these

Question 13

The index model for stock A has been estimated with the following result:
RA = 0.01 + 0.9RM + eA
If σM = 0.25 and R2A = 0.25,the standard deviation of return of stock A is _________.

Accepted Answer

A)  0.2025 
B)  0.2500 
C)  0.4500 
D)  0.8100 
E)  none of these 
A)  0.2025 
B)  0.2500 
C)  0.4500 
D)  0.8100 
E)  none of these

Question 14

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

Accepted Answer

A)  factor risk. 
B)  non-factor risk. 
C)  standard deviation of returns. 
D)  both a and b are true. 
E)  none of these are true. 
A)  factor risk. 
B)  non-factor risk. 
C)  standard deviation of returns. 
D)  both a and b are true. 
E)  none of these are true.

Question 15

Security A has a beta of 1.0 and an expected return of 12%.Security B has a beta of 0.75 and an expected return of 11%.The risk-free rate is 6%.Explain the arbitrage opportunity that exists;explain how an investor can take advantage of it.Give specific details about how to form the portfolio,what to buy and what to sell.B.The investor can accomplish this by choosing .75 as the weight in A and .25 in the risk-free asset.This portfolio would have E(rp)= 0.75(12%)+ 0.25(6%)= 10.5%,which is less than B's 11% expected return.The investor should buy B and finance the purchase by short selling A and borrowing at the risk-free asset.

Accepted Answer

An arbitrage opportunity exists because

Question 16

Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements?
I.the expected return-beta relationship is maintained for all but a small number of well-diversified portfolios.
II.the expected return-beta relationship is maintained for all well-diversified portfolios.
III.the expected return-beta relationship is maintained for all but a small number of individual securities.
IV.the expected return-beta relationship is maintained for all individual securities.

Accepted Answer

A)  I and III are correct. 
B)  I and IV are correct. 
C)  II and III are correct. 
D)  II and IV are correct. 
E)  Only I is correct. 
A)  I and III are correct. 
B)  I and IV are correct. 
C)  II and III are correct. 
D)  II and IV are correct. 
E)  Only I is correct.

Question 17

The Security Characteristic Line (SCL)associated with the single-index model is a plot of

Accepted Answer

A)  the security's returns on the vertical axis and the market index's returns on the horizontal axis. 
B)  the market index's returns on the vertical axis and the security's returns on the horizontal axis. 
C)  the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis. 
D)  the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis. 
E)  the security's returns on the vertical axis and Beta on the horizontal axis. 
A)  the security's returns on the vertical axis and the market index's returns on the horizontal axis. 
B)  the market index's returns on the vertical axis and the security's returns on the horizontal axis. 
C)  the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis. 
D)  the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis. 
E)  the security's returns on the vertical axis and Beta on the horizontal axis.

Question 18

Which of the following factors was used by Fama and French in their multi-factor model?

Accepted Answer

A)  Return on the market index 
B)  Excess return of small stocks over large stocks 
C)  Excess return of high book-to-market stocks over low book-to-market stocks 
D)  All of these factors were included in their model. 
E)  None of these factors were included in their model. 
A)  Return on the market index 
B)  Excess return of small stocks over large stocks 
C)  Excess return of high book-to-market stocks over low book-to-market stocks 
D)  All of these factors were included in their model. 
E)  None of these factors were included in their model.

Question 19

The index model has been estimated for stock A with the following results:
RA = 0.01 + 0.8RM + eA
ΣM = 0.20 σ(eA)= 0.10
The standard deviation of the return for stock A is __________.

Accepted Answer

A)  0.0356 
B)  0.1886 
C)  0.1600 
D)  0.6400 
E)  none of these 
A)  0.0356 
B)  0.1886 
C)  0.1600 
D)  0.6400 
E)  none of these

An arbitrage opportunity exists if an investor can construct a _________ investment portfolio that will yield a sure profit.

A well-diversified portfolio is defined as

Name three variables that Chen,Roll,and Ross used to measure the impact of macroeconomic factors on security returns.Briefly explain the reasoning behind their model.

Covariances between security returns tend to be

The factor F in the APT model represents

Consider the one-factor APT.The variance of returns on the factor portfolio is 6%.The beta of a well-diversified portfolio on the factor is 1.1.The variance of returns on the well-diversified portfolio is approximately __________.

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate ___ expected returns and _ variances of returns.

In the context of the Arbitrage Pricing Theory,as a well-diversified portfolio becomes larger its nonsystematic risk approaches

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the σ of your portfolio was 0.20 and σ_M was 0.16,the β of the portfolio would be approximately ________.

___________ a relationship between expected return and risk.

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 18%.The standard deviation on the factor portfolio is 16%.The beta of the well-diversified portfolio is approximately __________.

The index model for stock A has been estimated with the following result: R_A = 0.01 + 0.9R_M + e_A If σ_M = 0.25 and R²_A = 0.25,the standard deviation of return of stock A is _________.

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

The Security Characteristic Line (SCL)associated with the single-index model is a plot of

Which of the following factors was used by Fama and French in their multi-factor model?

The index model has been estimated for stock A with the following results: R_A = 0.01 + 0.8R_M + e_A Σ_M = 0.20 σ(e_A)= 0.10 The standard deviation of the return for stock A is __________.

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

Exam 8: The Efficient Market Hypothesis

An arbitrage opportunity exists if an investor can construct a _________ investment portfolio that will yield a sure profit.

A well-diversified portfolio is defined as

Name three variables that Chen,Roll,and Ross used to measure the impact of macroeconomic factors on security returns.Briefly explain the reasoning behind their model.

Covariances between security returns tend to be

The factor F in the APT model represents

Consider the one-factor APT.The variance of returns on the factor portfolio is 6%.The beta of a well-diversified portfolio on the factor is 1.1.The variance of returns on the well-diversified portfolio is approximately __________.

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.

In the context of the Arbitrage Pricing Theory,as a well-diversified portfolio becomes larger its nonsystematic risk approaches

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the σ of your portfolio was 0.20 and σM was 0.16,the β of the portfolio would be approximately ________.

___________ a relationship between expected return and risk.

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 18%.The standard deviation on the factor portfolio is 16%.The beta of the well-diversified portfolio is approximately __________.

The index model for stock A has been estimated with the following result: RA = 0.01 + 0.9RM + eA If σM = 0.25 and R2A = 0.25,the standard deviation of return of stock A is _________.

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

The Security Characteristic Line (SCL)associated with the single-index model is a plot of

Which of the following factors was used by Fama and French in their multi-factor model?

The index model has been estimated for stock A with the following results: RA = 0.01 + 0.8RM + eA ΣM = 0.20 σ(eA)= 0.10 The standard deviation of the return for stock A is __________.

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

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate ___ expected returns and _ variances of returns.

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the σ of your portfolio was 0.20 and σ_M was 0.16,the β of the portfolio would be approximately ________.

The index model for stock A has been estimated with the following result: R_A = 0.01 + 0.9R_M + e_A If σ_M = 0.25 and R²_A = 0.25,the standard deviation of return of stock A is _________.

The index model has been estimated for stock A with the following results: R_A = 0.01 + 0.8R_M + e_A Σ_M = 0.20 σ(e_A)= 0.10 The standard deviation of the return for stock A is __________.