Exam 8: Index Models

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

As diversification increases, the unique risk of a portfolio approaches

An analyst estimates the index model for a stock using regression analysis involving total returns.The estimated the intercept in the regression equation is 6% and the β is 0.5.The risk-free rate of return is 12%.The true β of the stock is

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

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

Consider the single-index model.The alpha of a stock is 0%.The return on the market index is 10%.The risk-free rate of return is 5%.The stock earns a return that exceeds the risk-free rate by 5%, and there are no firm-specific events affecting the stock performance.The β of the stock is

As diversification increases, the standard deviation of a portfolio approaches

As diversification increases, the firm-specific risk of a portfolio approaches

The expected impact of unanticipated macroeconomic events on a security's return during the period is

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

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

Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters.

If a firm's beta was calculated as 1.35 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

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 0.25 and σ_M was 0.21, the β of the portfolio would be approximately ________.

The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of

The security characteristic line (SCL)

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 0.14 and σ_M was 0.19, the β of the portfolio would be approximately

In their study about predicting beta coefficients, which of the following did Rosenberg and Guy find to be factors that influence beta I. Industry group II. Variance of cash flow III. Dividend yield IV. Growth in earnings per share

If a firm's beta was calculated as 0.6 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

Analysts may use regression analysis to estimate the index model for a stock.When doing so, the intercept of the regression line is an estimate of