Question 1

If a firm's beta was calculated as 1.3 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

Accepted Answer

A) less than 1.0 but greater than zero. 
B) between 0.3 and 0.9. 
C) between 1.0 and 1.3. 
D) greater than 1.3. 
E) zero or less. 
A) less than 1.0 but greater than zero. 
B) between 0.3 and 0.9. 
C) between 1.0 and 1.3. 
D) greater than 1.3. 
E) zero or less.

Question 2

The beta of Apple stock has been estimated as 2.3 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of

Accepted Answer

A) 2.20. 
B) 1.87. 
C) 2.13. 
D) 1.66. 
A) 2.20. 
B) 1.87. 
C) 2.13. 
D) 1.66.

Question 3

Suppose the following equation best describes the evolution of β over time: βt = 0.4 + 0.6βt - 1.
If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A) 0.45 
B) 0.60 
C) 0.70 
D) 0.94 
A) 0.45 
B) 0.60 
C) 0.70 
D) 0.94

Question 4

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.8RM + eA.
RB = 0.02 + 1.2RM + eB.
ΣM = 0.20; σ(eA) = 0.20; σ(eB) = 0.10.
The standard deviation for stock A is

Accepted Answer

A) 0.0656. 
B) 0.0676. 
C) 0.2561. 
D) 0.2600. 
A) 0.0656. 
B) 0.0676. 
C) 0.2561. 
D) 0.2600.

Question 5

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 500 stocks in order to construct a mean-variance efficient portfolio constrained by 500 investments.They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimates for the variance of the macroeconomic factor.

Accepted Answer

A) 500; 1 
B) 500; 500 
C) 124,750; 1 
D) 124,750; 500 
E) 250,000; 500 
A) 500; 1 
B) 500; 500 
C) 124,750; 1 
D) 124,750; 500 
E) 250,000; 500

Question 6

As diversification increases, the unsystematic risk of a portfolio approaches

Accepted Answer

A) 1. 
B) 0. 
C) infinity. 
D) (n - 1) × n. 
A) 1. 
B) 0. 
C) infinity. 
D) (n - 1) × n.

Question 7

Suppose the following equation best describes the evolution of β over time: βt = 0.18 + 0.63βt - 1.
If a stock had a β of 1.09 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A) 0.87 
B) 0.18 
C) 0.63 
D) 0.81 
A) 0.87 
B) 0.18 
C) 0.63 
D) 0.81

Question 8

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments.They will need to calculate ____________ covariances.

Accepted Answer

A) 90 
B) 125 
C) 7,750 
D) 15,625 
A) 90 
B) 125 
C) 7,750 
D) 15,625

Question 9

The index model for stock B has been estimated with the following result: RB = 0.01 + 1.1RM + eB.
If σM = 0.20 and R2B = 0.50, the standard deviation of the return on stock B is

Accepted Answer

A) 0.1111. 
B) 0.2111. 
C) 0.3111. 
D) 0.4111. 
A) 0.1111. 
B) 0.2111. 
C) 0.3111. 
D) 0.4111.

Question 10

The beta of a stock has been estimated as 1.4 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of

Accepted Answer

A) 1.27. 
B) 1.32. 
C) 1.13. 
D) 1.0. 
A) 1.27. 
B) 1.32. 
C) 1.13. 
D) 1.0.

Question 11

Suppose the following equation best describes the evolution of β over time: βt = 0.25 + 0.75βt - 1.
If a stock had a β of 0.6 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A) 0.45 
B) 0.60 
C) 0.70 
D) 0.75 
A) 0.45 
B) 0.60 
C) 0.70 
D) 0.75

Question 12

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 ____________ covariances.

Accepted Answer

A) 45 
B) 100 
C) 4,950 
D) 10,000 
A) 45 
B) 100 
C) 4,950 
D) 10,000

Question 13

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 a common method to derive adjusted betas.

Accepted Answer

A) 15.0% 
B) 15.5% 
C) 16.0% 
D) 16.8% 
A) 15.0% 
B) 15.5% 
C) 16.0% 
D) 16.8%

Question 14

Rosenberg and Guy found that ___________ helped to predict firms' betas.

Accepted Answer

A) debt/asset ratios 
B) market capitalization 
C) variance of earnings 
D) All of the options 
E) None of the options 
A) debt/asset ratios 
B) market capitalization 
C) variance of earnings 
D) All of the options 
E) None of the options

Question 15

If a firm's beta was calculated as 0.8 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

Accepted Answer

A) less than 0.8 but greater than zero. 
B) between 1.0 and 1.8. 
C) between 0.8 and 1.0. 
D) greater than 1.8. 
E) zero or less. 
A) less than 0.8 but greater than zero. 
B) between 1.0 and 1.8. 
C) between 0.8 and 1.0. 
D) greater than 1.8. 
E) zero or less.

Question 16

Suppose the following equation best describes the evolution of β over time: βt = 0.31 + 0.82βt - 1.
If a stock had a β of 0.88 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A) 0.88 
B) 0.82 
C) 0.31 
D) 1.03 
A) 0.88 
B) 0.82 
C) 0.31 
D) 1.03

Question 17

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments.They will need to calculate ____________ covariances.

Accepted Answer

A) 12 
B) 150 
C) 22,500 
D) 11,175 
A) 12 
B) 150 
C) 22,500 
D) 11,175

Question 18

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. 
A) 0.0356. 
B) 0.1886. 
C) 0.1600. 
D) 0.6400.

Question 19

Consider the single-index model.The alpha of a stock is 0%.The return on the market index is 16%.The risk-free rate of return is 5%.The stock earns a return that exceeds the risk-free rate by 11% and there are no firm-specific events affecting the stock performance.The β of the stock is

Accepted Answer

A) 0.67. 
B) 0.75. 
C) 1.0. 
D) 1.33. 
E) 1.50. 
A) 0.67. 
B) 0.75. 
C) 1.0. 
D) 1.33. 
E) 1.50.

Question 20

The index model has been estimated for stocks A and B with the following results: RA = 0.03 + 0.7RM + eA.
RB = 0.01 + 0.9RM + eB.
ΣM = 0.35; 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) 0.0772. 
E) 0.4000. 
A) 0.0384. 
B) 0.0406. 
C) 0.1920. 
D) 0.0772. 
E) 0.4000.

Exam 8: Index Models

If a firm's beta was calculated as 1.3 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

The beta of Apple stock has been estimated as 2.3 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of

Suppose the following equation best describes the evolution of β over time: βt = 0.4 + 0.6βt - 1. If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.8RM + eA. RB = 0.02 + 1.2RM + eB. ΣM = 0.20; σ(eA) = 0.20; σ(eB) = 0.10. The standard deviation for stock A is

As diversification increases, the unsystematic risk of a portfolio approaches

Suppose the following equation best describes the evolution of β over time: βt = 0.18 + 0.63βt - 1. If a stock had a β of 1.09 last year, you would forecast the β to be _______ in the coming year.

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments.They will need to calculate ____________ covariances.

The index model for stock B has been estimated with the following result: RB = 0.01 + 1.1RM + eB. If σM = 0.20 and R2B = 0.50, the standard deviation of the return on stock B is

The beta of a stock has been estimated as 1.4 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of

Suppose the following equation best describes the evolution of β over time: βt = 0.25 + 0.75βt - 1. If a stock had a β of 0.6 last year, you would forecast the β to be _______ in the coming year.

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 ____________ covariances.

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 a common method to derive adjusted betas.

Rosenberg and Guy found that ___________ helped to predict firms' betas.

If a firm's beta was calculated as 0.8 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

Suppose the following equation best describes the evolution of β over time: βt = 0.31 + 0.82βt - 1. If a stock had a β of 0.88 last year, you would forecast the β to be _______ in the coming year.

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments.They will need to calculate ____________ covariances.

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

Consider the single-index model.The alpha of a stock is 0%.The return on the market index is 16%.The risk-free rate of return is 5%.The stock earns a return that exceeds the risk-free rate by 11% and there are no firm-specific events affecting the stock performance.The β of the stock is

The index model has been estimated for stocks A and B with the following results: RA = 0.03 + 0.7RM + eA. RB = 0.01 + 0.9RM + eB. ΣM = 0.35; σ(eA) = 0.20; σ(eB) = 0.10. The covariance between the returns on stocks A and B is

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Suppose the following equation best describes the evolution of β over time: β_t = 0.4 + 0.6β_t _{- 1}. If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.

The index model has been estimated for stocks A and B with the following results: R_A = 0.01 + 0.8R_M + e_A. R_B = 0.02 + 1.2R_M + e_B. Σ_M = 0.20; σ(e_A) = 0.20; σ(e_B) = 0.10. The standard deviation for stock A is

Suppose the following equation best describes the evolution of β over time: β_t = 0.18 + 0.63β_t _{- 1}. If a stock had a β of 1.09 last year, you would forecast the β to be _______ in the coming year.

The index model for stock B has been estimated with the following result: R_B = 0.01 + 1.1R_M + e_B. If σ_M = 0.20 and R²_B = 0.50, the standard deviation of the return on stock B is

Suppose the following equation best describes the evolution of β over time: β_t = 0.25 + 0.75β_t _{- 1}. If a stock had a β of 0.6 last year, you would forecast the β to be _______ in the coming year.

Suppose the following equation best describes the evolution of β over time: β_t = 0.31 + 0.82β_t _{- 1}. If a stock had a β of 0.88 last year, you would forecast the β to be _______ in the coming year.

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

The index model has been estimated for stocks A and B with the following results: R_A = 0.03 + 0.7R_M + e_A. R_B = 0.01 + 0.9R_M + e_B. Σ_M = 0.35; σ(e_A) = 0.20; σ(e_B) = 0.10. The covariance between the returns on stocks A and B is