Question 1

The correlation coefficient measures the:

Accepted Answer

A) rate of return of individual stocks. 
B) direction of movement of the return of individual stocks. 
C) degree to which the returns of two stocks move together. 
D) degree of s unique risk present in the standard deviations of a pair of stocks. 
A) rate of return of individual stocks. 
B) direction of movement of the return of individual stocks. 
C) degree to which the returns of two stocks move together. 
D) degree of s unique risk present in the standard deviations of a pair of stocks.

Question 2

One would expect a stock with a beta of 1.25 to increase in returns:

Accepted Answer

A) 25% more than the market in up markets. 
B) 25% more than the market in down markets. 
C) 125% more than the market in up markets. 
D) 125% more than the market in down markets. 
A) 25% more than the market in up markets. 
B) 25% more than the market in down markets. 
C) 125% more than the market in up markets. 
D) 125% more than the market in down markets.

Question 3

Assume the following data for a stock: Risk-free rate = 5%; Beta (market)= 1.4; Beta (size)= 0.4; Beta (book-to-market)= -1.1; Market risk premium = 7%; Size risk premium = 3.7%; and book-to-market risk premium = 5.2%.Calculate the expected return on the stock using the Fama-French three-factor model.

Accepted Answer

A) 22.3% 
B) 7.8% 
C) 10.6% 
D) 20.9% 
A) 22.3% 
B) 7.8% 
C) 10.6% 
D) 20.9%

Question 4

The beta of the market portfolio is:

Accepted Answer

A) 0.0. 
B) +0.5. 
C) -1.0. 
D) +1.0. 
A) 0.0. 
B) +0.5. 
C) -1.0. 
D) +1.0.

Question 5

The capital asset pricing model (CAPM)states which of the following:

Accepted Answer

A) The expected risk premium on an investment is proportional to its beta. 
B) The expected rate of return on an investment is proportional to its beta. 
C) The expected rate of return on an investment is determined entirely by the risk-free rate and the market rate of return. 
D) The expected rate of return on an investment is determined entirely by the risk-free rate. 
A) The expected risk premium on an investment is proportional to its beta. 
B) The expected rate of return on an investment is proportional to its beta. 
C) The expected rate of return on an investment is determined entirely by the risk-free rate and the market rate of return. 
D) The expected rate of return on an investment is determined entirely by the risk-free rate.

Question 6

By combining lending and borrowing at the risk-free rate with efficient portfolios,we can:
I.extend the range of investment possibilities;
II.change the set of efficient portfolios from being curvilinear to a straight line;
III.provide a higher expected return for any level of risk,except for the tangential portfolio and the risk-free asset

Accepted Answer

A) I only 
B) I and II only 
C) I,II,and III 
D) II and III only 
A) I only 
B) I and II only 
C) I,II,and III 
D) II and III only

Question 7

Suppose the beta of Microsoft is 1.13,the risk-free rate is 3%,and the market risk premium is 8%.Calculate the expected return for Microsoft.

Accepted Answer

A) 12.04% 
B) 15.66% 
C) 13.94% 
D) 8.65% 
A) 12.04% 
B) 15.66% 
C) 13.94% 
D) 8.65%

Question 8

Risk-free U.S.Treasury bills have a beta greater than zero.

Accepted Answer

A) True 
 B)False

Question 9

If the market risk premium is 8%,then according to the CAPM,the risk premium of a stock with beta value of 1.7 must be:

Accepted Answer

A) less than 12%. 
B) 12%. 
C) greater than 12%. 
D) cannot be determined. 
A) less than 12%. 
B) 12%. 
C) greater than 12%. 
D) cannot be determined.

Question 10

Florida Company (FC)and Minnesota Company (MC)are both service companies.Their stock returns for the past three years were: FC: -5%,15%,20%; MC: 8%,8%,20%.
Calculate the correlation coefficient between the returns of FC and MC.

Accepted Answer

A) 0.000 
B) -0.655 
C) +0.655 
D) 0.500 
A) 0.000 
B) -0.655 
C) +0.655 
D) 0.500

Question 11

The beta of Treasury bills is:

Accepted Answer

A) +1.0. 
B) +0.5. 
C) -1.0. 
D) 0.0. 
A) +1.0. 
B) +0.5. 
C) -1.0. 
D) 0.0.

Question 12

The distribution of returns,measured over a short interval of time,such as daily returns,is best approximated by the:

Accepted Answer

A) normal distribution. 
B) lognormal distribution. 
C) binomial distribution. 
D) uniform distribution. 
A) normal distribution. 
B) lognormal distribution. 
C) binomial distribution. 
D) uniform distribution.

Question 13

Suppose the beta of Amazon is 2.2,the risk-free rate is 5.5%,and the market risk premium is 8%.Calculate the expected rate of return for Amazon.

Accepted Answer

A) 15.8% 
B) 14.3% 
C) 35.2% 
D) 23.1% 
A) 15.8% 
B) 14.3% 
C) 35.2% 
D) 23.1%

Question 14

According to the CAPM,the market portfolio is a tangency portfolio.

Accepted Answer

A) True 
 B)False

Question 15

If a stock were underpriced,it would plot:

Accepted Answer

A) above the security market line. 
B) below the security market line. 
C) on the security market line. 
D) on the Y-axis. 
A) above the security market line. 
B) below the security market line. 
C) on the security market line. 
D) on the Y-axis.

Question 16

The distribution of returns,measured over long intervals,like annual returns,is best approximated by the:

Accepted Answer

A) normal distribution. 
B) binomial distribution. 
C) lognormal distribution. 
D) uniform distribution. 
A) normal distribution. 
B) binomial distribution. 
C) lognormal distribution. 
D) uniform distribution.

Question 17

Almost all tests of the CAPM have confirmed that it explains stock returns,especially for high-beta stocks.

Accepted Answer

A) True 
 B)False

Question 18

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 18% and a risk-free asset with an interest rate of 4%.Calculate the standard deviation of the returns on the resulting portfolio.

Accepted Answer

A) 8% 
B) 10% 
C) 20% 
D) 9% 
A) 8% 
B) 10% 
C) 20% 
D) 9%

Question 19

On an expected return versus standard deviation diagram,most investors prefer portfolios that appear more towards the top and the left.

Accepted Answer

A) True 
 B)False

Question 20

Overpriced stocks will plot below the security market line.

Accepted Answer

A) True 
 B)False

Exam 8: Portfolio Theory and the Capital Asset Pricing Model

The correlation coefficient measures the:

One would expect a stock with a beta of 1.25 to increase in returns:

The beta of the market portfolio is:

The capital asset pricing model (CAPM)states which of the following:

Suppose the beta of Microsoft is 1.13,the risk-free rate is 3%,and the market risk premium is 8%.Calculate the expected return for Microsoft.

Risk-free U.S.Treasury bills have a beta greater than zero.

If the market risk premium is 8%,then according to the CAPM,the risk premium of a stock with beta value of 1.7 must be:

Florida Company (FC)and Minnesota Company (MC)are both service companies.Their stock returns for the past three years were: FC: -5%,15%,20%; MC: 8%,8%,20%. Calculate the correlation coefficient between the returns of FC and MC.

The beta of Treasury bills is:

The distribution of returns,measured over a short interval of time,such as daily returns,is best approximated by the:

Suppose the beta of Amazon is 2.2,the risk-free rate is 5.5%,and the market risk premium is 8%.Calculate the expected rate of return for Amazon.

According to the CAPM,the market portfolio is a tangency portfolio.

If a stock were underpriced,it would plot:

The distribution of returns,measured over long intervals,like annual returns,is best approximated by the:

Almost all tests of the CAPM have confirmed that it explains stock returns,especially for high-beta stocks.

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 18% and a risk-free asset with an interest rate of 4%.Calculate the standard deviation of the returns on the resulting portfolio.

On an expected return versus standard deviation diagram,most investors prefer portfolios that appear more towards the top and the left.

Overpriced stocks will plot below the security market line.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters