Question 1

Underpriced stocks will plot above the security market line.

Accepted Answer

A) True 
 B)False  True

Question 2

Suppose the beta of Exxon-Mobil is 0.65, the risk-free rate is 4 percent, and the expected market rate of return is 14 percent.Calculate the expected rate of return on Exxon-Mobil.

Accepted Answer

A) 12.6 percent 
B) 10.5 percent 
C) 13.1 percent 
D) 6.5 percent 
A) 12.6 percent 
B) 10.5 percent 
C) 13.1 percent 
D) 6.5 percent B

Question 3

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

Accepted Answer

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

Question 4

Briefly explain the Fama-French three-factor model.

Accepted Answer

The three-factor model was developed by

Question 5

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were as follows: FC: -5 percent, 15 percent, 20 percent; MC: 8 percent, 8 percent, 20 percent. 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 6

According to the CAPM, all investments plot along the security market line.

Accepted Answer

A) True 
 B)False

Question 7

Investments B and C both have the same standard deviation of 20 percent and have the same correlation to the market portfolio.If the expected return on B is 15 percent and that of C is 18 percent, then the investors would

Accepted Answer

A) prefer B to C. 
B) prefer C to B. 
C) reject both B and C. 
D) The answer cannot be determined without knowing investors' risk preferences. 
A) prefer B to C. 
B) prefer C to B. 
C) reject both B and C. 
D) The answer cannot be determined without knowing investors' risk preferences.

Question 8

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were as follows: FC: -5 percent, 15 percent, 20 percent; MC: 8 percent, 8 percent, 20 percent. Calculate the mean return for each company.

Accepted Answer

A) FC: 12 percent; MC: 6 percent 
B) FC: 10 percent; MC: 12 percent 
C) FC: 20 percent; MC: 32 percent 
D) None of the options are correct. 
A) FC: 12 percent; MC: 6 percent 
B) FC: 10 percent; MC: 12 percent 
C) FC: 20 percent; MC: 32 percent 
D) None of the options are correct.

Question 9

If the correlation coefficient between Stock A and Stock B is +0.6, what is the correlation coefficient between Stock B with Stock A?

Accepted Answer

A) +0.6 
B) -0.6 
C) +0.4 
D) -0.4 
A) +0.6 
B) -0.6 
C) +0.4 
D) -0.4

Question 10

A common criticism of the CAPM is that it

Accepted Answer

A) ignores the return on the market portfolio. 
B) uses too many factors. 
C) requires only a single measure of systematic risk. 
D) ignores the risk-free rate of return. 
A) ignores the return on the market portfolio. 
B) uses too many factors. 
C) requires only a single measure of systematic risk. 
D) ignores the risk-free rate of return.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The distribution of annual returns over long periods for stocks is more closely related to the normal distribution than the lognormal distribution.

Accepted Answer

A) True 
 B)False

Question 13

The correlation between the return on a risk-free asset and the return on any common stock will equal zero.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Normal and lognormal distributions are completely specified by their

Accepted Answer

A) mean only. 
B) mean and standard deviation. 
C) standard deviation only. 
D) third moment only. 
A) mean only. 
B) mean and standard deviation. 
C) standard deviation only. 
D) third moment only.

Question 16

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 17

In theory, the CAPM requires that the market portfolio consist of only common stocks.

Accepted Answer

A) True 
 B)False

Question 18

If the market risk premium is 8 percent, 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 percent. 
B) 12 percent. 
C) greater than 12 percent. 
D) The answer cannot be determined. 
A) less than 12 percent. 
B) 12 percent. 
C) greater than 12 percent. 
D) The answer cannot be determined.

Question 19

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

Accepted Answer

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

Question 20

On an expected return versus standard deviation diagram (with expected return on the vertical axis), most investors prefer portfolios that appear more towards the top and the left.

Accepted Answer

A) True 
 B)False

Exam 8: Portfolio Theory and the Capital Asset Pricing Model

Underpriced stocks will plot above the security market line.

Suppose the beta of Exxon-Mobil is 0.65, the risk-free rate is 4 percent, and the expected market rate of return is 14 percent.Calculate the expected rate of return on Exxon-Mobil.

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

Briefly explain the Fama-French three-factor model.

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

According to the CAPM, all investments plot along the security market line.

Investments B and C both have the same standard deviation of 20 percent and have the same correlation to the market portfolio.If the expected return on B is 15 percent and that of C is 18 percent, then the investors would

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were as follows: FC: -5 percent, 15 percent, 20 percent; MC: 8 percent, 8 percent, 20 percent. Calculate the mean return for each company.

If the correlation coefficient between Stock A and Stock B is +0.6, what is the correlation coefficient between Stock B with Stock A?

A common criticism of the CAPM is that it

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

The distribution of annual returns over long periods for stocks is more closely related to the normal distribution than the lognormal distribution.

The correlation between the return on a risk-free asset and the return on any common stock will equal zero.

The beta of the market portfolio is

Normal and lognormal distributions are completely specified by their

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

In theory, the CAPM requires that the market portfolio consist of only common stocks.

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

On an expected return versus standard deviation diagram (with expected return on the vertical axis), most investors prefer portfolios that appear more towards the top and the left.

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 Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters