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

Both the CAPM and the APT stress that unique risk does not affect expected return.

Accepted Answer

A) True 
 B)False

Question 3

Briefly explain the capital asset pricing model.

Accepted Answer

The CAPM is the relationship, in a compe

Question 4

Assume the following data for a stock: Risk-free rate = 5 percent; beta (market) = 1.5; beta (size) = 0.3; 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) 11.5 percent 
D) 20.9 percent 
A) 22.3 percent 
B) 7.8 percent 
C) 11.5 percent 
D) 20.9 percent

Question 5

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

Accepted Answer

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

Question 6

Briefly discuss how you would use the Fama-French three-factor model to estimate the cost of equity for a firm.

Accepted Answer

The three factors considered a

Question 7

Who first developed portfolio theory?

Accepted Answer

A) Merton Miller 
B) Richard Brealey 
C) Franco Modigliani 
D) Harry Markowitz 
A) Merton Miller 
B) Richard Brealey 
C) Franco Modigliani 
D) Harry Markowitz

Question 8

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 9

One would expect a stock with a beta of zero to have a rate of return equal to

Accepted Answer

A) zero. 
B) the market risk premium. 
C) the risk-free rate. 
D) the market rate of return. 
A) zero. 
B) the market risk premium. 
C) the risk-free rate. 
D) the market rate of return.

Question 10

Overpriced stocks will plot below the security market line.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 13

If the covariance of Stock A with Stock B is -100, what is the covariance of Stock B with Stock A?

Accepted Answer

A) +100 
B) -100 
C) 1/100 
D) Additional information is needed. 
A) +100 
B) -100 
C) 1/100 
D) Additional information is needed.

Question 14

By combining lending and borrowing at the risk-free rate with efficient portfolios, we can

Accepted Answer

A) extend the range of investment possibilities. 
B) extend the range of investment possibilities and change the set of efficient portfolios from being curvilinear to a straight line. 
C) extend the range of investment possibilities, change the set of efficient portfolios from being curvilinear to a straight line, and provide a higher expected return for any level of risk, except for the tangential portfolio and the risk-free asset. 
D) change the set of efficient portfolios from being curvilinear to a straight line and provide a higher expected return for any level of risk, except for the tangential portfolio and the risk-free asset. 
A) extend the range of investment possibilities. 
B) extend the range of investment possibilities and change the set of efficient portfolios from being curvilinear to a straight line. 
C) extend the range of investment possibilities, change the set of efficient portfolios from being curvilinear to a straight line, and provide a higher expected return for any level of risk, except for the tangential portfolio and the risk-free asset. 
D) change the set of efficient portfolios from being curvilinear to a straight line and provide a higher expected return for any level of risk, except for the tangential portfolio and the risk-free asset.

Question 15

The correlation coefficient between the efficient portfolio and the risk-free asset is

Accepted Answer

A) +1.0. 
B) -1.0. 
C) 0.0. 
D) Further information is needed. 
A) +1.0. 
B) -1.0. 
C) 0.0. 
D) Further information is needed.

Question 16

An efficient portfolio

Accepted Answer

A) has only unique risk. 
B) provides the highest expected return for a given level of risk and provides the least risk for a given level of expected return. 
C) has no risk at all. 
D) provides the highest expected return for a given level of risk. 
A) has only unique risk. 
B) provides the highest expected return for a given level of risk and provides the least risk for a given level of expected return. 
C) has no risk at all. 
D) provides the highest expected return for a given level of risk.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were as follows: FC: -5%, 15 percent, 20 percent; MC: 8 percent, 8 percent, 20 percent. Calculate the covariance between the returns of FC and MC.(Ignore the correction for the loss of a degree of freedom set out in the text.)

Accepted Answer

A) 60 
B) 80 
C) 40 
D) 100 
A) 60 
B) 80 
C) 40 
D) 100

Question 19

A stock return's beta measures

Accepted Answer

A) the stock's covariance with the risk-free asset. 
B) the change in the stock's return for a given change in the market return. 
C) the return on the stock. 
D) the standard deviation on the stock's return. 
A) the stock's covariance with the risk-free asset. 
B) the change in the stock's return for a given change in the market return. 
C) the return on the stock. 
D) the standard deviation on the stock's return.

Question 20

For a company like the aluminum manufacturer Alcoa, what is the most likely factor when developing an arbitrage pricing model?

Accepted Answer

A) Commodity price 
B) GDP 
C) Inflation 
A) Commodity price 
B) GDP 
C) Inflation

Exam 8: Portfolio Theory and the Capital Asset Pricing Model

The correlation coefficient measures the

Both the CAPM and the APT stress that unique risk does not affect expected return.

Briefly explain the capital asset pricing model.

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

Briefly discuss how you would use the Fama-French three-factor model to estimate the cost of equity for a firm.

Who first developed portfolio theory?

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

One would expect a stock with a beta of zero to have a rate of return equal to

Overpriced stocks will plot below the security market line.

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

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

If the covariance of Stock A with Stock B is -100, what is the covariance of Stock B with Stock A?

By combining lending and borrowing at the risk-free rate with efficient portfolios, we can

The correlation coefficient between the efficient portfolio and the risk-free asset is

An efficient portfolio

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

A stock return's beta measures

For a company like the aluminum manufacturer Alcoa, what is the most likely factor when developing an arbitrage pricing model?

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