Exam 8: Index Models

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.

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 _____________ expected returns and ___________ variances of returns.

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 _____________ expected returns and ___________ variances of returns.

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 0.24 and σ_M was 0.18, the β of the portfolio would be approximately

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 security characteristic line (SCL)

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 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

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 beta of Exxon stock has been estimated as 1.6 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

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

According to the index model, covariances among security pairs are

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

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 217 stocks in order to construct a mean-variance efficient portfolio constrained by 217 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

The single-index model

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

As diversification increases, the unique risk of a portfolio approaches

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

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.

The index model for stock A has been estimated with the following result: R_A = 0.01 + 0.94R_M + e_A If σ_M = 0.30 and R²_A = 0.28, the standard deviation of return of stock A is