Question 1

If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP.

Accepted Answer

A)  βHPQ 
B)  βKMP 
C)  σM 
D)  all of the options 
E)  None of the options are correct. 
A)  βHPQ 
B)  βKMP 
C)  σM 
D)  all of the options 
E)  None of the options are correct.

Question 2

The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  1.01. 
B)  0.95. 
C)  1.13. 
D)  0.90. 
A)  1.01. 
B)  0.95. 
C)  1.13. 
D)  0.90.

Question 3

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 4

If a firm's beta was calculated as 1.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  less than 0.6 but greater than zero. 
B)  between 0.6 and 1.0. 
C)  between 1.0 and 1.6. 
D)  greater than 1.6. 
E)  zero or less. 
A)  less than 0.6 but greater than zero. 
B)  between 0.6 and 1.0. 
C)  between 1.0 and 1.6. 
D)  greater than 1.6. 
E)  zero or less.

Question 5

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 6

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 7

If the index model is valid, _________ would be helpful in determining the covariance between assets K and L.

Accepted Answer

A)  βk 
B)  βL 
C)  σM 
D)  all of the options 
E)  None of the options are correct. 
A)  βk 
B)  βL 
C)  σM 
D)  all of the options 
E)  None of the options are correct.

Question 8

Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 10%. The risk-free rate of return is 3%. 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)  1.57. 
B)  0.75. 
C)  1.17. 
D)  1.33. 
E)  1.50. 
A)  1.57. 
B)  0.75. 
C)  1.17. 
D)  1.33. 
E)  1.50.

Question 9

Assume that stock market returns do follow 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 ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A)  125; 15,225 
B)  15,625; 125 
C)  7,750; 125 
D)  125; 125 
A)  125; 15,225 
B)  15,625; 125 
C)  7,750; 125 
D)  125; 125

Question 10

As diversification increases, the total variance of a portfolio approaches

Accepted Answer

A)  0. 
B)  1. 
C)  the variance of the market portfolio. 
D)  infinity. 
E)  None of the options are correct. 
A)  0. 
B)  1. 
C)  the variance of the market portfolio. 
D)  infinity. 
E)  None of the options are correct.

Question 11

Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of

Accepted Answer

A)  the α of the asset. 
B)  the β of the asset. 
C)  the σ of the asset. 
D)  the δ of the asset. 
A)  the α of the asset. 
B)  the β of the asset. 
C)  the σ of the asset. 
D)  the δ of the asset.

Question 12

Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted β of Mobil stock is 1.50. 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)  14.7% 
A)  15.0% 
B)  15.5% 
C)  16.0% 
D)  14.7%

Question 13

The intercept in the regression equations calculated by beta books is equal to

Accepted Answer

A)  α in the CAPM. 
B)  α + rf(1 + β). 
C)  α + rf(1 - β). 
D)  1 - α. 
A)  α in the CAPM. 
B)  α + rf(1 + β). 
C)  α + rf(1 - β). 
D)  1 - α.

Question 14

Security returns

Accepted Answer

A)  are based on both macro events and firm-specific events. 
B)  are based on firm-specific events only. 
C)  are usually positively correlated with each other. 
D)  are based on firm-specific events only and are usually positively correlated with each other. 
E)  are based on both macro events and firm-specific events and are usually positively correlated with each other. 
A)  are based on both macro events and firm-specific events. 
B)  are based on firm-specific events only. 
C)  are usually positively correlated with each other. 
D)  are based on firm-specific events only and are usually positively correlated with each other. 
E)  are based on both macro events and firm-specific events and are usually positively correlated with each other.

Question 15

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 0.25 and σM was 0.21, the β of the portfolio would be approximately ________.

Accepted Answer

A)  0.64 
B)  1.19 
C)  1.25 
D)  1.56 
A)  0.64 
B)  1.19 
C)  1.25 
D)  1.56

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 follow a single-index structure. An investment fund analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained by 175 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A)  175; 15,225 
B)  175; 175 
C)  15,225; 175 
D)  15,225; 15,225 
A)  175; 15,225 
B)  175; 175 
C)  15,225; 175 
D)  15,225; 15,225

Question 18

Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE. Using a single-index model rather than the Markowitz model

Accepted Answer

A)  increases the number of inputs needed from about 1,400 to more than 1.4 million. 
B)  increases the number of inputs needed from about 10,000 to more than 125,000. 
C)  reduces the number of inputs needed from more than 125,000 to about 10,000. 
D)  reduces the number of inputs needed from more than 5 million to about 10,000. 
E)  increases the number of inputs needed from about 150 to more than 1,500. 
A)  increases the number of inputs needed from about 1,400 to more than 1.4 million. 
B)  increases the number of inputs needed from about 10,000 to more than 125,000. 
C)  reduces the number of inputs needed from more than 125,000 to about 10,000. 
D)  reduces the number of inputs needed from more than 5 million to about 10,000. 
E)  increases the number of inputs needed from about 150 to more than 1,500.

Question 19

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 132 stocks in order to construct a mean-variance efficient portfolio constrained by 132 investments. They will need to calculate ____________ covariances.

Accepted Answer

A)  100 
B)  132 
C)  4,950 
D)  8,646 
A)  100 
B)  132 
C)  4,950 
D)  8,646

Question 20

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.5RM + eA.
RB = 0.02 + 1.3RM + eB.
ΣM = 0.25; 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)  0.0050. 
E)  0.4000. 
A)  0.0384. 
B)  0.0406. 
C)  0.1920. 
D)  0.0050. 
E)  0.4000.

Exam 8: Index Models

If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP.

The beta of a stock has been estimated as 0.85 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 1.3 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

If a firm's beta was calculated as 1.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

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.

If the index model is valid, _________ would be helpful in determining the covariance between assets K and L.

Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 10%. The risk-free rate of return is 3%. 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

As diversification increases, the total variance of a portfolio approaches

Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of

Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted β of Mobil stock is 1.50. 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 intercept in the regression equations calculated by beta books is equal to

Security 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 0.25 and σM was 0.21, the β of the portfolio would be approximately ________.

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.

Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE. Using a single-index model rather than the Markowitz model

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 132 stocks in order to construct a mean-variance efficient portfolio constrained by 132 investments. They will need to calculate ____________ covariances.

The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.5RM + eA. RB = 0.02 + 1.3RM + eB. ΣM = 0.25; 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 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 0.25 and σ_M was 0.21, the β of the portfolio would be approximately ________.

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 stocks A and B with the following results: R_A = 0.01 + 0.5R_M + e_A. R_B = 0.02 + 1.3R_M + e_B. Σ_M = 0.25; σ(e_A) = 0.20; σ(e_B) = 0.10. The covariance between the returns on stocks A and B is