Question 1

The beta of a stock has been estimated as 1.4 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  1.27. 
B)  1.32. 
C)  1.13. 
D)  1.0. 
A)  1.27. 
B)  1.32. 
C)  1.13. 
D)  1.0.

Question 2

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 _____________ expected returns and ___________ variances of returns.

Accepted Answer

A)  100; 100 
B)  100; 4950 
C)  4950; 100 
D)  4950; 4950 
A)  100; 100 
B)  100; 4950 
C)  4950; 100 
D)  4950; 4950

Question 3

In their study about predicting beta coefficients, which of the following did Rosenberg and Guy find to be factors that influence beta? I) Industry group
II) Variance of cash flow
III) Dividend yield
IV) Growth in earnings per share

Accepted Answer

A)  I and II 
B)  I and III 
C)  I, II, and III 
D)  I, II, and IV 
E)  I, II, III, and IV 
A)  I and II 
B)  I and III 
C)  I, II, and III 
D)  I, II, and IV 
E)  I, II, III, and IV

Question 4

The beta of a stock has been estimated as 1.8 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  1.20. 
B)  1.53. 
C)  1.13. 
D)  1.0. 
A)  1.20. 
B)  1.53. 
C)  1.13. 
D)  1.0.

Question 5

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

Accepted Answer

A)  0.75. 
B)  0.56. 
C)  0.07. 
D)  1.03. 
A)  0.75. 
B)  0.56. 
C)  0.07. 
D)  1.03.

Question 6

The beta of Apple stock has been estimated as 2.3 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  2.20. 
B)  1.87. 
C)  2.13. 
D)  1.66. 
A)  2.20. 
B)  1.87. 
C)  2.13. 
D)  1.66.

Question 7

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 ____________ covariances.

Accepted Answer

A)  125 
B)  7,750 
C)  15,625 
D)  11,750 
A)  125 
B)  7,750 
C)  15,625 
D)  11,750

Question 8

Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 16%. The risk-free rate of return is 5%. 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)  0.67. 
B)  0.75. 
C)  1.0. 
D)  1.33. 
E)  1.50. 
A)  0.67. 
B)  0.75. 
C)  1.0. 
D)  1.33. 
E)  1.50.

Question 9

Covariances between security returns tend to be

Accepted Answer

A)  positive because of SEC regulations. 
B)  positive because of Exchange regulations. 
C)  positive because of economic forces that affect many firms. 
D)  negative because of SEC regulations. 
E)  negative because of economic forces that affect many firms. 
A)  positive because of SEC regulations. 
B)  positive because of Exchange regulations. 
C)  positive because of economic forces that affect many firms. 
D)  negative because of SEC regulations. 
E)  negative because of economic forces that affect many firms.

Question 10

A single-index model uses __________ as a proxy for the systematic risk factor.

Accepted Answer

A)  a market index, such as the S&P 500 
B)  the current account deficit 
C)  the growth rate in GNP 
D)  the unemployment rate. 
A)  a market index, such as the S&P 500 
B)  the current account deficit 
C)  the growth rate in GNP 
D)  the unemployment rate.

Question 11

One "cost" of the single-index model is that it

Accepted Answer

A)  is virtually impossible to apply. 
B)  prohibits specialization of efforts within the security analysis industry. 
C)  requires forecasts of the money supply. 
D)  is legally prohibited by the SEC. 
E)  allows for only two kinds of risk-macro risk and micro risk. 
A)  is virtually impossible to apply. 
B)  prohibits specialization of efforts within the security analysis industry. 
C)  requires forecasts of the money supply. 
D)  is legally prohibited by the SEC. 
E)  allows for only two kinds of risk-macro risk and micro risk.

Question 12

In a factor model, the return on a stock in a particular period will be related to

Accepted Answer

A)  firm-specific events. 
B)  macroeconomic events. 
C)  the error term. 
D)  both firm-specific events and macroeconomic events. 
E)  neither firm-specific events nor macroeconomic events. 
A)  firm-specific events. 
B)  macroeconomic events. 
C)  the error term. 
D)  both firm-specific events and macroeconomic events. 
E)  neither firm-specific events nor macroeconomic events.

Question 13

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 0.22 and σM was 0.19, the β of the portfolio would be approximately

Accepted Answer

A)  1.34. 
B)  1.16. 
C)  1.25. 
D)  1.56. 
A)  1.34. 
B)  1.16. 
C)  1.25. 
D)  1.56.

Question 14

Rosenberg and Guy found that __________ helped to predict a firm's beta.

Accepted Answer

A)  the firm's financial characteristics 
B)  the firm's industry group 
C)  firm size 
D)  the firm's financial characteristics and the firm's industry group 
E)  All of the options are correct. 
A)  the firm's financial characteristics 
B)  the firm's industry group 
C)  firm size 
D)  the firm's financial characteristics and the firm's industry group 
E)  All of the options are correct.

Question 15

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained by 200 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A)  200; 19,900 
B)  200; 200 
C)  19,900; 200 
D)  19,900; 19.900 
A)  200; 19,900 
B)  200; 200 
C)  19,900; 200 
D)  19,900; 19.900

Question 16

The expected impact of unanticipated macroeconomic events on a security's return during the period is

Accepted Answer

A)  included in the security's expected return. 
B)  zero. 
C)  equal to the risk-free rate. 
D)  proportional to the firm's beta. 
E)  infinite. 
A)  included in the security's expected return. 
B)  zero. 
C)  equal to the risk-free rate. 
D)  proportional to the firm's beta. 
E)  infinite.

Question 17

Suppose the following equation best describes the evolution of β over time: βt = 0.30 + 0.70βt - 1
If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A)  0.91 
B)  0.77 
C)  0.63 
D)  0.87 
A)  0.91 
B)  0.77 
C)  0.63 
D)  0.87

Question 18

The index model for stock B has been estimated with the following result: RB = 0.01 + 1.1RM + eB.
If σM = 0.20 and R2B = 0.50, the standard deviation of the return on stock B is

Accepted Answer

A)  0.1111. 
B)  0.2111. 
C)  0.3111. 
D)  0.4111. 
A)  0.1111. 
B)  0.2111. 
C)  0.3111. 
D)  0.4111.

Question 19

The beta of JCP stock has been estimated as 1.2 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  1.20. 
B)  1.32. 
C)  1.13. 
D)  1.0. 
A)  1.20. 
B)  1.32. 
C)  1.13. 
D)  1.0.

Question 20

Suppose the following equation best describes the evolution of β over time: t = 0.18 + 0.63βt - 1.
If a stock had a β of 1.09 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A)  0.87 
B)  0.18 
C)  0.63 
D)  0.81 
A)  0.87 
B)  0.18 
C)  0.63 
D)  0.81

Exam 8: Index Models

The beta of a stock has been estimated as 1.4 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

In their study about predicting beta coefficients, which of the following did Rosenberg and Guy find to be factors that influence beta? I) Industry group II) Variance of cash flow III) Dividend yield IV) Growth in earnings per share

The beta of a stock has been estimated as 1.8 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

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

The beta of Apple stock has been estimated as 2.3 using regression analysis on a sample of historical returns. 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 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments. They will need to calculate ____________ covariances.

Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 16%. The risk-free rate of return is 5%. 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

Covariances between security returns tend to be

A single-index model uses __________ as a proxy for the systematic risk factor.

One "cost" of the single-index model is that it

In a factor model, the return on a stock in a particular period will be related to

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 0.22 and σM was 0.19, the β of the portfolio would be approximately

Rosenberg and Guy found that __________ helped to predict a firm's beta.

The expected impact of unanticipated macroeconomic events on a security's return during the period is

Suppose the following equation best describes the evolution of β over time: βt = 0.30 + 0.70βt - 1 If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

The index model for stock B has been estimated with the following result: RB = 0.01 + 1.1RM + eB. If σM = 0.20 and R2B = 0.50, the standard deviation of the return on stock B is

The beta of JCP stock has been estimated as 1.2 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

Suppose the following equation best describes the evolution of β over time: t = 0.18 + 0.63βt - 1. If a stock had a β of 1.09 last year, you would forecast the β to be _______ in the coming year.

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

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 0.22 and σ_M was 0.19, the β of the portfolio would be approximately

Suppose the following equation best describes the evolution of β over time: β_t = 0.30 + 0.70β_t- ₁ If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

The index model for stock B has been estimated with the following result: R_B = 0.01 + 1.1R_M + e_B. If σ_M = 0.20 and R²_B = 0.50, the standard deviation of the return on stock B is

Suppose the following equation best describes the evolution of β over time: _t = 0.18 + 0.63β_t _{- 1}. If a stock had a β of 1.09 last year, you would forecast the β to be _______ in the coming year.