Question 1

Beta is a measure of systematic risk and relates one security's return to another security's return.

Accepted Answer

A) True 
 B)False  False

Question 2

In a declining market,a portfolio manager should attempt to increase the overall beta of the portfolio.

Accepted Answer

A) True 
 B)False  False

Question 3

The characteristic line is the regression fitting total returns for a stock against total
returns for the market,and is sometimes calculated using excess returns.

Accepted Answer

A) True 
 B)False  True

Question 4

Securities with betas greater than l should have:

Accepted Answer

A) expected returns higher than the market.::::: 
B) required returns higher than the market return. 
C) required returns lower than the market return. 
D) no systematic risk. 
A) expected returns higher than the market.::::: 
B) required returns higher than the market return. 
C) required returns lower than the market return. 
D) no systematic risk.

Question 5

If the risk free lending rate is lower than the borrowing rate,what would the shape
of the CML and efficient frontier look like?

Accepted Answer

The CML would go from the risk-free rate

Question 6

Like the CAPM,the APT assumes a single-period investment horizon.

Accepted Answer

A) True 
 B)False

Question 7

The arbitrage pricing theory (APT)

Accepted Answer

A) considers only one factor and is a narrower model than the CAPM. 
B) considers more factors than the CAPM and is a broader model. 
C) is useful only for well-diversified portfolios of common stock. 
D) is Easy to practice because the factors are readily observable. 
A) considers only one factor and is a narrower model than the CAPM. 
B) considers more factors than the CAPM and is a broader model. 
C) is useful only for well-diversified portfolios of common stock. 
D) is Easy to practice because the factors are readily observable.

Question 8

Select the correct statement regarding the market portfolio.It:

Accepted Answer

A) is readily and precisely observable. 
B) is a risky portfolio. 
C) is the lowest point of tangency between the risk-free rate and the efficient frontier. 
D) should be composed of stocks or bonds. 
A) is readily and precisely observable. 
B) is a risky portfolio. 
C) is the lowest point of tangency between the risk-free rate and the efficient frontier. 
D) should be composed of stocks or bonds.

Question 9

Which of the following might be used as a factor in an APT factor model?

Accepted Answer

A) The risk-free rate 
B) Expected inflation 
C) Unanticipated deviations from expected inflation 
D) Loss by fire at a company's manufacturing plant 
A) The risk-free rate 
B) Expected inflation 
C) Unanticipated deviations from expected inflation 
D) Loss by fire at a company's manufacturing plant

Question 10

The APT is based on the law of one price,which states two identical assets cannot sell at different prices.

Accepted Answer

A) True 
 B)False

Question 11

Most professional investors use the S&P 500 as a general gauge of total market performance.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is not one of the assumptions of the CMT?

Accepted Answer

A) All investors have the same one-period time horizon. 
B) There are no personal income taxes. 
C) There is no interest rate charged on borrowing. 
D) There are no transaction costs. 
A) All investors have the same one-period time horizon. 
B) There are no personal income taxes. 
C) There is no interest rate charged on borrowing. 
D) There are no transaction costs.

Question 13

The Capital Asset Pricing Model:

Accepted Answer

A) has serious flaws because of its complexity. 
B) measures relevant risk of a security and shows the relationship between risk and expected return. 
C) was developed by Markowitz in the 1930s. 
D) discounts almost all of the Markowitz portfolio theory. 
A) has serious flaws because of its complexity. 
B) measures relevant risk of a security and shows the relationship between risk and expected return. 
C) was developed by Markowitz in the 1930s. 
D) discounts almost all of the Markowitz portfolio theory.

Question 14

Betas of individual securities are unstable over time.What are some characteristics that could cause a company's beta to change over time?

Accepted Answer

A 
few examples incl

Question 15

Compare the capital market line and the security market line.

Accepted Answer

CML and SML both indicate an upward slop

Question 16

Testing of the CAPM suggests the trade-off between expected return and risk is an upward-sloping straight line.

Accepted Answer

A) True 
 B)False

Question 17

Given an expected return for the market of 12 percent,with a standard deviation of 20 percent,and a risk-free rate of 8 percent,consider the following data:
 $\begin{array}{ccc}
\text { Stock } & \text { Beta }&{ R }_\mathrm{i}(\%) \
\hline 1 & 0.8 & 12 \
2 & 1.2 & 13 \
3 & 0.6 & 11
\end{array}$ 
(a)Calculate the required return for each stock using the SML.
(b)Assume that an analyst,using fundamental analysis,develops the estimates labeled Ri for these stocks.Which stock would be recommended for purchase?

Accepted Answer

(a) Stock @#LAT-DLM& percent
S

Question 18

Compare the security market line model and the arbitrage pricing theory.

Accepted Answer

SML is a one-factor model,the factor bei

Question 19

The arbitrage pricing theory (APT)and the CAPM both assume all except the following?

Accepted Answer

A) Investors have homogeneous beliefs. 
B) Investors are risk-averse utility maximizers. 
C) Borrowing and lending can be done at the rate RF. 
D) Markets are perfect. 
A) Investors have homogeneous beliefs. 
B) Investors are risk-averse utility maximizers. 
C) Borrowing and lending can be done at the rate RF. 
D) Markets are perfect.

Question 20

Some securities are considered to be "defensive" in that they tend to hold their value or increase in value when the majority of securities are losing value,such as during a recession.What could one conclude about the betas of defensive securities?

Accepted Answer

One would expect the

Exam 9: Asset Pricing Models

Beta is a measure of systematic risk and relates one security's return to another security's return.

In a declining market,a portfolio manager should attempt to increase the overall beta of the portfolio.

The characteristic line is the regression fitting total returns for a stock against total returns for the market,and is sometimes calculated using excess returns.

Securities with betas greater than l should have:

If the risk free lending rate is lower than the borrowing rate,what would the shape of the CML and efficient frontier look like?

Like the CAPM,the APT assumes a single-period investment horizon.

The arbitrage pricing theory (APT)

Select the correct statement regarding the market portfolio.It:

Which of the following might be used as a factor in an APT factor model?

The APT is based on the law of one price,which states two identical assets cannot sell at different prices.

Most professional investors use the S&P 500 as a general gauge of total market performance.

Which of the following is not one of the assumptions of the CMT?

The Capital Asset Pricing Model:

Betas of individual securities are unstable over time.What are some characteristics that could cause a company's beta to change over time?

Compare the capital market line and the security market line.

Testing of the CAPM suggests the trade-off between expected return and risk is an upward-sloping straight line.

Compare the security market line model and the arbitrage pricing theory.

The arbitrage pricing theory (APT)and the CAPM both assume all except the following?

Some securities are considered to be "defensive" in that they tend to hold their value or increase in value when the majority of securities are losing value,such as during a recession.What could one conclude about the betas of defensive securities?

Understanding Investments

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Securities Markets and Market Indexes

How Securities Are Traded

The Risks and Returns From Investing

Portfolio Theory

Portfolio Selection

Common Stock Valuation

Common Stocks: Analysis

Market Efficiency

Economy Market Analysis

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Company Analysis

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Bond Yields

Bonds: Analysis and Strategy

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