Question 1

Studies indicate that neither firm size nor the time interval used are important when computing beta.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following would most closely resemble the true market portfolio?

Accepted Answer

A)  Stocks 
B)  Stocks and bonds 
C)  Stocks, bonds and foreign securities 
D)  Stocks, bonds, foreign securities and options 
E)  Stocks, bonds, foreign securities options and coins 
A)  Stocks 
B)  Stocks and bonds 
C)  Stocks, bonds and foreign securities 
D)  Stocks, bonds, foreign securities and options 
E)  Stocks, bonds, foreign securities options and coins

Question 3

Exhibit 7-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccc}
\text { Portiolio } & \text { Expected Return } & \text { Standard Deviation } \
\hline  \text { A } & 9.8 \% & 14.0 \% \
\text { B } & 6.7 \% & 9.8 \% \
\text { C } & 11.2\%& 18.5\%
\end{array}$
-Refer to Exhibit 7-5. Which of the three portfolios are most likely to be the market portfolio?

Accepted Answer

A)  Portfolio A 
B)  Portfolio B 
C)  Portfolio C 
D)  All of the portfolios are equally likely to be the market portfolio 
E)  There is insufficient information to differentiate between the three portfolios 
A)  Portfolio A 
B)  Portfolio B 
C)  Portfolio C 
D)  All of the portfolios are equally likely to be the market portfolio 
E)  There is insufficient information to differentiate between the three portfolios

Question 4

Which of the following variables were found to be important in explaining return based upon a study of Fama and French (covering the period 1963 to 1990)?

Accepted Answer

A)  Size 
B)  Book-to-market value 
C)  Beta 
D)  Choices a and b 
E)  All of the above. 
A)  Size 
B)  Book-to-market value 
C)  Beta 
D)  Choices a and b 
E)  All of the above.

Question 5

An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 4.0% and the expected return on the stock index is 15%. Calculate the expected return on the portfolio.

Accepted Answer

A)  18.25% 
B)  18.85% 
C)  9.50% 
D)  15.00% 
E)  11.15% 
A)  18.25% 
B)  18.85% 
C)  9.50% 
D)  15.00% 
E)  11.15%

Question 6

Assume that as a portfolio manager the beta of your portfolio is 1.15 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML? 1) $ \quad \mathrm{RFR}=0.0625 \quad \quad \quad \quad \mathrm{R}_{\mathrm{m}}(\mathrm{proxy})=0.12 $
2) $ \quad \mathrm{R}_{\mathrm{K}}=0.078 \quad\quad \quad \quad \quad \quad  \mathrm{P}_{\mathrm{m}}( $ true $ )=0.10 $

Accepted Answer

A)  2.53% lower 
B)  3.85% lower 
C)  2.53% higher 
D)  4.4% higher 
E)  3.85% higher 
A)  2.53% lower 
B)  3.85% lower 
C)  2.53% higher 
D)  4.4% higher 
E)  3.85% higher

Question 7

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. Calculate the expected return on the portfolio.

Accepted Answer

A)  8.25% 
B)  16.50% 
C)  17.50% 
D)  9.75% 
E)  14.38% 
A)  8.25% 
B)  16.50% 
C)  17.50% 
D)  9.75% 
E)  14.38%

Question 8

The only way to estimate a beta for a security is to calculate the covariance of the security with the market.

Accepted Answer

A) True 
 B)False

Question 9

Securities with returns that lie below the security market line are undervalued.

Accepted Answer

A) True 
 B)False

Question 10

The "true" market portfolio is unknown.

Accepted Answer

A) True 
 B)False

Question 11

Exhibit 7-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) $$\begin{array} { c c c } 
\text { Stack } & \text { Factor 1 Loading } & \text { Factor 2 Loading } \
\hline \mathbf { X } & - 0.55 & 1.2 \
\mathbf { Y } & - 0.10 & 0.85 \
\mathbf { Z } & 0.35 & 0.5
\end{array}$$ 
The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7-8. Assume that you wish to create a portfolio with no net wealth invested. The portfolio that achieves this has 50% in stock X, -100% in stock Y, and 50% in stock Z. The weighted exposure to risk factor 2 for stocks X, Y, and Z are

Accepted Answer

A)  0.50, -1.0, 0.50 
B)  -0.50, 1.0, -0.50 
C)  0.60, -0.85, 0.25 
D)  -0.275, 0.10, 0.175 
E)  None of the above. 
A)  0.50, -1.0, 0.50 
B)  -0.50, 1.0, -0.50 
C)  0.60, -0.85, 0.25 
D)  -0.275, 0.10, 0.175 
E)  None of the above.

Question 12

In the APT model, the identity of all the factors is known.

Accepted Answer

A) True 
 B)False

Question 13

Utilizing the security market line an investor owning a stock with a beta of -2 would expect the stock's return to ____ in a market that was expected to decline 15%.

Accepted Answer

A)  Rise or fall an indeterminate amount 
B)  Fall by 3% 
C)  Fall by 30% 
D)  Rise by 13% 
E)  Rise by 30% 
A)  Rise or fall an indeterminate amount 
B)  Fall by 3% 
C)  Fall by 30% 
D)  Rise by 13% 
E)  Rise by 30%

Question 14

Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return (λS1U1B10S1U1B0) = .025 and the risk premiums for the two factors are (λS1U1B11S1U1B0) = .12 and (λS1U1B10S1U1B0) = .10.
 $\begin{array}{ccc}
\text { Stock } & \text { Factor } 1 b_{i l} & \text { Factor } 2 b_{i 2} \
\hline \text { A } & -0.25 & 1.1 \
\text { B } & -0.05 & 0.9 \
\text { C } & 0.01 & 0.6
\end{array}$
-Refer to Exhibit 7-9. Assume that stocks A, B, and C never pay dividends and stocks A, B, and C are currently trading at $10, $20, and $30, respectively. What is the expected price next year for each stock? $\begin{array}{lccc} 
& A & B & C \
\hline  \text { I. } & \$ 10.82 & \$ 21.82 & \$ 30.99 \
\text { II. } & \$ 11.05 & \$ 22.18 & \$ 30.96 \
\text { III. } & \$ 11.32 & \$ 22.56 & \$ 30.99 \
\text { IV. } & \$ 11.65 & \$ 22.42 & \$ 30.96 \
\text { V. } & \$ 18.50 & \$ 37.00 & \$ 48.30
\end{array}$

Accepted Answer

A)  I 
B)  II 
C)  III 
D)  IV 
E)  V 
A)  I 
B)  II 
C)  III 
D)  IV 
E)  V

Question 15

Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return (λS1U1B10S1U1B0) = .025 and the risk premiums for the two factors are (λS1U1B11S1U1B0) = .12 and (λS1U1B10S1U1B0) = .10.
 $\begin{array}{ccc}
\text { Stock } & \text { Factor } 1 b_{i l} & \text { Factor } 2 b_{i 2} \
\hline \text { A } & -0.25 & 1.1 \
\text { B } & -0.05 & 0.9 \
\text { C } & 0.01 & 0.6
\end{array}$
-Refer to Exhibit 7-9. Suppose that you know that the prices of stocks A, B, and C will be $10.95, 22.18, and $30.89, respectively. Based on this information

Accepted Answer

A)  All three stocks are overvalued. 
B)  All three stocks are undervalued. 
C)  Stock a is undervalued, stock b is properly valued, stock c is undervalued. 
D)  Stock a is undervalued, stock b is properly valued, stock c is overvalued. 
E)  Stock a is overvalued, stock b is overvalued, stock c is undervalued. 
A)  All three stocks are overvalued. 
B)  All three stocks are undervalued. 
C)  Stock a is undervalued, stock b is properly valued, stock c is undervalued. 
D)  Stock a is undervalued, stock b is properly valued, stock c is overvalued. 
E)  Stock a is overvalued, stock b is overvalued, stock c is undervalued.

Question 16

Your broker has advised you that he believes that the stock of Brat Inc. is going to rise from $20 to $22.15 per share over the next year. You know that the annual return on the S&P/TSX composite index has been 11.25% and the 90-day T-bill rate has been yielding 4.75% per year over the past 10 years. If beta for Brat is 1.25, will you purchase the stock?

Accepted Answer

A)  Yes, because it is overvalued 
B)  No, because it is overvalued 
C)  No, because it is undervalued 
D)  Yes, because it is undervalued 
E)  Yes, because the expected return equals the estimated return 
A)  Yes, because it is overvalued 
B)  No, because it is overvalued 
C)  No, because it is undervalued 
D)  Yes, because it is undervalued 
E)  Yes, because the expected return equals the estimated return

Question 17

Under the following conditions, what are the expected returns for stocks A and C?

$\begin{array}{ll}
\lambda^{0}=0.07 & \mathrm{~b}_{\mathrm{a}, 1}=0.95 \
\mathrm{k}_{1}=0.04 & \mathrm{~b}_{\mathrm{a}, 2}=1.10 \
\mathrm{k}_{2}=0.03 & \mathrm{~b}_{c, 1}=1.10 \
&\mathrm{~b}_{\mathrm{c}, 2}=2.35
\end{array}$

Accepted Answer

A)  14.1% and 17.65% 
B)  14.1% and 18.45% 
C)  17.65% and 18.45% 
D)  18.45% and 17.52% 
E)  None of the above 
A)  14.1% and 17.65% 
B)  14.1% and 18.45% 
C)  17.65% and 18.45% 
D)  18.45% and 17.52% 
E)  None of the above

Question 18

All of the following questions remain to be answered in the real world except

Accepted Answer

A)  What is a good proxy for the market portfolio? 
B)  What happens when you cannot borrow or lend at the risk free rate? 
C)  How good is the capital asset model as a predictor? 
D)  What is the beta of the market portfolio of risky assets? 
E)  What is the stability of beta for individual stocks? 
A)  What is a good proxy for the market portfolio? 
B)  What happens when you cannot borrow or lend at the risk free rate? 
C)  How good is the capital asset model as a predictor? 
D)  What is the beta of the market portfolio of risky assets? 
E)  What is the stability of beta for individual stocks?

Question 19

Assume that the risk-free rate of return is 3% and the market portfolio on the Capital Market Line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8%?

Accepted Answer

A)  Invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate. 
B)  Invest $80,000 in the market portfolio and the remainder in the risk-free security. 
C)  Invest $63,636.36 in the market portfolio and the remainder in the risk-free security. 
D)  Invest $36,363.64 in the market portfolio and the remainder in the risk-free security. 
E)  Invest $100,000 on another portfolio on the CML that does not contain any of the market portfolio or the risk-free security, but has a standard deviation of 8%. 
A)  Invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate. 
B)  Invest $80,000 in the market portfolio and the remainder in the risk-free security. 
C)  Invest $63,636.36 in the market portfolio and the remainder in the risk-free security. 
D)  Invest $36,363.64 in the market portfolio and the remainder in the risk-free security. 
E)  Invest $100,000 on another portfolio on the CML that does not contain any of the market portfolio or the risk-free security, but has a standard deviation of 8%.

Question 20

Consider the following list of risk factors: 1. monthly growth in industrial production
2. return on high book to market value portfolio minus return on low book to market value portfolio
3. change in inflation
4. excess return on stock market portfolio
5. return on small cap portfolio minus return on big cap portfolio
6. unanticipated change in bond credit spread
Which of the following factors would you use to develop a microeconomic-based risk factor model?

Accepted Answer

A)  1, 2, and 3 
B)  1, 3, and 5 
C)  2, 4, and 5 
D)  1, 3, and 6 
E)  4, 5, and 6 
A)  1, 2, and 3 
B)  1, 3, and 5 
C)  2, 4, and 5 
D)  1, 3, and 6 
E)  4, 5, and 6

Studies indicate that neither firm size nor the time interval used are important when computing beta.

Which of the following would most closely resemble the true market portfolio?

Exhibit 7-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Portiolio Expected Return Standard Deviation A 9.8\% 14.0\% B 6.7\% 9.8\% C 11.2\% 18.5\% -Refer to Exhibit 7-5. Which of the three portfolios are most likely to be the market portfolio?

Which of the following variables were found to be important in explaining return based upon a study of Fama and French (covering the period 1963 to 1990)?

An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 4.0% and the expected return on the stock index is 15%. Calculate the expected return on the portfolio.

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. Calculate the expected return on the portfolio.

The only way to estimate a beta for a security is to calculate the covariance of the security with the market.

Securities with returns that lie below the security market line are undervalued.

The "true" market portfolio is unknown.

In the APT model, the identity of all the factors is known.

Utilizing the security market line an investor owning a stock with a beta of -2 would expect the stock's return to ____ in a market that was expected to decline 15%.

Under the following conditions, what are the expected returns for stocks A and C? =0.07 =0.95 =0.04 =1.10 =0.03 =1.10 =2.35

All of the following questions remain to be answered in the real world except

Assume that the risk-free rate of return is 3% and the market portfolio on the Capital Market Line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8%?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

Exam 7: Asset Pricing Models: Capm and Apt

Studies indicate that neither firm size nor the time interval used are important when computing beta.

Which of the following would most closely resemble the true market portfolio?

Exhibit 7-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Portiolio Expected Return Standard Deviation A 9.8\% 14.0\% B 6.7\% 9.8\% C 11.2\% 18.5\% -Refer to Exhibit 7-5. Which of the three portfolios are most likely to be the market portfolio?

Which of the following variables were found to be important in explaining return based upon a study of Fama and French (covering the period 1963 to 1990)?

An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 4.0% and the expected return on the stock index is 15%. Calculate the expected return on the portfolio.

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. Calculate the expected return on the portfolio.

The only way to estimate a beta for a security is to calculate the covariance of the security with the market.

Securities with returns that lie below the security market line are undervalued.

The "true" market portfolio is unknown.

In the APT model, the identity of all the factors is known.

Utilizing the security market line an investor owning a stock with a beta of -2 would expect the stock's return to ____ in a market that was expected to decline 15%.

Under the following conditions, what are the expected returns for stocks A and C? =0.07 =0.95 =0.04 =1.10 =0.03 =1.10 =2.35

All of the following questions remain to be answered in the real world except

Assume that the risk-free rate of return is 3% and the market portfolio on the Capital Market Line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8%?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters