Question 1

Momentum is defined as:

Accepted Answer

A) the number of securities traded on a trading day. 
B) the asset's return over a set previous period. 
C) the ratio of a firm's market value to book value. 
D) the market value of a firm's outstanding shares. 
A) the number of securities traded on a trading day. 
B) the asset's return over a set previous period. 
C) the ratio of a firm's market value to book value. 
D) the market value of a firm's outstanding shares. B

Question 2

How are mean-variance analysis and the CAPM useful to corporations?

Accepted Answer

Corporations can use mean-variance analysis to hedge their risks optimally and diversify their portfolios of real investment projects.However,one of the lessons of the CAPM is that,while diversifying investments can reduce the variance of a firm's share price,it does not reduce the firm's cost of capital.As a result,a corporate diversification strategy can create value for a corporation only if the diversification increases the expected returns of the real asset investments of the corporation.Corporations also use the CAPM and mean-variance analysis to evaluate their capital expenditure decisions.Financial managers use the insights of mean-variance analysis and the CAPM not only to derive important conclusions about how to value real assets,but also to understand how debt financing affects the risk and the required return of equity.

Question 3

Which of the following is the correct CAPM equation used to determine the expected returns (r)of financial assets? (RM is the mean return of the market portfolio,rf is the risk-free rate,and $\beta$ is the beta computed against the return of the market portfolio.)

Accepted Answer

A) r = $\beta$ (RM - rf)- rf 
B) r = rf - $\beta$ (RM - rf) 
C) r = rf - $\beta$ (RM + rf) 
D) r = rf + $\beta$ (RM - rf) 
A) r = $\beta$ (RM - rf)- rf 
B) r = rf - $\beta$ (RM - rf) 
C) r = rf - $\beta$ (RM + rf) 
D) r = rf + $\beta$ (RM - rf) D

Question 4

The beta of a stock or portfolio is the:

Accepted Answer

A) ratio of its covariance with the returns of the tangency portfolio to the market risk premium of the market portfolio. 
B) ratio of its covariance with the returns of the tangency portfolio to the standard deviation of the tangency portfolio. 
C) ratio of its covariance with the returns of the tangency portfolio to the variance of the tangency portfolio. 
D) ratio of its correlation with the returns of the tangency portfolio to the standard deviation of the tangency portfolio. 
A) ratio of its covariance with the returns of the tangency portfolio to the market risk premium of the market portfolio. 
B) ratio of its covariance with the returns of the tangency portfolio to the standard deviation of the tangency portfolio. 
C) ratio of its covariance with the returns of the tangency portfolio to the variance of the tangency portfolio. 
D) ratio of its correlation with the returns of the tangency portfolio to the standard deviation of the tangency portfolio.

Question 5

Explain the concept of efficient frontier.

Accepted Answer

The efficient frontier represents the me

Question 6

Which of the following can be considered as a risk-free asset in finding the efficient frontier?

Accepted Answer

A) Corporate bonds 
B) Pension funds 
C) Treasury bills 
D) Mutual funds 
A) Corporate bonds 
B) Pension funds 
C) Treasury bills 
D) Mutual funds

Question 7

Which of the following equations is used to estimate beta using regression analysis?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 8

Which of the following is a disadvantage of CAPM?

Accepted Answer

A) It assumes that investors are indifferent to risk and return. 
B) It does not capture all the relevant risk factors in the economy. 
C) It ignores systematic risk. 
D) It assumes that no two securities have significant correlation. 
A) It assumes that investors are indifferent to risk and return. 
B) It does not capture all the relevant risk factors in the economy. 
C) It ignores systematic risk. 
D) It assumes that no two securities have significant correlation.

Question 9

The efficient frontier represents:

Accepted Answer

A) the means and correlation of the mean-variance efficient portfolios. 
B) the set of portfolios that gives the highest return at each level of risk. 
C) the set of portfolios that involve no personal trade-off between mean and variance for investors. 
D) the returns of individual equities that are not distributed normally. 
A) the means and correlation of the mean-variance efficient portfolios. 
B) the set of portfolios that gives the highest return at each level of risk. 
C) the set of portfolios that involve no personal trade-off between mean and variance for investors. 
D) the returns of individual equities that are not distributed normally.

Question 10

Which of the following is a reason for beta being considered as a relevant measure risk,instead of variance?

Accepted Answer

A) The marginal variance determines the incremental risk from adding a small amount of the investment to the portfolio. 
B) The total variance determines the incremental risk from adding a small amount of the investment to the portfolio. 
C) The total variance of the asset added determines the total risk of the portfolio. 
D) The marginal risk of the portfolio is unaffected by the variance in the returns of the individual assets in the portfolio. 
A) The marginal variance determines the incremental risk from adding a small amount of the investment to the portfolio. 
B) The total variance determines the incremental risk from adding a small amount of the investment to the portfolio. 
C) The total variance of the asset added determines the total risk of the portfolio. 
D) The marginal risk of the portfolio is unaffected by the variance in the returns of the individual assets in the portfolio.

Question 11

Which of the following is an assumption of the CAPM?

Accepted Answer

A) Investors will be trying to outsmart one another. 
B) Investors will actively manage their portfolios. 
C) Investors will assume zero risk for all investments. 
D) Investors have homogeneous beliefs. 
A) Investors will be trying to outsmart one another. 
B) Investors will actively manage their portfolios. 
C) Investors will assume zero risk for all investments. 
D) Investors have homogeneous beliefs.

Question 12

The market portfolio is:

Accepted Answer

A) a portfolio where the weight on each asset is its market value divided by the market value of all risky assets. 
B) a portfolio which is designed to match certain attributes of target portfolios in a given market. 
C) a portfolio which includes all risky and risk-free assets in the market. 
D) a unique optimal portfolio that gives the highest possible returns for the lowest risk in the market. 
A) a portfolio where the weight on each asset is its market value divided by the market value of all risky assets. 
B) a portfolio which is designed to match certain attributes of target portfolios in a given market. 
C) a portfolio which includes all risky and risk-free assets in the market. 
D) a unique optimal portfolio that gives the highest possible returns for the lowest risk in the market.

Question 13

To identify the tangency portfolio:

Accepted Answer

A) we must find the portfolio that has a covariance with each asset that is a constant proportion of the asset's risk premium. 
B) we must find the portfolio that has a covariance with each asset that is a constant proportion of the asset's mean variance. 
C) we must find the portfolio that has a correlation with each asset that is a constant proportion of the asset's standard deviation. 
D) we must find the portfolio that has a covariance with each asset that is a constant proportion of the risk free rate. 
A) we must find the portfolio that has a covariance with each asset that is a constant proportion of the asset's risk premium. 
B) we must find the portfolio that has a covariance with each asset that is a constant proportion of the asset's mean variance. 
C) we must find the portfolio that has a correlation with each asset that is a constant proportion of the asset's standard deviation. 
D) we must find the portfolio that has a covariance with each asset that is a constant proportion of the risk free rate.

Question 14

The beta of a risk-free asset:

Accepted Answer

A) is equal to zero. 
B) is equal to -1. 
C) is equal to 1. 
D) can take any value greater than 0. 
A) is equal to zero. 
B) is equal to -1. 
C) is equal to 1. 
D) can take any value greater than 0.

Question 15

What is beta? Why is it that the beta and not the variance the relevant measure of risk?

Accepted Answer

The beta of a stock or portfolio can be

Question 16

What are the main assumptions of mean-variance analysis?

Accepted Answer

The first assumption of mean-variance an

Question 17

A portfolio consists of three stocks with equal weightage.If the betas of the three stocks are 2.3,3.4 and 1.5.Find the portfolio's beta.

Accepted Answer

A) 7.2 
B) 21.6 
C) 3.6 
D) 2.4 
A) 7.2 
B) 21.6 
C) 3.6 
D) 2.4

Question 18

Which of the following represents the capital market line (CML)? (RT and $\sigma$T are the mean and standard deviation of the tangency portfolio's return,respectively.$\sigma$P is the standard deviation of the portfolio,and rf is the return of the risk-free asset.)

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 19

Which of the following is an assumption of mean-variance analysis?

Accepted Answer

A) The securities have zero covariance. 
B) There are no arbitrage opportunities. 
C) The securities have either perfect positive or negative correlation. 
D) Financial markets are frictionless. 
A) The securities have zero covariance. 
B) There are no arbitrage opportunities. 
C) The securities have either perfect positive or negative correlation. 
D) Financial markets are frictionless.

Exam 5: Mean-Variance Analysis and the Capital Asset Pricing Model

Momentum is defined as:

How are mean-variance analysis and the CAPM useful to corporations?

Which of the following is the correct CAPM equation used to determine the expected returns (r)of financial assets? (RM is the mean return of the market portfolio,rf is the risk-free rate,and β\betaβ is the beta computed against the return of the market portfolio.)

The beta of a stock or portfolio is the:

Explain the concept of efficient frontier.

Which of the following can be considered as a risk-free asset in finding the efficient frontier?

Which of the following equations is used to estimate beta using regression analysis?

Which of the following is a disadvantage of CAPM?

The efficient frontier represents:

Which of the following is a reason for beta being considered as a relevant measure risk,instead of variance?

Which of the following is an assumption of the CAPM?

The market portfolio is:

To identify the tangency portfolio:

The beta of a risk-free asset:

What is beta? Why is it that the beta and not the variance the relevant measure of risk?

What are the main assumptions of mean-variance analysis?

A portfolio consists of three stocks with equal weightage.If the betas of the three stocks are 2.3,3.4 and 1.5.Find the portfolio's beta.

Which of the following represents the capital market line (CML)? (RT and σ\sigmaσ T are the mean and standard deviation of the tangency portfolio's return,respectively. σ\sigmaσ P is the standard deviation of the portfolio,and rf is the return of the risk-free asset.)

Which of the following is an assumption of mean-variance analysis?

Raising Capital

Debt Financing

Equity Financing

Portfolio Tools

Factor Models and the Arbitrage Pricing Theory

Pricing Derivatives

Options

Discounting and Valuation

Investing in Risk-Free Projects

Investing in Risky Projects

Allocating Capital and Corporate Strategy

Corporate Taxes and the Impact of Financing on Real Asset Valuation

How Taxes Affect Financing Choices

How Taxes Affect Dividends and Share Repurchases

Bankruptcy Costs and Debt Holder-Equity Holder Conflicts

Capital Structure and Corporate Strategy

How Managerial Incentives Affects Financial Decisions

The Information Conveyed by Financial Decisions

Mergers and Acquisitions

Risk Management and Corporate Strategy

The Practice of Hedging

Interest Rate Risk Management

Filters

Which of the following is the correct CAPM equation used to determine the expected returns (r)of financial assets? (RM is the mean return of the market portfolio,r_f is the risk-free rate,and $\beta$ is the beta computed against the return of the market portfolio.)

Which of the following represents the capital market line (CML)? (R_T and $\sigma$ _T are the mean and standard deviation of the tangency portfolio's return,respectively. $\sigma$ _P is the standard deviation of the portfolio,and r_f is the return of the risk-free asset.)