Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

The expected return on the market for next period is 11 percent. The risk free rate of return is 4 percent, and Alpha Company has a beta of 1.1. The market risk premium is

Accepted Answer

A)  7.7 percent. 
B)  7 percent. 
C)  11 percent. 
D)  12.1 percent. 
A)  7.7 percent. 
B)  7 percent. 
C)  11 percent. 
D)  12.1 percent.

Question 3

What are the assumptions in the CAPM? Can these be relaxed without destroying the conclusions of the model?

Accepted Answer

(1) homogeneous expectations, (2) one-pe

Question 4

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 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 to practice because the factors are readily observable.

Question 5

Which of the following is the correct calculation for the required rate of return under the CAPM?

Accepted Answer

A)  beta (market risk premium) 
B)  beta + market risk premium 
C)  risk-free rate + risk premium 
D)  risk-free rate(market risk premium) 
A)  beta (market risk premium) 
B)  beta + market risk premium 
C)  risk-free rate + risk premium 
D)  risk-free rate(market risk premium)

Question 6

Suppose the SML has a risk-free rate of 5 percent and an expected market return of 15 percent. Now suppose that the SML shifts, changing slope, so that kRF is still 5 percent but kM is now 16 percent. What does this shift suggest about investors' risk aversion? If the slope were to change downward, what would that suggest?

Accepted Answer

Suggest that investors are more averse t

Question 7

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

Accepted Answer

SML is a one-factor model, the factor be

Question 8

Risk factors in the APT must possess all of the following the characteristics except:

Accepted Answer

A)  Factors must be readily observable in risk/return space. 
B)  Each factor must have a pervasive influence on stock returns 
C)  The factors must influence expected return. 
D)  Factors must be unpredictable. 
A)  Factors must be readily observable in risk/return space. 
B)  Each factor must have a pervasive influence on stock returns 
C)  The factors must influence expected return. 
D)  Factors must be unpredictable.

Question 9

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 10

The CML indicates the required return for each portfolio risk level.

Accepted Answer

A) True 
 B)False

Question 11

With the introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into a straight line.

Accepted Answer

A) True 
 B)False

Question 12

What does it mean when the CAPM is called "robust?"

Accepted Answer

A)  The CAPM requires no assumptions. 
B)  Even if most of the assumptions of the CAPM are relaxed, most of the conclusions will still hold. 
C)  The CAPM is based on realistic assumptions. 
D)  No other model can represent stock returns better than the CAPM. 
A)  The CAPM requires no assumptions. 
B)  Even if most of the assumptions of the CAPM are relaxed, most of the conclusions will still hold. 
C)  The CAPM is based on realistic assumptions. 
D)  No other model can represent stock returns better than the CAPM.

Question 13

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:
 $\begin{array} { c c c } 
\underline { \text { Stock } }  & \underline { \text { Beta } }& \underline { \mathrm { R } _ { \mathrm { i } } ( \% ) } \
1 & 0.8 & 12 \
2 & 1.2 & 13\
3&0.6&11
\end{array}$
 (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) @#IMG-DLM& (b) Stock 3 is

Question 14

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 15

A security that plots above the SML would be a good security to sell short.

Accepted Answer

A) True 
 B)False

Question 16

Compare the capital market line and the security market line.

Accepted Answer

@#IMG-DLM& CML and SML both in

Question 17

With the APT, risk is defined in terms of a stock's sensitivity to basic economic factors.

Accepted Answer

A) True 
 B)False

Question 18

Using the separation theorem, it is necessary to match each investor's indifference curves with a particular efficient portfolio.

Accepted Answer

A) True 
 B)False

Question 19

Positive theory refers to a theory that

Accepted Answer

A)  explains how economic participants should act 
B)  describes how economic participants act 
C)  is optimistic 
D)  has been shown to have high explanatory power as a result of empirical testing 
A)  explains how economic participants should act 
B)  describes how economic participants act 
C)  is optimistic 
D)  has been shown to have high explanatory power as a result of empirical testing

Question 20

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

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

The expected return on the market for next period is 11 percent. The risk free rate of return is 4 percent, and Alpha Company has a beta of 1.1. The market risk premium is

What are the assumptions in the CAPM? Can these be relaxed without destroying the conclusions of the model?

The arbitrage pricing theory (APT)

Which of the following is the correct calculation for the required rate of return under the CAPM?

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

Risk factors in the APT must possess all of the following the characteristics except:

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

The CML indicates the required return for each portfolio risk level.

With the introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into a straight line.

What does it mean when the CAPM is called "robust?"

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

A security that plots above the SML would be a good security to sell short.

Compare the capital market line and the security market line.

With the APT, risk is defined in terms of a stock's sensitivity to basic economic factors.

Using the separation theorem, it is necessary to match each investor's indifference curves with a particular efficient portfolio.

Positive theory refers to a theory that

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

Investing Is an Important Activity Worldwide

Investment Alternatives: Generic Principles All Investors Must Know

Indirect Investing: a Global Activity

Securities Markets Matter to All Investors

All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

Portfolio Theory Is Universal

Portfolio Selection for All Investors

Common Stock Valuation Lessons for All Investors

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

Fixed Income Securities Are Available Worldwide

Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Options

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

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Exam 9: Asset Pricing Principles

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

The expected return on the market for next period is 11 percent. The risk free rate of return is 4 percent, and Alpha Company has a beta of 1.1. The market risk premium is

What are the assumptions in the CAPM? Can these be relaxed without destroying the conclusions of the model?

The arbitrage pricing theory (APT)

Which of the following is the correct calculation for the required rate of return under the CAPM?

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

Risk factors in the APT must possess all of the following the characteristics except:

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

The CML indicates the required return for each portfolio risk level.

With the introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into a straight line.

What does it mean when the CAPM is called "robust?"

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

A security that plots above the SML would be a good security to sell short.

Compare the capital market line and the security market line.

With the APT, risk is defined in terms of a stock's sensitivity to basic economic factors.

Using the separation theorem, it is necessary to match each investor's indifference curves with a particular efficient portfolio.

Positive theory refers to a theory that

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

Investing Is an Important Activity Worldwide

Investment Alternatives: Generic Principles All Investors Must Know

Indirect Investing: a Global Activity

Securities Markets Matter to All Investors

All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

Portfolio Theory Is Universal

Portfolio Selection for All Investors

Common Stock Valuation Lessons for All Investors

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

Fixed Income Securities Are Available Worldwide

Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Options

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

Filters