Question 1

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 0.30 and σM was 0.16, the β of the portfolio would be approximately

Accepted Answer

A)  0.64. 
B)  1.80. 
C)  1.88. 
D)  1.56.

Question 2

Assume that stock market returns do follow 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 ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A)  125; 15,225 
B)  15,625; 125 
C)  7,750; 125 
D)  125; 125

Question 3

Consider the single-index model. The alpha of a stock is 2%. 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)  0.82. 
D)  1.33. 
E)  1.50.

Question 4

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

Question 5

HAW Inc. has an estimated beta of 0.87. Given a forecasted market return of 9% and a T-bill rate 3%, using the index model and the adjusted beta, what is the forecasted return?

Accepted Answer

A)  11.7% 
B)  10.2% 
C)  8.5% 
D)  7.8%

Question 6

Using the single index model, what is the alpha of a stock with beta of 1.2, a market return of 14%, risk free rate of 3% and the actual return of the stock is 18%?

Accepted Answer

A)  −1.37% 
B)  0.75% 
C)  1.80% 
D)  2.11% 
E)  −3.12%

Question 7

Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of

Accepted Answer

A)  the α of the asset. 
B)  the β of the asset. 
C)  the σ of the asset. 
D)  the δ of the asset.

Question 8

Suppose the following equation best describes the evolution of β over time:βt = 0.36 + 0.85βt − 1.If a stock had a β of 0.6 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A)  0.45 
B)  0.60 
C)  0.87 
D)  0.75

Question 9

The security characteristic line (SCL)

Accepted Answer

A)  plots the excess return on a security as a function of the excess return on the market. 
B)  allows one to estimate the beta of the security. 
C)  allows one to estimate the alpha of the security. 
D)  All of the options. 
E)  None of the options are correct.

Question 10

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained by 175 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A)  175; 15,225 
B)  175; 175 
C)  15,225; 175 
D)  15,225; 15,225

Question 11

If the index model is valid, _________ would be helpful in determining the covariance between assets GM and GE.

Accepted Answer

A)  βGM 
B)  βGE 
C)  σM 
D)  all of the options 
E)  None of the options are correct.

Question 12

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.

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

Accepted Answer

A)  0.64. 
B)  1.33. 
C)  1.25. 
D)  1.56.

Question 14

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 750 stocks in order to construct a mean-variance efficient portfolio constrained by 750 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimate(s) for the variance of the macroeconomic factor.

Accepted Answer

A)  750; 1 
B)  750; 750 
C)  124,750; 1 
D)  124,750; 750 
E)  562,500; 750

Question 15

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 0.17, the β of the portfolio would be approximately

Accepted Answer

A)  1.34. 
B)  1.29. 
C)  1.25. 
D)  1.56.

Question 16

Suppose the following equation best describes the evolution of β over time:βt = 0.49 + 0.77βt − 1.If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.

Accepted Answer

A)  0.88 
B)  0.82 
C)  0.31 
D)  1.18

Question 17

Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted β of Mobil stock is 1.10. A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.

Accepted Answer

A)  15.0% 
B)  14.5% 
C)  13.0% 
D)  12.5%

Question 18

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.

Accepted Answer

A)  150; 150 
B)  150; 22500 
C)  22500; 150 
D)  22500; 22500

Question 19

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 _____________ expected returns and ___________ variances of returns.

Accepted Answer

A)  125; 125 
B)  125; 15,625 
C)  15,625; 125 
D)  15,625; 15,625 
E)  None of the options are correct.

Question 20

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 132 stocks in order to construct a mean-variance efficient portfolio constrained by 132 investments. They will need to calculate ____________ covariances.

Accepted Answer

A)  100 
B)  132 
C)  4,950 
D)  8,646

Exam 8: Index Models

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 0.30 and σ_M was 0.16, the β of the portfolio would be approximately

Consider the single-index model. The alpha of a stock is 2%. 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

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.

HAW Inc. has an estimated beta of 0.87. Given a forecasted market return of 9% and a T-bill rate 3%, using the index model and the adjusted beta, what is the forecasted return?

Using the single index model, what is the alpha of a stock with beta of 1.2, a market return of 14%, risk free rate of 3% and the actual return of the stock is 18%?

Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of

Suppose the following equation best describes the evolution of β over time:β_t = 0.36 + 0.85β_t ₋₁.If a stock had a β of 0.6 last year, you would forecast the β to be _______ in the coming year.

The security characteristic line (SCL)

If the index model is valid, _________ would be helpful in determining the covariance between assets GM and GE.

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

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 0.24 and σ_M was 0.18, 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 0.17, the β of the portfolio would be approximately

Suppose the following equation best describes the evolution of β over time:β_t = 0.49 + 0.77β_t ₋₁.If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.

Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted β of Mobil stock is 1.10. A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments. They will need to calculate ___ expected returns and _ variances of returns.

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 ___ expected returns and _ variances of returns.

Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 132 stocks in order to construct a mean-variance efficient portfolio constrained by 132 investments. They will need to calculate ____________ covariances.