Question 1

Underpriced stocks will plot above the security market line.

Accepted Answer

A) True 
 B)False

Question 2

Florida Company (FC)and Minnesota Company (MC)are both service companies.Their stock returns for the past three years were: FC: -5%,15%,20%; MC: 8%,8%,20%.If FC and MC are combined into a portfolio with 50% of the funds invested in each stock,calculate the expected return on the portfolio.

Accepted Answer

A) 12% 
B) 10% 
C) 11% 
D) 9%

Question 3

In addition to common stocks,the addition of investment-grade baseball trading cards (as an investment alternative)will likely expand the efficient frontier to a better risk-return trade-off.

Accepted Answer

A) True 
 B)False

Question 4

Assume the following data for a stock: Beta = 0.9; Risk-free rate = 4%; Market rate of return = 14%; and Expected rate of return on the stock = 13%.Then the stock is:

Accepted Answer

A) overpriced. 
B) underpriced. 
C) correctly priced. 
D) cannot be determined.

Question 5

Briefly discuss how you would use the Fama-French three-factor model to estimate the cost of equity for a firm.

Accepted Answer

The answer of Briefly discuss how you would use the...

Question 6

Assume the following data for a stock: Beta = 0.5; Risk-free rate = 4%; Market rate of return = 12%; and Expected rate of return on the stock = 10%.Then the stock is:

Accepted Answer

A) overpriced. 
B) underpriced. 
C) correctly priced. 
D) cannot be determined.

Question 7

Florida Company (FC)and Minnesota Company (MC)are both service companies.Their stock returns for the past three years were: FC: - 5%,15%,20%; MC: 8%,8%,20%.
Calculate the mean return for each company.

Accepted Answer

A) FC: 12%,MC: 6% 
B) FC: 10%,MC: 12% 
C) FC: 20%,MC: 32% 
D) None of the options

Question 8

Briefly explain the Fama-French three-factor model.

Accepted Answer

The answer of Briefly explain the Fama-French three-factor model....

Question 9

If a stock were overpriced,it would plot:

Accepted Answer

A) above the security market line. 
B) below the security market line. 
C) on the security market line. 
D) on the Y-axis.

Question 10

Most investors dislike uncertainty.

Accepted Answer

A) True 
 B)False

Question 11

Florida Company (FC)and Minnesota Company (MC)are both service companies.Their stock returns for the past three years were: FC: -5%,15%,20%; MC: 8%,8%,20%.
Calculate the covariance between the returns of FC and MC.

Accepted Answer

A) 60 
B) 80 
C) 40 
D) 100

Question 12

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 18% and a risk-free asset with an interest rate of 4%.Calculate the expected return on the resulting portfolio.

Accepted Answer

A) 10% 
B) 4% 
C) 12% 
D) 9%

Question 13

The distribution of daily returns for stocks is more closely related to the lognormal distribution than the normal distribution.

Accepted Answer

A) True 
 B)False

Question 14

The security market line (SML)is the graph of:

Accepted Answer

A) expected rate of return on investment vs.variance of returns. 
B) expected rate of return on investment vs.standard deviation of returns. 
C) expected rate of return on investment vs.beta. 
D) expected rate of return on investment vs.average returns.

Question 15

Where would underpriced and overpriced securities plot on the SML (security market line)?

Accepted Answer

The answer of Where would underpriced and overpriced securities plot...

Question 16

Normal and lognormal distributions are completely specified by their:
i.mean; II)standard deviation; III)third moment

Accepted Answer

A) I only 
B) I and II only 
C) II only 
D) III only

Question 17

Briefly explain the effect of introducing borrowing and lending at the risk-free rate on the efficient portfolios.

Accepted Answer

The answer of Briefly explain the effect of introducing borrowing...

Question 18

Florida Company (FC)and Minnesota Company (MC)are both service companies.Their stock returns for the past three years were: FC: -5%,15%,20%; MC: 8%,8%,20%.
Calculate the standard deviations of returns for FC and MC.

Accepted Answer

A) FC: 10.0% MC: 12.0% 
B) FC: 18.7% MC: 9.8% 
C) FC: 13.2% MC: 6.9% 
D) FC: 6.9% MC: 13.2%

Question 19

Does it make sense that returns on holding a U.S.Treasury bill are always lower than the returns on the S&P 500 index?

Accepted Answer

The answer of Does it make sense that returns on...

Question 20

The graphical representation of the CAPM (capital asset pricing model)is called the:

Accepted Answer

A) capital market line. 
B) characteristic line. 
C) security market line. 
D) none of the options.

Exam 8: Portfolio Theory and the Capital Asset Pricing Model

Underpriced stocks will plot above the security market line.

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were: FC: -5%,15%,20%; MC: 8%,8%,20%.If FC and MC are combined into a portfolio with 50% of the funds invested in each stock,calculate the expected return on the portfolio.

In addition to common stocks,the addition of investment-grade baseball trading cards (as an investment alternative)will likely expand the efficient frontier to a better risk-return trade-off.

Assume the following data for a stock: Beta = 0.9; Risk-free rate = 4%; Market rate of return = 14%; and Expected rate of return on the stock = 13%.Then the stock is:

Briefly discuss how you would use the Fama-French three-factor model to estimate the cost of equity for a firm.

Assume the following data for a stock: Beta = 0.5; Risk-free rate = 4%; Market rate of return = 12%; and Expected rate of return on the stock = 10%.Then the stock is:

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were: FC: - 5%,15%,20%; MC: 8%,8%,20%. Calculate the mean return for each company.

Briefly explain the Fama-French three-factor model.

If a stock were overpriced,it would plot:

Most investors dislike uncertainty.

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were: FC: -5%,15%,20%; MC: 8%,8%,20%. Calculate the covariance between the returns of FC and MC.

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 18% and a risk-free asset with an interest rate of 4%.Calculate the expected return on the resulting portfolio.

The distribution of daily returns for stocks is more closely related to the lognormal distribution than the normal distribution.

The security market line (SML) is the graph of:

Where would underpriced and overpriced securities plot on the SML (security market line)?

Normal and lognormal distributions are completely specified by their: i.mean; II) standard deviation; III) third moment

Briefly explain the effect of introducing borrowing and lending at the risk-free rate on the efficient portfolios.

Florida Company (FC) and Minnesota Company (MC) are both service companies.Their stock returns for the past three years were: FC: -5%,15%,20%; MC: 8%,8%,20%. Calculate the standard deviations of returns for FC and MC.

Does it make sense that returns on holding a U.S.Treasury bill are always lower than the returns on the S&P 500 index?

The graphical representation of the CAPM (capital asset pricing model) is called the: