Question 1

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.

Accepted Answer

A)  100, 100
B)  40, 40
C)  4950, 100
D)  4950, 4950
E)  none of the above B

Question 2

If a firm's beta was calculated as 1.3 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of

Accepted Answer

A)  less than 1.0 but greater than zero.
B)  between 0.3 and 0.9.
C)  between 1.0 and 1.3.
D)  greater than 1.3.
E)  zero or less. C

Question 3

Discuss the security characteristic line (SCL).

Accepted Answer

The security characteristic line (SCL) is the result of estimating the regression equation of the single-index model. The SCL is a plot of the typical excess returns on a security over the risk-free rate as a function of the excess return on the market. The slope of the SCL is the beta of the security, and the intercept (alpha) is the excess return on the security when the excess market return is zero.

Question 4

Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters.

Accepted Answer

A)  12
B)  36
C)  60
D)  120
E)  none of the above

Question 5

Rosenberg and Guy found that ___________ helped to predict firms' betas.

Accepted Answer

A)  debt/asset ratios
B)  market capitalization
C)  variance of earnings
D)  all of the above
E)  none of the above

Question 6

The idea that there is a limit to the reduction of portfolio risk due to diversification is

Accepted Answer

A)  contradicted by both the CAPM and the single-index model.
B)  contradicted by the CAPM.
C)  contradicted by the single-index model.
D)  supported in theory, but not supported empirically.
E)  supported both in theory and by empirical evidence.

Question 7

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 217 stocks in order to construct a mean-variance efficient portfolio constrained by 217 investments.They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Accepted Answer

A)  217; 47,089
B)  217; 217
C)  47,089; 217
D)  47,089; 47,089
E)  none of the above

Question 8

Security returns

Accepted Answer

A)  are based on both macro events and firm-specific events.
B)  are based on firm-specific events only.
C)  are usually positively correlated with each other.
D)  A and B.
E)  A and C.

Question 9

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 500 stocks in order to construct a mean-variance efficient portfolio constrained by 500 investments.They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimates for the variance of the macroeconomic factor.

Accepted Answer

A)  500; 1
B)  500; 500
C)  124,750; 1
D)  124,750; 500
E)  250,000; 500

Question 10

As diversification increases,the firm-specific risk of a portfolio approaches ____________.

Accepted Answer

A)  0
B)  1
C)  infinity
D)  n-1 * n
E)  none of the above

Question 11

The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of ___________.

Accepted Answer

A)  1.01
B)  0.95
C)  1.13
D)  0.90
E)  none of the above

Question 12

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 above

Question 13

Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%.The unadjusted β of Mobil stock is 1.30.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)  15.5%
C)  16.0%
D)  16.8%
E)  none of the above

Question 14

Suppose the following equation best describes the evolution of β over time:
Βt= 0.4 + 0.6βt-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)  0.45
B)  0.60
C)  0.70
D)  0.94
E)  none of the above

Question 15

A single-index model uses __________ as a proxy for the systematic risk factor.

Accepted Answer

A)  a market index, such as the S&P 500
B)  the current account deficit
C)  the growth rate in GNP
D)  the unemployment rate
E)  none of the above

Question 16

If a firm's beta was calculated as 1.35 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of.SSS

Accepted Answer

A)  less than 1.35.
B)  between 0.0 and 1.0.
C)  between 1.0 and 1.35.
D)  greater than 1.35.
E)  zero or less.

Question 17

The index model has been estimated for stock A with the following results:
RA= 0.01 + 0.8RM+ eA
ΒM= 0.20 β(eA)= 0.10
The standard deviation of the return for stock A is __________.

Accepted Answer

A)  0.0356
B)  0.1886
C)  0.1600
D)  0.6400
E)  none of the above

Question 18

According to the index model,covariances among security pairs are

Accepted Answer

A)  due to the influence of a single common factor represented by the market index return
B)  extremely difficult to calculate
C)  related to industry-specific events
D)  usually positive
E)  A and D

Question 19

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 1.30.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)  15.5%
C)  16.0%
D)  14.6%
E)  none of the above

Question 20

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the β of your portfolio was 0.14 and βMwas 0.19,the β of the portfolio would be approximately ________.

Accepted Answer

A)  0.74
B)  0.80
C)  1.25
D)  1.56
E)  none of the above

Exam 8: Index Models

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments.They will need to calculate ___ expected returns and _ variances of returns.

If a firm's beta was calculated as 1.3 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of

Discuss the security characteristic line (SCL).

Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters.

Rosenberg and Guy found that ___________ helped to predict firms' betas.

The idea that there is a limit to the reduction of portfolio risk due to diversification is

Security returns

As diversification increases,the firm-specific risk of a portfolio approaches ____________.

The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of ___________.

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.

Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%.The unadjusted β of Mobil stock is 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.

Suppose the following equation best describes the evolution of β over time: Β_t= 0.4 + 0.6β_t-1 If a stock had a β of 0.9 last year,you would forecast the β to be _______ in the coming year.

A single-index model uses __________ as a proxy for the systematic risk factor.

If a firm's beta was calculated as 1.35 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of.SSS

The index model has been estimated for stock A with the following results: R_A= 0.01 + 0.8R_M+ e_A Β_M= 0.20 β(e_A) = 0.10 The standard deviation of the return for stock A is __________.

According to the index model,covariances among security pairs are

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 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the β of your portfolio was 0.14 and β_Mwas 0.19,the β of the portfolio would be approximately ________.

Exam 8: Index Models

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments.They will need to calculate _____________ expected returns and ___________ variances of returns.

If a firm's beta was calculated as 1.3 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of

Discuss the security characteristic line (SCL).

Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters.

Rosenberg and Guy found that ___________ helped to predict firms' betas.

The idea that there is a limit to the reduction of portfolio risk due to diversification is

Security returns

As diversification increases,the firm-specific risk of a portfolio approaches ____________.

The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns.A commonly used adjustment technique would provide an adjusted beta of ___________.

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.

Suppose you forecast that the market index will earn a return of 15% in the coming year.Treasury bills are yielding 6%.The unadjusted β of Mobil stock is 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.

Suppose the following equation best describes the evolution of β over time: Βt= 0.4 + 0.6βt-1 If a stock had a β of 0.9 last year,you would forecast the β to be _______ in the coming year.

A single-index model uses __________ as a proxy for the systematic risk factor.

If a firm's beta was calculated as 1.35 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of.SSS

The index model has been estimated for stock A with the following results: RA= 0.01 + 0.8RM+ eA ΒM= 0.20 β(eA) = 0.10 The standard deviation of the return for stock A is __________.

According to the index model,covariances among security pairs are

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 1.30.A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the β of your portfolio was 0.14 and βMwas 0.19,the β of the portfolio would be approximately ________.

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 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.

Suppose the following equation best describes the evolution of β over time: Β_t= 0.4 + 0.6β_t-1 If a stock had a β of 0.9 last year,you would forecast the β to be _______ in the coming year.

The index model has been estimated for stock A with the following results: R_A= 0.01 + 0.8R_M+ e_A Β_M= 0.20 β(e_A) = 0.10 The standard deviation of the return for stock A is __________.

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the β of your portfolio was 0.14 and β_Mwas 0.19,the β of the portfolio would be approximately ________.