# Quiz 8: An Introduction to Asset Pricing Models

Anthropology

Q 1Q 1

One of the assumptions of capital market theory is that investors can borrow or lend at the risk free rate.

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True False

True

Q 2Q 2

Since many of the assumptions made by the capital market theory are unrealistic, the theory is not applicable in the real world.

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True False

False

Q 3Q 3

A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty.

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True False

True

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True False

Q 5Q 5

The introduction of lending and borrowing severely limits the available risk/return opportunities.

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True False

Q 6Q 6

The capital market line is the tangent line between the risk free rate of return and the efficient frontier.

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True False

Q 7Q 7

The portfolios on the capital market line are combinations of the risk-free asset and the market portfolio.

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True False

Q 8Q 8

If you borrow money at the RFR and invest the money in the market portfolio, the rate of return on your portfolio will be higher than the market rate of return.

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True False

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True False

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True False

Q 11Q 11

The betas of those companies compiled by Value Line Investment Services tend to be almost identical to those compiled by Merrill Lynch.

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True False

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True False

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True False

Q 14Q 14

Under the CAPM framework, the introduction of lending and borrowing at differential rates leads to a non-linear capital market line.

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True False

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True False

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True False

Q 17Q 17

The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors.

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True False

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True False

Q 19Q 19

If the market portfolio is mean-variance efficient it has the lowest risk for a given level of return among the attainable set of portfolios.

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True False

Q 20Q 20

Using the S&P index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

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True False

Q 21Q 21

If an incorrect proxy market portfolio such as the S&P index is used when developing the security market line, the slope of the line will tend to be underestimated.

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True False

Q 22Q 22

Since the market portfolio is reasonable in theory, it is easy to implement when testing or using the CAPM.

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True False

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True False

Q 24Q 24

The only way to estimate a beta for a security is to calculate the covariance of the security with the market.

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True False

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True False

Q 26Q 26

More recent studies done in 2001 suggest more securities are needed than historically to create a well-diversified portfolio.

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True False

Q 27Q 27

Tobin's separation theory states that the market is a separate investment from the risk-free security.

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True False

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True False

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True False

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True False

Q 31Q 31

Overall the correlation coefficients of industries to the market portfolio vary widely, which is expected due to the wide variance of industry Betas.

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True False

Q 32Q 32

The Capital Market Line (CML) refers only to those portfolios that lie on the line segment that extends from the risk-free asset to the point of tangency on the efficient frontier known as the market portfolio.

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True False

Q 33Q 33

Which of the following is not an assumption of the Capital Market Theory?
A)All investors are Markowitz efficient investors.
B)All investors have homogeneous expectations.
C)There are no taxes or transaction costs in buying or selling assets.
D)All investments are indivisible so it is impossible to buy or sell fractional shares.
E)All investors have the same one period time horizon.

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Multiple Choice

Q 34Q 34

The rate of return on a risk free asset should equal the
A)Long run real growth rate of the economy.
B)Long run nominal growth rate of the economy.
C)Short run real growth rate of the economy.
D)Short run nominal growth rate of the economy.
E)Prime rate of interest.

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Multiple Choice

Q 35Q 35

What does W

_{RF}= 0.50 mean? A)The investor can borrow money at the risk-free rate. B)The investor can lend money at the current market rate. C)The investor can borrow money at the current market rate. D)The investor can borrow money at the prime rate of interest. E)The investor can lend money at the prime rate of interest.Free

Multiple Choice

Q 36Q 36

The market portfolio consists of all
A)New York Stock Exchange stocks.
B)High grade stocks and bonds.
C)Stocks and bonds.
D)U.S.and non-U.S.stocks and bonds.
E)Risky assets.

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Multiple Choice

Q 37Q 37

The separation theorem divides decisions on ____ from decisions on ____.
A)Lending, borrowing
B)Risk, return
C)Investing, financing
D)Risky assets, risk free assets
E)Buying stocks, buying bonds

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Multiple Choice

Q 38Q 38

When identifying undervalued and overvalued assets, which of the following statements is false?
A)An asset is properly valued if its estimated rate of return is equal to its required rate of return.
B)An asset is considered overvalued if its estimated rate of return is below its required rate of return.
C)An asset is considered undervalued if its estimated rate of return is above its required rate of return.
D)An asset is considered overvalued if its required rate of return is below its estimated rate of return.
E)None of the above (that is, all are true statements)

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Multiple Choice

Q 39Q 39

The line of best fit for a scatter diagram showing the rates of return of an individual risky asset and the market portfolio of risky assets over time is called the
A)Security market line.
B)Capital asset pricing model.
C)Characteristic line.
D)Line of least resistance.
E)Market line.

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Multiple Choice

Q 40Q 40

Utilizing the security market line an investor owning a stock with a beta of 2 would expect the stock's return to ____ in a market that was expected to decline 15 percent.
A)Rise or fall an indeterminate amount
B)Fall by 3%
C)Fall by 30%
D)Rise by 13%
E)Rise by 30%

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Multiple Choice

Q 41Q 41

All of the following questions remain to be answered in the real world except
A)What is a good proxy for the market portfolio?
B)What happens when you cannot borrow or lend at the risk free rate?
C)How good is the capital asset model as a predictor?
D)What is the beta of the market portfolio of risky assets?
E)What is the stability of beta for individual stocks?

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Multiple Choice

Q 42Q 42

The correlation coefficient between the market return and a risk-free asset would
A)be +.
B)be .
C)be +1.
D)be 1.
E)be Zero.

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Multiple Choice

Q 43Q 43

As the number of securities in a portfolio increases, the amount of systematic risk
A)Remains constant.
B)Decreases.
C)Increases.
D)Changes.
E)None of the above

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Multiple Choice

Q 44Q 44

Theoretically, the correlation coefficient between a completely diversified portfolio and the market portfolio should be
A)1.0.
B)+1.0.
C)0.0.
D)0.5.
E)+0.5.

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Multiple Choice

Q 45Q 45

All portfolios on the capital market line are
A)Perfectly positively correlated.
B)Perfectly negatively correlated.
C)Unique from each other.
D)Weakly correlated.
E)Unrelated except that they contain the risk free asset.

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Multiple Choice

Q 46Q 46

The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)
A)Zero beta model.
B)unstable beta or a higher borrowing rate.
C)Zero beta model or a higher borrowing rate.
D)higher borrowing rate.
E)unstable beta.

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Multiple Choice

Q 47Q 47

If the assumption that there are no transaction costs is relaxed, the SML will be a
A)Straight line.
B)Band of securities.
C)Convex curve.
D)Concave curve.
E)Parabolic curve.

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Multiple Choice

Q 48Q 48

Which of the following is not a relaxation of the assumptions for the CAPM?
A)Differential lending and borrowing rates
B)A zero beta model
C)Transaction costs
D)Taxes
E)Homogeneous expectations and fixed planning periods

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Multiple Choice

Q 49Q 49

Which of the following variables were found to be important in explaining return based upon a study of Fama and French (covering the period 1963 to 1990)?
A)Size
B)Book-to-market value
C)Beta
D)Choices a and b only
E)All of the above

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Multiple Choice

Q 50Q 50

Which of the following would most closely resemble the true market portfolio?
A)Stocks
B)Stocks and bonds
C)Stocks, bonds and foreign securities
D)Stocks, bonds, foreign securities and options
E)Stocks, bonds, foreign securities options and coins

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Multiple Choice

Q 51Q 51

The error caused by not using the true market portfolio has become known as the
A)Portfolio deviation.
B)CAPM shift.
C)Benchmark error.
D)Market error.
E)Beta error.

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Multiple Choice

Q 52Q 52

The ____ the number of stocks in a portfolio and the ____ the time period the ____ the portfolio beta.
A)Larger, longer, less stable
B)Larger, longer, more stable
C)Larger, shorter, less stable
D)Larger, shorter, more stable
E)Smaller, longer, more stable

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Multiple Choice

Q 53Q 53

A completely diversified portfolio would have a correlation with the market portfolio that is
A)Equal to zero because it has only unsystematic risk.
B)Equal to one because it has only systematic risk.
C)Less than zero because it has only systematic risk.
D)Less than one because it has only unsystematic risk.
E)Less than one because it has only systematic risk.

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Multiple Choice

Q 54Q 54

In the presence of transactions costs, the SML will be
A)A single straight line.
B)A kinked line.
C)A set of lines rather than a single straight line.
D)A curve rather than a single straight line.
E)Impossible to determine.

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Multiple Choice

Q 55Q 55

All of the following are assumptions of the Capital Asset Pricing Model (CAPM) except
A)Investors can borrow and lend any amount at the risk-free rate.
B)Investors all have homogeneous expectations regarding expected returns.
C)Investors can have different time horizons, daily, weekly, annual, or some other period.
D)All investments are infinitely divisible.
E)Capital markets are in equilibrium.

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Multiple Choice

Q 56Q 56

Beta is a measure of:
A)Company specific risk
B)Industry risk
C)Diversifiable risk
D)Systematic risk
E)Unique risk

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Multiple Choice

Q 57Q 57

The Efficient Frontier refers to a set of portfolios that
A)Have the highest expected return for a given level of risk.
B)Have the lowest risk for a given level of return.
C)Are dominant to all other portfolios.
D)a, b, and c above are correct.
E)None of the answers above are correct.

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Multiple Choice

Q 58Q 58

If an individual owns only one security the most appropriate measure of risk is:
A)Standard deviation
B)Correlation
C)Beta
D)Covariance
E)All of the above are equally important

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Multiple Choice

Q 59Q 59

The betas for the market portfolio and risk-free security are: Market Risk-free
A)0 1
B)1 0
C)1 1
D)1 1
E)2 1

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Multiple Choice

Q 60Q 60

A portfolio manager uses two different proxies for the market portfolio, the S&P 500 index and the MSCI World index. Differences in the manager's portfolio performance resulting from the different market portfolios is referred to as
A)The size effect
B)The market effect
C)Measurement error
D)Benchmark error
E)Manager's performance error

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Multiple Choice

Q 61Q 61

The capital market line (CML) uses ____ as a risk measurement, whereas the capital asset pricing model (CAPM) uses ____.
A)Beta; total risk
B)Standard deviation; total risk
C)Standard deviation; systematic risk
D)Unsystematic risk; total risk
E)Systematic risk; beta

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Multiple Choice

Q 62Q 62

Which of the following is not a major difference between the capital market line (CML) and the capital asset pricing model (CAPM)?
A)Definitions of portfolio risk are based on systematic and total risk
B)One is related to the market portfolio, the other does not
C)The number of calculations to determine risk is significantly greater for one method
D)One requires a tangency point on the efficient frontier, the other does not
E)All of the above

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Multiple Choice

Q 63Q 63

Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.
A)11.13%
B)14.97%
C)16.25%
D)22.25%
E)17.0%

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Multiple Choice

Q 64Q 64

Calculate the expected return for B Services which has a beta of 0.83 when the risk free rate is 0.05 and you expect the market return to be 0.12.
A)14.96%
B)16.15%
C)10.81%
D)17.00%
E)15.25%

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Multiple Choice

Q 65Q 65

Calculate the expected return for C Inc. which has a beta of 0.8 when the risk free rate is 0.04 and you expect the market return to be 0.12.
A)8.10%
B)9.60%
C)10.40%
D)11.20%
E)12.60%

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Multiple Choice

Q 66Q 66

Calculate the expected return for D Industries which has a beta of 1.0 when the risk free rate is 0.03 and you expect the market return to be 0.13.
A)8.6%
B)9.2%
C)11.0%
D)12.0%
E)13.0%

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Multiple Choice

Q 67Q 67

Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is 0.05 and you expect the market return to be 0.11.
A)10.6%
B)12.1%
C)13.6%
D)14.0%
E)16.2%

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Multiple Choice

Q 68Q 68

Calculate the expected return for F Inc. which has a beta of 1.3 when the risk free rate is 0.06 and you expect the market return to be 0.125.
A)12.65%
B)13.55%
C)14.45%
D)15.05%
E)16.34%

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Multiple Choice

Q 69Q 69

Exhibit 8.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.1. Compute the beta for RA Computer using the historic returns presented above.
A)0.7715
B)1.2195
C)1.3893
D)1.1023
E)0.7715

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Multiple Choice

Q 70Q 70

Exhibit 8.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.1. Compute the correlation coefficient between RA Computer and the Market Index.
A)0.32
B)0.78
C)0.66
D)0.58
E)0.32

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Multiple Choice

Q 71Q 71

Exhibit 8.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.1. Compute the intercept of the characteristic line for RA Computer.
A)9.41
B)11.63
C)4.92
D)4.92
E)7.98

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Multiple Choice

Q 72Q 72

Exhibit 8.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.1. The equation of the characteristic line for RA is
A)R

_{RA}= 11.63 + 1.2195R_{MI}B)R_{RA}= 7.98 + 1.1023R_{MI}C)R_{RA}= 9.41 + 1.3893R_{MI}D)R_{RA}= 4.92 0.7715R_{MI}E)R_{RA}= 4.92 + 0.7715R_{MI}Free

Multiple Choice

Q 73Q 73

Exhibit 8.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.1. If you expected the return on the Market Index to be 12%, what would you expect the return on RA Computer to be?
A)7.26%
B)6.75%
C)8.00%
D)9.37%
E)3.29%

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Multiple Choice

Q 74Q 74

Exhibit 8.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
-Refer to Exhibit 8.2. What are the expected (required) rates of return for the three stocks (in the order X, Y, Z)?
A)16.50%, 5.50%, 22.00%
B)9.25%, 10.5%, 7.5%
C)21.25%, 8.33%, 11.43%
D)6.20%, 2.20%, 8.20%
E)15.00%, 3.50%, 7.30%

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Multiple Choice

Q 75Q 75

Exhibit 8.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
-Refer to Exhibit 8.2. What are the estimated rates of return for the three stocks (in the order X, Y, Z)?
A)21.25%, 8.33%, 11.43%
B)6.20%, 2.20%, 8.20%
C)16.50%, 5.50%, 22.00%
D)9.25%, 10.5%, 7.5%
E)15.00%, 3.50%, 7.30%

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Multiple Choice

Q 76Q 76

Exhibit 8.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
-Refer to Exhibit 8.2. What is your investment strategy concerning the three stocks?
A)Buy X and Y, sell Z.
B)Sell X, Y and Z.
C)Sell X and Z, buy Y.
D)Buy X, Y and Z.
E)Buy X and Z, sell Y.

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Multiple Choice

Q 77Q 77

Recently you have received a tip that the stock of Bubbly Incorporated is going to rise from $57 to $61 per share over the next year. You know that the annual return on the S&P 500 has been 9.25% and the 90-day T-bill rate has been yielding 3.75% per year over the past 10 years. If beta for Bubbly is 0.85, will you purchase the stock?
A)Yes, because it is overvalued.
B)No, because it is overvalued.
C)No, because it is undervalued.
D)Yes, because it is undervalued.
E)Yes, because the expected return equals the estimated return.

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Multiple Choice

Q 78Q 78

Your broker has advised you that he believes that the stock of Brat Inc. is going to rise from $20 to $22.15 per share over the next year. You know that the annual return on the S&P 500 has been 11.25% and the 90-day T-bill rate has been yielding 4.75% per year over the past 10 years. If beta for Brat is 1.25, will you purchase the stock?
A)Yes, because it is overvalued
B)No, because it is overvalued
C)No, because it is undervalued
D)Yes, because it is undervalued
E)Yes, because the expected return equals the estimated return

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Multiple Choice

Q 79Q 79

Recently you have received a tip that the stock of Buttercup Industries is going to rise from $76.00 to $85.00 per share over the next year. You know that the annual return on the S&P 500 has been 13% and the 90-day T-bill rate has been yielding 3% per year over the past 10 years. If beta for Buttercup is 1.0, will you purchase the stock?
A)Yes, because it is overvalued.
B)Yes, because it is undervalued.
C)No, because it is undervalued.
D)No, because it is overvalued.
E)Yes, because the expected return equals the estimated return.

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Multiple Choice

Q 80Q 80

A friend has some reliable information that the stock of Puddles Company is going to rise from $43.00 to $50.00 per share over the next year. You know that the annual return on the S&P 500 has been 11% and the 90-day T-bill rate has been yielding 5% per year over the past 10 years. If beta for Puddles is 1.5, will you purchase the stock?
A)Yes, because it is overvalued.
B)Yes, because it is undervalued.
C)No, because it is undervalued.
D)No, because it is overvalued.
E)Yes, because the expected return equals the estimated return.

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Multiple Choice

Q 81Q 81

Recently your broker has advised you that he believes that the stock of Casey Incorporated is going to rise from $55.00 to $70.00 per share over the next year. You know that the annual return on the S&P 500 has been 12.5% and the 90-day T-bill rate has been yielding 6% per year over the past 10 years. If beta for Casey is 1.3, will you purchase the stock?
A)Yes, because it is overvalued.
B)Yes, because it is undervalued.
C)No, because it is undervalued.
D)No, because it is overvalued.
E)Yes, because the expected return equals the estimated return.

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Multiple Choice

Q 82Q 82

A friend has information that the stock of Zip Incorporated is going to rise from $62.00 to $65.00 per share over the next year. You know that the annual return on the S&P 500 has been 10% and the 90-day T-bill rate has been yielding 6% per year over the past 10 years. If beta for Zip is 0.9, will you purchase the stock?
A)Yes, because it is overvalued.
B)Yes, because it is undervalued.
C)No, because it is undervalued.
D)No, because it is overvalued.
E)Yes, because the expected return equals the estimated return.

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Multiple Choice

Q 83Q 83

Assume that as a portfolio manager the beta of your portfolio is 0.85 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?
A)1.33% higher
B)2.35% lower
C)8% lower
D)1.33% lower
E)2.35% higher

Free

Multiple Choice

Q 84Q 84

Assume that as a portfolio manager the beta of your portfolio is 1.15 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?
A)2.53% lower
B)3.85% lower
C)2.53% higher
D)4.4% higher
E)3.85% higher

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Multiple Choice

Q 85Q 85

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?
A)4.2% lower
B)3.6% lower
C)3.8% lower
D)4.2% higher
E)3.6% higher

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Multiple Choice

Q 86Q 86

Assume that as a portfolio manager the beta of your portfolio is 1.2 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?
A)2% lower
B)1% lower
C)5% lower
D)1% higher
E)2% higher

Free

Multiple Choice

Q 87Q 87

Assume that as a portfolio manager the beta of your portfolio is 1.1 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?
A)3.2% lower
B)6.4% lower
C)4.9% lower
D)3.2% higher
E)6.4% higher

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Multiple Choice

Q 88Q 88

Assume that as a portfolio manager the beta of your portfolio is 1.4 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?
A)2.0% lower
B)0.5% lower
C)0.5% lower
D)1.0% higher
E)2.0% higher

Free

Multiple Choice

Q 89Q 89

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.3. The average true return is
A)1%
B)2%
C)3%
D)4%
E)5%

Free

Multiple Choice

Q 90Q 90

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.3. The average proxy return is
A)1%
B)2%
C)3%
D)4%
E)5%

Free

Multiple Choice

Q 91Q 91

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.3. The average return for Radtron is
A)1%
B)2%
C)3%
D)4%
E)5%

Free

Multiple Choice

Q 92Q 92

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.3. The covariance between Radtron and the proxy index is
A)57.30
B)86.50
C)88.00
D)92.50
E)107.90

Free

Multiple Choice

Q 93Q 93

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.3. The covariance between Radtron and the true index is
A)57.30
B)86.50
C)88.00
D)92.50
E)107.90

Free

Multiple Choice

Q 94Q 94

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.3. What is the beta for Radtron using the proxy index?
A)0.87
B)0.97
C)1.02
D)1.15
E)1.28

Free

Multiple Choice

Q 95Q 95

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.3. What is the beta for Radtron using the true index?
A)0.87
B)0.97
C)1.02
D)1.15
E)1.28

Free

Multiple Choice

Q 96Q 96

Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5% and the expected return on the stock index is 15%. The estimated return on the asset is 20%. Calculate the alpha for the asset.
A)19.25%
B)0.75%
C)0.75%
D)9.75%
E)9.0%

Free

Multiple Choice

Q 97Q 97

The variance of returns for a risky asset is 25%. The variance of the error term, Var(e), is 8%. What portion of the total risk of the asset, as measured by variance, is systematic?
A)32%
B)8%
C)68%
D)25%
E)75%

Free

Multiple Choice

Q 98Q 98

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. The standard deviation of returns on the stock index is 6%. Calculate the expected standard deviation of the portfolio.
A)4.20%
B)25.20%
C)3.29%
D)10.80%
E)5.02%

Free

Multiple Choice

Q 99Q 99

An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 4.0% and the expected return on the stock index is 15%. Calculate the expected return on the portfolio.
A)18.25%
B)18.85%
C)9.50%
D)15.00%
E)11.15%

Free

Multiple Choice

Q 100Q 100

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. Calculate the expected return on the portfolio.
A)8.25%
B)16.50%
C)17.50%
D)9.75%
E)14.38%

Free

Multiple Choice

Q 101Q 101

A stock has a beta of 1.25. The risk free rate is 5% and the return on the market is 6%. The estimated return for the stock is 14%. According to the CAPM you should
A)Sell because it is overvalued.
B)Sell because it is undervalued.
C)Buy because it overvalued.
D)Buy because it is undervalued.
E)Short because it is undervalued.

Free

Multiple Choice

Q 102Q 102

Consider a risky asset that has a standard deviation of returns of 15. Calculate the correlation between the risky asset and a risk free asset.
A)1.0
B)0.0
C)1.0
D)0.5
E)0.5

Free

Multiple Choice

Q 103Q 103

The expected return for a stock, calculated using the CAPM, is 10.5%. The market return is 9.5% and the beta of the stock is 1.50. Calculate the implied risk-free rate.
A)7.50%
B)13.91%
C)17.50%
D)21.88%
E)14.38%

Free

Multiple Choice

Q 104Q 104

The expected return for a stock, calculated using the CAPM, is 25%. The risk free rate is 7.5% and the beta of the stock is 0.80. Calculate the implied return on the market.
A)7.50%
B)13.91%
C)17.50%
D)21.88%
E)14.38%

Free

Multiple Choice

Q 105Q 105

The expected return for Zbrite stock calculated using the CAPM is 15.5%. The risk free rate is 3.5% and the beta of the stock is 1.2. Calculate the implied market risk premium.
A)5.5%
B)6.5%
C)10.0%
D)15.5%
E)12.0%

Free

Multiple Choice

Q 106Q 106

Exhibit 8.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.4. What are the expected returns for stocks X, Y, and Z for the next period based on the above prices and dividends? X Y Z
A)4.8% 18.3% 16.9%
B)10.7% 17.5% 14.4%
C)11.2% 20.7% 16.9%
D)12.3% 22.5% 22.3%
E)13.1% 24.3% 18.2%

Free

Multiple Choice

Q 107Q 107

Exhibit 8.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.4. If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM? X Y Z
A)4.8% 18.3% 16.9%
B)7.2% 20.7% 22.3%
C)10.7% 17.5% 14.4%
D)10.1% 12.2% 19.2%
E)11.1% 12.2% 21.3%

Free

Multiple Choice

Q 108Q 108

Exhibit 8.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.4. Which of the following statements is correct?
A)Stocks X, Y, and Z are undervalued.
B)Stocks X, Y and Z are overvalued.
C)Stocks X and Y are overvalued and stock Z is undervalued.
D)Stocks X and Y are undervalued and stock Z is overvalued.
E)Stocks X, Y, and Z are all properly valued.

Free

Multiple Choice

Q 109Q 109

Exhibit 8.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.5. Calculate the risk premium per unit of risk for the three portfolios above assuming the risk-free rate is 4.0%. A B C
A)0.068 0.027 0.072
B)0.414 0.276 0.389
C)0.700 0.680 0.605
D)0.300 0.280 0.205
E)0.650 0.580 0.480

Free

Multiple Choice

Q 110Q 110

Exhibit 8.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
-Refer to Exhibit 8.5. Which of the three portfolios are most likely to be the market portfolio?
A)Portfolio A
B)Portfolio B
C)Portfolio C
D)All of the portfolios are equally likely to be the market portfolio
E)There is insufficient information to differentiate between the three portfolios

Free

Multiple Choice

Q 111Q 111

Assume that the risk-free rate of return is 3% and the market portfolio on the Capital Market Line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8%?
A)Invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate.
B)Invest $80,000 in the market portfolio and the remainder in the risk-free security.
C)Invest $63,636.36 in the market portfolio and the remainder in the risk-free security.
D)Invest $36,363.64 in the market portfolio and the remainder in the risk-free security.
E)Invest $100,000 on another portfolio on the CML that does not contain any of the market portfolio or the risk-free security, but has a standard deviation of 8%.

Free

Multiple Choice

Q 112Q 112

Exhibit 8.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6% with a standard deviation of 13% and a beta of 1.3. The market risk premium for this period of time was 6% and the risk-free rate of return was 5%.
-Refer to Exhibit 8.6. Based on the Capital Asset Pricing Model (CAPM), what is the required rate of return for this portfolio?
A)6.3%
B)7.8%
C)10.6%
D)12.8%
E)15.4%

Free

Multiple Choice

Q 113Q 113

Exhibit 8.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6% with a standard deviation of 13% and a beta of 1.3. The market risk premium for this period of time was 6% and the risk-free rate of return was 5%.
-Refer to Exhibit 8.6. How does Jonathan Crowley's portfolio compare to the market portfolio?
A)Crowley's portfolio is less risky than the market portfolio.
B)Crowley's portfolio significantly outperformed the market portfolio.
C)On a risk-adjusted basis Crowley's portfolio performed similar to the market portfolio.
D)On a risk-adjusted basis Crowley's portfolio significantly underperformed the market.
E)On a risk-adjusted basis Crowley's portfolio significantly outperformed the market.

Free

Multiple Choice

Q 114Q 114

Assume the risk-free rate is 4.5% and the expected return on the market is 11%. You anticipate Stock XYZ to sell for $28 at the end of next year and pay a dividend of $2. The stock is currently selling for $26.50 with a beta of 1.2. You currently hold stock XYZ in a well-diversified portfolio. Assuming you have money to invest, you should:
A)Buy stock XYZ.
B)Sell stock XYZ.
C)Do nothing because it is properly valued.
D)Invest your money in the risk-free rate of return.
E)Both b and d above.

Free

Multiple Choice

Q 115Q 115

Exhibit 8.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
-Refer to Exhibit 8.7. What are the required rates of return for the three stocks (in the order A, B, C)?
A)13.0%, 10.6%, 8.8%
B)15.0%, 11.1%, 2.9%
C)18.7%, 11.1%, 8.8%
D)21.7%, 10.0%, 6.9%
E)25.0%, 11.1%, 7.1%

Free

Multiple Choice

Q 116Q 116

Exhibit 8.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
-Refer to Exhibit 8.7. What are the estimated rates of return for the three stocks (in the order A, B, C)?
A)13.0%, 10.6%, 8.8%
B)15.0%, 11.1%, 2.9%
C)18.7%, 11.1%, 8.8%
D)21.7%, 10.0%, 6.9%
E)25.0%, 11.1%, 7.1%

Free

Multiple Choice

Q 117Q 117

Exhibit 8.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
-Refer to Exhibit 8.7. What is your investment strategy concerning the three stocks?
A)Buy A and B, sell C.
B)Sell A, B and C.
C)Sell A and B, buy C.
D)Buy A, B and C.
E)Buy A and C, sell B.

Free

Multiple Choice

Q 118Q 118

An investor constructs a portfolio with a 75% allocation to a stock index and a 25% allocation to a risk free asset. The expected returns on the risk-free asset and the stock index are 3% and 10%, respectively. The standard deviation of returns on the stock index is 14%. Calculate the expected standard deviation of the portfolio.
A)7.5%
B)9.0%
C)10.5%
D)11.5%
E)13.0%

Free

Multiple Choice

Q 119Q 119

An investor wishes to construct a portfolio by borrowing 30% of his initial wealth at the risk-free rate of 3% and investing all the money in a stock index. The expected return on the stock index is 12%. Calculate the expected return on the portfolio.
A)14.7%
B)15.6%
C)17.1%
D)18.9%
E)19.7%

Free

Multiple Choice