Question 1

Consider the single-index model.The alpha of a stock is 0%.The return on the market index is 10%.The risk-free rate of return is 5%.The stock earns a return that exceeds the risk-free rate by 5%, and there are no firm-specific events affecting the stock performance.The β of the stock is
A)0.67.
B)0.75.
C)1.0.
D)1.33.
E)1.50.

Accepted Answer

5% = 0% + b(5%); b = 1.0.

Question 2

Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.

Accepted Answer

The answer of Discuss the advantages of the single-index model...

Question 3

Suppose the following equation best describes the evolution of β over time: β_t = 0.30 + 0.70β_{t -} ₁ If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year. A)0.91 B)0.77 C)0.63 D)0.87

Accepted Answer

0.30 + 0.70(0.82) = 0.874.

Question 4

Discuss the security characteristic line (SCL).

Accepted Answer

The answer of Discuss the security characteristic line (SCL)....

Question 5

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 0.14 and σ_M was 0.19, the β of the portfolio would be approximately A)0.74. B)0.80. C)1.25. D)1.56.

Accepted Answer

s²p/s²m = b²; (0.14)²/(0.19)² = 0.54; b = 0.74.

Question 6

Discuss a commonly used adjustment technique to provide an adjusted beta.

Accepted Answer

The answer of Discuss a commonly used adjustment technique to...

Question 7

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

Accepted Answer

s²p/s²m = b²; (0.24)²/(0.18)² = 1.78; b = 1.33.

Quiz 8: Index Models

Consider the single-index model.The alpha of a stock is 0%.The return on the market index is 10%.The risk-free rate of return is 5%.The stock earns a return that exceeds the risk-free rate by 5%, and there are no firm-specific events affecting the stock performance.The β of the stock is

Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.

Suppose the following equation best describes the evolution of β over time: βt = 0.30 + 0.70βt - 1 If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

Discuss the security characteristic line (SCL).

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 0.14 and σM was 0.19, the β of the portfolio would be approximately

Discuss a commonly used adjustment technique to provide an adjusted beta.

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

Suppose the following equation best describes the evolution of β over time: β_t = 0.30 + 0.70β_{t -} ₁ If a stock had a β of 0.82 last year, you would forecast the β to be _______ in the coming year.

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 0.14 and σ_M was 0.19, 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 0.24 and σ_M was 0.18, the β of the portfolio would be approximately