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 β of your portfolio was 0.24 and β_Mwas 0.18,the β of the portfolio would be approximately ________.

Accepted Answer

The answer of Suppose you held a well-diversified portfolio with...

Question 2

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 ________.

Accepted Answer

The beta of a well-diversified portfolio is equal to the weighted average of the betas of the individual securities in the portfolio, with the weights being the proportions of the portfolio invested in each security. In this case, the portfolio has a beta of 0.14, and the market has a beta of 0.19. Therefore, the portfolio is less risky than the market, and its beta is less than 1. The correct answer is A) 0.74.

Question 3

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 _______.

Accepted Answer

Using the single-index model: 
Ri = αi + βiRm + εi

Given:
αi = 0%
Rm = 10%
Rf = 5%
Ri = Rf + 5% = 10%
εi = 0 (since there are no firm-specific events)

Solving for βi:
10% = 0% + βi(10% - 5%)
βi = 1.0

Question 4

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.

Accepted Answer

Using the given equation, we plug in the β value from last year (βS1U1B0-1 = 0.82) and solve for the forecasted β for the coming year:

βS1U1B1tS1U1B0 = 0.30 + 0.70(0.82) = 0.856

Therefore, the forecasted β for the coming year is 0.856, rounded to 0.87 in choice (D).

Question 5

Discuss the security characteristic line (SCL).

Accepted Answer

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

Question 6

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...

Quiz 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 β of your portfolio was 0.24 and βMwas 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 β of your portfolio was 0.14 and βMwas 0.19,the β of the portfolio would be approximately ________.