1. The variance of a portfolio of risky securities is .
A) the sum of the securities’ covariances with the portfolio
B) the sum of the securities’
... [Show More] variances
C) the weighted sum of the securities’ covariances with the porfolio
D) the weighted sum of the securities’ variances
E) none of the above
2. According to the capital asset pricing model, .
A) all securities must lie on the capital market line
B) all securities must lie on the security market line
C) underpriced securities lie below the security market line
D) overpriced securities lie above the security market line
E) all of the above
3. A security’s beta coefficient will be negative if
A) its returns are negatively correlated with market index returns
B) its returns are positively correlated with market index returns
C) its stock price has historically been very stable
D) its returns have been on average negative for a while
E) market demand for the firm’s shares is very low
4. Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 12%?
A) .5
B) .7
C) 1.2
D) 1.4
E) None of the above
5. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then according to the CAPM you should .
A) buy stock X because it is overpriced
B) buy stock X because it is underpriced
C) sell short stock X because it is overpriced
D) sell short stock X because it is underpriced
E) None of the above
6. Which is NOT a true statement regarding the market portfolio.
A) All securities in the market portfolio are held in proportion to their market values
B) It includes all assets of the universe
C) It is the tangency point between the capital market line and the indifference curve
D) It lies on the efficient frontier
E) All are true
7. Suppose the Capital Asset Pricing Model (CAPM) assumptions hold. The market portfolio consists of only 2 risky assets, which are in positive net supply. The expected rate of return of assets A and B are 10% and 13% respectively, their market betas are
0.5 and 0.8 respectively, and the risk free rate is 5%. Is this economy in equilibrium?
A) Yes, both assets lie on the SML, satisfying the optimality of the market.
B) No, asset A is held in negative amount in the tangency portfolio in contrast to supply=demand condition.
C) No, asset B is held in negative amount in the tangency portfolio in contrast to supply=demand condition.
D) It is impossible to tell without further information about the correlation be- tween the two assets
E) None of the above
8. Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is
.
A) -1.7%
B) 3.7%
C) 5.5%
D) 8.7%
9. The beta of a security is
A) The covariance between the security and the market returns divided by the variance of the market returns.
B) The covariance between the security and the market returns divided by the variance of the security’s returns.
C) The correlation coefficient between the security and the market return.
D) The covariance between the security and the market returns.
E) None of the above.
10. Stocks A, B, and C have betas of 1.5, 0.4, and 0.9 respectively. What is the beta of an equally weighted portfolio of the three stocks?
A) 0.25
B) 0.93
C) 1.00
D) 1.13
11. Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.25. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security would be considered a good buy because .
A) A, it offers an alpha of 0.8%
B) A, it offers an alpha of 2.2%
C) B, it offers an alpha of 1.8%
D) B, it offers an alpha of 2.4%
12. The relevant measure of the risk of individual securities is
A) non-systematic risk
B) beta
C) standard deviation of returns
D) variance of returns
E) value at risk
13. The relevant measure of the risk for your overall portfolio is
A) non-systematic risk
B) beta
C) standard deviation of returns
D) correlations of returns
E) both A and B
14. True or False (Explain): The CAPM says that the holder of a risky asset should be compensated proportionally to the standard deviation of the asset’s return.
15. True or False (Explain): According to the CAPM, stocks with a beta of zero offer an expected rate of return of zero.
Answer: FALSE
16. True or False (Explain): The CAPM implies that investors require a higher return to hold highly volatile securities.
17. True or False (Explain): You can construct a portfolio with a beta of 0.75 by investing
0.75 of the budget in T-Bills and the remainder in the market portfolio.
18. True or False (Explain): The CAPM implies that if the variance of a stock is higher than the variance of the market, then the expected return on that stock should be higher than the expected return on the market. [Show Less]