Q&A Hero

Q: The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that

Q: Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of 2% yesterday. This suggests that A. the market is not efficient. B. Music Doctors stock will probably rise in value tomorrow. C. investors expected the sales increase to be larger than what was actually announced. D. investors expected the sales increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

Q: LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that A. the market is not efficient. B. LJP stock will probably rise in value again tomorrow. C. investors view the international joint venture as bad news. D. investors view the international joint venture as good news. E. earnings are expected to decrease next quarter.

Q: QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that QQAG had an abnormal return of 1.7% yesterday. This suggests that A. the market is not efficient. B. QQAG stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

Q: Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because A. they may result from data snooping. B. they are sources of systematic risk. C. they can be explained by security characteristic lines. D. they are more appropriate for a single-factor model. E. they are macroeconomic factors.

Q: Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 19%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately A. 1.58. B. 1.13. C. 1.25. D. 0.76.

Q: Consider the single-factor APT. Stocks A and B have expected returns of 12% and 14%, respectively. The risk-free rate of return is 5%. Stock B has a beta of 1.2. If arbitrage opportunities are ruled out, stock A has a beta of A. 0.67. B. 0.93. C. 1.30. D. 1.69.

Q: Which of the following factors were used by Fama and French in their multifactor model? A. Return on the market index B. Excess return of small stocks over large stocks C. Excess return of high book-to-market stocks over low book-to-market stocks D. All of the factors were included in their model. E. None of the factors were included in their model.

Q: Which of the following factors did Chen, Roll, and Ross include in their multifactor model? A. Change in industrial waste B. Change in expected inflation C. Change in unanticipated inflation D. Change in expected inflation and unanticipated inflation E. All of the factors were included in their model.

Q: Which of the following factors did Chen, Roll, and Ross not include in their multifactor model? A. Change in industrial production B. Change in expected inflation C. Change in unanticipated inflation D. Excess return of long-term government bonds over T-bills E. All of the factors are included in the Chen, Roll, and Ross multifactor model.

Q: In a factor model, the return on a stock in a particular period will be related to A. factor risk. B. nonfactor risk. C. standard deviation of returns. D. factor risk and nonfactor risk. E. None of the options are true.

Q: Which of the following is(are) true regarding the APT? I) The security market line does not apply to the APT. II) More than one factor can be important in determining returns. III) Almost all individual securities satisfy the APT relationship. IV) It doesn't rely on the market portfolio that contains all assets. A. II, III, and IV B. II and IV C. II and III D. I, II, and IV E. I, II, III, and IV

Q: Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2. The portfolios have expected returns of 15% and 6%, respectively. Based on this information, what would be the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor and 0.50 on the second factor? The risk-free rate is 3%. A. 15.2% B. 14.1% C. 13.3% D. 10.7% E. 8.4%

Q: If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected excess return must be A. inversely proportional to the risk-free rate. B. inversely proportional to its standard deviation. C. proportional to its weight in the market portfolio. D. proportional to its standard deviation. E. proportional to its beta coefficient.

Q: Which of the following is false about the security market line (SML) derived from the APT? A. The SML has a downward slope. B. The SML for the APT shows expected return in relation to portfolio standard deviation. C. The SML for the APT has an intercept equal to the expected return on the market portfolio. D. The benchmark portfolio for the SML may be any well-diversified portfolio. E. The SML has a downward slope, shows expected return in relation to portfolio standard . deviation, and has an intercept equal to the expected return on the market portfolio.

Q: Which of the following is true about the security market line (SML) derived from the APT? A. The SML has a downward slope. B. The SML for the APT shows expected return in relation to portfolio standard deviation. C. The SML for the APT has an intercept equal to the expected return on the market portfolio. D. The benchmark portfolio for the SML may be any well-diversified portfolio. E. The SML is not relevant for the APT.

Q: In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei ) equal to 18% and 250 securities? A. 1.14% B. 625% C. 0.5% D. 3.54% E. 3.16%

Q: In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei ) equal to 20% and 40 securities? A. 12.5% B. 625% C. 0.5% D. 3.54% E. 3.16%

Q: In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of (ei ) equal to 20% and 20 securities? A. 12.5% B. 625% C. 4.47% D. 3.54% E. 14.59%

Q: In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei ) equal to 25% and 50 securities? A. 12.5% B. 625% C. 0.5% D. 3.54% E. 14.59%

Q: The factor F in the APT model represents A. firm-specific risk. B. the sensitivity of the firm to that factor. C. a factor that affects all security returns. D. the deviation from its expected value of a factor that affects all security returns. E. a random amount of return attributable to firm events.

Q: To take advantage of an arbitrage opportunity, an investor would I) construct a zero-investment portfolio that will yield a sure profit. II) construct a zero-beta-investment portfolio that will yield a sure profit. III) make simultaneous trades in two markets without any net investment. IV) short sell the asset in the low-priced market and buy it in the high-priced market. A. I and IV B. I and III C. II and III D. I, III, and IV E. II, III, and IV

Q: The term "arbitrage" refers to A. buying low and selling high. B. short selling high and buying low. C. earning risk-free economic profits. D. negotiating for favorable brokerage fees. E. hedging your portfolio through the use of options.

Q: Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4%, and the risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor, what is its expected return? A. 7.0% B. 8.0% C. 9.2% D. 13.0% E. 13.2%

Q: Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? I) The expected return-beta relationship is maintained for all but a small number of well-diversified portfolios. II) The expected return-beta relationship is maintained for all well-diversified portfolios. III) The expected return-beta relationship is maintained for all but a small number of individual securities. IV) The expected return-beta relationship is maintained for all individual securities. A. I and III B. I and IV C. II and III D. II and IV E. Only I is correct.

Q: The APT requires a benchmark portfolio A. that is equal to the true market portfolio. B. that contains all securities in proportion to their market values. C. that need not be well-diversified. D. that is well-diversified and lies on the SML. E. that is unobservable.

Q: An underpriced security will plot A. on the security market line. B. below the security market line. C. above the security market line. D. either above or below the security market line depending on its covariance with the market. E. either above or below the security-market line depending on its standard deviation.

Q: Studies of liquidity spreads in security markets have shown that A. liquid stocks earn higher returns than illiquid stocks. B. illiquid stocks earn higher returns than liquid stocks. C. both liquid and illiquid stocks earn the same returns. D. illiquid stocks are good investments for frequent, short-term traders.

Q: The security market line (SML) A. can be portrayed graphically as the expected return-beta relationship. B. can be portrayed graphically as the expected return-standard deviation of market-returns relationship. C. provides a benchmark for evaluation of investment performance. D. can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance. E. can be portrayed graphically as the expected return-standard deviation of market-returns relationship and

Q: The expected return-beta relationship A. is the most familiar expression of the CAPM to practitioners. B. refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. C. assumes that investors hold well-diversified portfolios. D. All of the options are true. E. None of the options are true.

Q: Standard deviation and beta both measure risk, but they are different in that beta measures A. both systematic and unsystematic risk. B. only systematic risk, while standard deviation is a measure of total risk. C. only unsystematic risk, while standard deviation is a measure of total risk. D. both systematic and unsystematic risk, while standard deviation measures only systematic risk. E. total risk, while standard deviation measures only nonsystematic risk.

Q: What is the expected return of a zero-beta security? A. The market rate of return B. Zero rate of return C. A negative rate of return D. The risk-free rate

Q: According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases A. directly with alpha. B. inversely with alpha. C. directly with beta. D. inversely with beta. E. in proportion to its standard deviation.

Q: Capital asset pricing theory asserts that portfolio returns are best explained by A. reinvestment risk. B. specific risk. C. systematic risk. D. diversification.

Q: Given are the following two stocks A and B: If the expected market rate of return is 0.09, and the risk-free rate is 0.05, which security would be considered the better buy, and why? A. A because it offers an expected excess return of 1.2%. B. B because it offers an expected excess return of 1.8%. C. A because it offers an expected excess return of 2.2%. D. B because it offers an expected return of 14%. E. B because it has a higher beta.

Q: You invest 55% of your money in security A with a beta of 1.4 and the rest of your money in security B with a beta of 0.9. The beta of the resulting portfolio is A. 1.466. B. 1.157. C. 0.968. D. 1.082. E. 1.175.

Q: The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 13%, you should A. buy CAT because it is overpriced. B. sell short CAT because it is overpriced. C. sell short CAT because it is underpriced. D. buy CAT because it is underpriced. E. None of the options, as CAT is fairly priced.

Q: Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing Model, this security Is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.

Q: Your opinion is that CSCO has an expected rate of return of 0.13. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing Model, this security is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.

Q: A security has an expected rate of return of 0.10 and a beta of 1.1. The market expected rate of return is 0.08, and the risk-free rate is 0.05. The alpha of the stock is A. 1.7%. B. 1.7%. C. 8.3%. D. 5.5%.

Q: You invest $600 in a security with a beta of 1.2 and $400 in another security with a beta of 0.90. The beta of the resulting portfolio is A. 1.40. B. 1.00. C. 0.36. D. 1.08. E. 0.80.

Q: The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should A. buy the stock because it is overpriced. B. sell short the stock because it is overpriced. C. sell the stock short because it is underpriced. D. buy the stock because it is underpriced. E. None of the options, as the stock is fairly priced.

Q: Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.

Q: Empirical results regarding betas estimated from historical data indicate that betas A. are constant over time. B. are always greater than one. C. are always near zero. D. appear to regress toward one over time. E. are always positive.

Q: In a well-diversified portfolio, A. market risk is negligible. B. systematic risk is negligible. C. unsystematic risk is negligible. D. nondiversifiable risk is negligible.

Q: According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false? A. The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate. B. The expected rate of return on a security increases as its beta increases. C. A fairly priced security has an alpha of zero. D. In equilibrium, all securities lie on the security market line. E. All of the statements are true.

Q: According to the Capital Asset Pricing Model (CAPM), a security with a A. positive alpha is considered overpriced. B. zero alpha is considered to be a good buy. C. negative alpha is considered to be a good buy. D. positive alpha is considered to be underpriced.

Q: According to the Capital Asset Pricing Model (CAPM), overpriced securities have A. positive betas. B. zero alphas. C. negative alphas. D. positive alphas.

Q: In a factor model, the return on a stock in a particular period will be related to A. firm-specific events. B. macroeconomic events. C. the error term. D. both firm-specific events and macroeconomic events. E. neither firm-specific events nor macroeconomic events.

Q: Analysts may use regression analysis to estimate the index model for a stock. When doing so, the intercept of the regression line is an estimate of A. the α of the asset. B. the β of the asset. C. the σ of the asset. D. the δ of the asset.

Q: Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of A. the α of the asset. B. the β of the asset. C. the σ of the asset. D. the δ of the asset.

Q: The intercept in the regression equations calculated by beta books is equal to A. α in the CAPM. B. α + rf(1 + β). C. α + rf(1 β). D. 1 α.

Q: According to the index model, covariances among security pairs are 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. due to the influence of a single common factor represented by the market index return and usually positive.

Q: The index model has been estimated for stocks A and B with the following results: RA = 0.03 + 0.7RM + eA. RB = 0.01 + 0.9RM + eB. σM = 0.35; σ(eA) = 0.20; σ(eB) = 0.10. The covariance between the returns on stocks A and B is A. 0.0384. B. 0.0406. C. 0.1920. D. 0.0772. E. 0.4000.

Q: Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters. A. 12 B. 36 C. 60 D. 120

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

Q: The index model was first suggested by A. Graham. B. Markowitz. C. Miller. D. Sharpe.

Q: As diversification increases, the unique risk of a portfolio approaches A. 1. B. 0. C. infinity. D. (n 1) n.

Q: As diversification increases, the unsystematic risk of a portfolio approaches A. 1. B. 0. C. infinity. D. (n 1) n.

Q: Assume that stock market returns do follow a single-index structure. An investment fund analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained by 175 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor. A. 175; 15,225 B. 175; 175 C. 15,225; 175 D. 15,225; 15,225

Q: Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate ____________ covariances. A. 45 B. 100 C. 4,950 D. 10,000

Q: 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 ____________ covariances. A. 125 B. 7,750 C. 15,625 D. 11,750

Q: Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments. They will need to calculate ____________ covariances. A. 12 B. 150 C. 22,500 D. 11,175

Q: Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate _____________ expected returns and ___________ variances of returns. A. 100; 100 B. 100; 4950 C. 4950; 100 D. 4950; 4950

Q: Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments. They will need to calculate _____________ expected returns and ___________ variances of returns. A. 150; 150 B. 150; 22500 C. 22500; 150 D. 22500; 22500

Q: The beta of JCP stock has been estimated as 1.2 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of A. 1.20. B. 1.32. C. 1.13. D. 1.0.

Q: The beta of Apple stock has been estimated as 2.3 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of A. 2.20. B. 1.87. C. 2.13. D. 1.66.

Q: The beta of Exxon stock has been estimated as 1.6 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of A. 1.20. B. 1.32. C. 1.13. D. 1.40.

Q: 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 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.

Q: If a firm's beta was calculated as 0.8 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of A. less than 0.8 but greater than zero. B. between 1.0 and 1.8. C. between 0.8 and 1.0. D. greater than 1.8. E. zero or less.

Q: Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 3%, what is the slope of the best feasible CAL? A. 0.64 B. 0.14 C. 0.08 D. 0.35 E. 0.36

Q: Given an optimal risky portfolio with expected return of 16%, standard deviation of 20%, and a risk-free rate of 4%, what is the slope of the best feasible CAL? A. 0.60 B. 0.14 C. 0.08 D. 0.36 E. 0.31

Q: Security X has expected return of 14% and standard deviation of 22%. Security Y has expected return of 16% and standard deviation of 28%. If the two securities have a correlation coefficient of 0.8, what is their covariance? A. 0.038 B. 0.049 C. 0.018 D. 0.013 E. 0.054

Q: Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 12% and a standard deviation of 17%. B has an expected rate of return of 9% and a standard deviation of 14%. The risk-free portfolio that can be formed with the two securities will earn _____ rate of return. A. 9.5% B. 10.4% C. 10.9% D. 9.9%

Q: Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 12% and a standard deviation of 17%. B has an expected rate of return of 9% and a standard deviation of 14%. The weights of A and B in the global minimum variance portfolio are _____ and _____, respectively. A. 0.24; 0.76 B. 0.50; 0.50 C. 0.57; 0.43 D. 0.45; 0.55 E. 0.76; 0.24

Q: Consider the following probability distribution for stocks A and B: If you invest 35% of your money in A and 65% in B, what would be your portfolio's expected rate of return and standard deviation? A. 9.9%; 3% B. 9.9%; 1.1% C. 10%; 1.7% D. 10%; 3%

Q: Consider the following probability distribution for stocks A and B: The coefficient of correlation between A and B is A. 0.474. B. 0.612. C. 0.590. D. 1.206.

Q: Consider the following probability distribution for stocks A and B: The standard deviations of stocks A and B are _____ and _____, respectively. A. 1.56%; 1.99% B. 2.45%; 1.66% C. 3.22%; 2.01% D. 1.54%; 1.11%

Q: Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _____ and _____, respectively. A. 13.2%; 9% B. 13%; 8.4% C. 13.2%; 7.7% D. 7.7%; 13.2%

Q: The separation property refers to the conclusion that A. the determination of the best risky portfolio is objective, and the choice of the best complete portfolio is subjective. B. the choice of the best complete portfolio is objective, and the determination of the best risky portfolio is objective. C. the choice of inputs to be used to determine the efficient frontier is objective, and the choice of the best CAL is subjective. D. the determination of the best CAL is objective, and the choice of the inputs to be used to determine the efficient frontier is subjective. E. investors are separate beings and will, therefore, have different preferences regarding the risk-return