Accounting
Anthropology
Archaeology
Art History
Banking
Biology & Life Science
Business
Business Communication
Business Development
Business Ethics
Business Law
Chemistry
Communication
Computer Science
Counseling
Criminal Law
Curriculum & Instruction
Design
Earth Science
Economic
Education
Engineering
Finance
History & Theory
Humanities
Human Resource
International Business
Investments & Securities
Journalism
Law
Management
Marketing
Medicine
Medicine & Health Science
Nursing
Philosophy
Physic
Psychology
Real Estate
Science
Social Science
Sociology
Special Education
Speech
Visual Arts
Investments & Securities
Q:
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to
use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 5%, and
the expected market rate of return is 10%. Your company has a beta of 0.67, and the project that you are
evaluating is considered to have risk equal to the average project that the company has accepted in the past.
According to CAPM, the appropriate hurdle rate would be
A. 10%.
B. 5%.
C. 8.35%.
D. 28.35%.
E. 0.67%.
Q:
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to
use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and
the expected market rate of return is 11%. Your company has a beta of 0.67, and the project that you are
evaluating is considered to have risk equal to the average project that the company has accepted in the past.
According to CAPM, the appropriate hurdle rate would be
A. 4%.
B. 8.69%.
C. 15%.
D. 11%.
E. 0.75%.
Q:
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to
use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and
the expected market rate of return is 11%. Your company has a beta of 0.75, and the project that you are
evaluating is considered to have risk equal to the average project that the company has accepted in the past.
According to CAPM, the appropriate hurdle rate would be
A. 4%.
B. 9.25%.
C. 15%.
D. 11%.
E. 0.75%.
Q:
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to use
the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and the
expected market rate of return is 11%. Your company has a beta of 1.4, and the project that you are evaluating
is considered to have risk equal to the average project that the company has accepted in the past. According to
CAPM, the appropriate hurdle rate would be
A. 13.8%.
B. 7%.
C. 15%.
D. 4%.
E. 1.4%.
Q:
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to use
the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and the
expected market rate of return is 11%. Your company has a beta of 1.0, and the project that you are evaluating
is considered to have risk equal to the average project that the company has accepted in the past. According to
CAPM, the appropriate hurdle rate would be
A. 4%.
B. 7%.
C. 15%.
D. 11%.
E. 1%.
Q:
Your opinion is that Boeing has an expected rate of return of 0.08. It has a beta of 0.92. The risk-free rate is
0.04 and the market expected rate of return is 0.10. 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 Boeing has an expected rate of return of 0.0952. It has a beta of 0.92. The risk-free rate is
0.04 and the market expected rate of return is 0.10. 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 Boeing has an expected rate of return of 0.112. It has a beta of 0.92. The risk-free rate is
0.04 and the market expected rate of return is 0.10. 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 0.15. 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.
E. None of the options are correct.
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:
According to the Capital Asset Pricing Model (CAPM), underpriced securities have
A. positive betas.
B. zero alphas.
C. negative betas.
D. positive alphas.
E. None of the options are correct.
Q:
According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have
A. positive betas.
B. zero alphas.
C. negative betas.
D. positive alphas.
Q:
The security market line (SML) is
A. the line that describes the expected return-beta relationship for well-diversified portfolios only.
B. also called the capital allocation line.
C. the line that is tangent to the efficient frontier of all risky assets.
D. the line that represents the expected return-beta relationship.
E. All of the options.
Q:
According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal
To
A. r f + [E(r M)].
B. r f + [E(r M) r f ].
C. [E(rM) r f ].
D. E(r M) + r f .
Q:
The market risk, beta, of a security is equal to
A. the covariance between the security's return and the market return divided by the variance of the market's
returns.
B. the covariance between the security and market returns divided by the standard deviation of the market's
returns.
C. the variance of the security's returns divided by the covariance between the security and market returns.
D. the variance of the security's returns divided by the variance of the market's returns.
Q:
Which statement is true regarding the capital market line (CML)?
I) The CML is the line from the risk-free rate through the market portfolio.
II) The CML is the best attainable capital allocation line.
III) The CML is also called the security market line.
IV) The CML always has a positive slope.
A. I only
B. II only
C. III only
D. IV only
E. I, II, and IV
Q:
Which statement is not true regarding the capital market line (CML)?
A. The CML is the line from the risk-free rate through the market portfolio.
B. The CML is the best attainable capital allocation line.
C. The CML is also called the security market line.
D. The CML always has a positive slope.
E. The risk measure for the CML is standard deviation.
Q:
Which statement is true regarding the market portfolio?
I) It includes all publicly traded financial assets.
II) It lies on the efficient frontier.
III) All securities in the market portfolio are held in proportion to their market values.
IV) It is the tangency point between the capital market line and the indifference curve.
A. I only
B. II only
C. III only
D. IV only
E. I, II, and III
Q:
Which statement is not true regarding the market portfolio?
A. It includes all publicly-traded financial assets.
B. It lies on the efficient frontier.
C. All securities in the market portfolio are held in proportion to their market values.
D. It is the tangency point between the capital market line and the indifference curve.
E. All of the options are true.
Q:
The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to
A. 0.142.
B. 0.144.
C. 0.153.
D. 0.134.
E. 0.117.
Q:
The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to
A. 0.06.
B. 0.144.
C. 0.12.
D. 0.132.
E. 0.18.
Q:
The market portfolio has a beta of
A. 0.
B. 1.
C. 1.
D. 0.5.
Q:
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function
Of
A. systematic risk.
B. unsystematic risk.
C. unique risk.
D. reinvestment risk.
Q:
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function
Of
A. beta risk.
B. unsystematic risk.
C. unique risk.
D. reinvestment risk.
E. None of the options are correct.
Q:
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function
Of
A. market risk.
B. unsystematic risk.
C. unique risk.
D. reinvestment risk.
E. None of the options are correct.
Q:
In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is
A. unique risk.
B. market risk.
C. standard deviation of returns.
D. variance of returns.
Q:
In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is
A. unique risk.
B. systematic risk.
C. standard deviation of returns.
D. variance of returns.
Q:
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
A. unique risk.
B. beta.
C. standard deviation of returns.
D. variance of returns.
Q:
If the index model is valid, _________ would be helpful in determining the covariance between assets K and L.
A. βk
B. βL
C. σM
D. all of the options
E. None of the options are correct.
Q:
If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP.
A. βHPQ
B. βKMP
C. σM
D. all of the options
E. None of the options are correct.
Q:
If the index model is valid, _________ would be helpful in determining the covariance between assets GM and GE.
A. βGM
B. βGE
C. σM
D. all of the options
E. None of the options are correct.
Q:
Rosenberg and Guy found that __________ helped to predict a firm's beta.
A. the firm's financial characteristics
B. the firm's industry group
C. firm size
D. the firm's financial characteristics and the firm's industry group
E. All of the options are correct.
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:
As diversification increases, the firm-specific risk of a portfolio approaches
A. 0.
B. 1.
C. infinity.
D. (n 1) n.
Q:
As diversification increases, the standard deviation of a portfolio approaches
A. 0.
B. 1.
C. infinity.
D. the standard deviation of the market portfolio.
E. None of the options are correct.
Q:
As diversification increases, the total variance of a portfolio approaches
A. 0.
B. 1.
C. the variance of the market portfolio.
D. infinity.
E. None of the options are correct.
Q:
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.
A. 0.91
B. 0.77
C. 0.63
D. 0.87
Q:
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
A. 0.74.
B. 0.80.
C. 1.25.
D. 1.56.
Q:
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
A. 0.64.
B. 1.33.
C. 1.25.
D. 1.56.
Q:
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.
Q:
Assume that stock market returns do follow a single-index structure. An investment fund analyzes 750 stocks in order to construct a mean-variance efficient portfolio constrained by 750 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimate(s) for the variance of the macroeconomic factor.
A. 750; 1
B. 750; 750
C. 124,750; 1
D. 124,750; 750
E. 562,500; 750
Q:
Assume that stock market returns do follow a single-index structure. An investment fund analyzes 217 stocks in order to construct a mean-variance efficient portfolio constrained by 217 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.
A. 217; 47,089
B. 217; 217
C. 47,089; 217
D. 47,089; 47,089
E. None of the options are correct.
Q:
Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 132 stocks in order to construct a mean-variance efficient portfolio constrained by 132 investments. They will need to calculate ____________ covariances.
A. 100
B. 132
C. 4,950
D. 8,646
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 _____________ expected returns and ___________ variances of returns.
A. 125; 125
B. 125; 15,625
C. 15,625; 125
D. 15,625; 15,625
E. None of the options are correct.
Q:
The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of
A. 1.01.
B. 0.95.
C. 1.13.
D. 0.90.
Q:
The beta of a stock has been estimated as 1.4 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of
A. 1.27.
B. 1.32.
C. 1.13.
D. 1.0.
Q:
If a firm's beta was calculated as 1.35 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of
A. equal to 1.35.
B. between 0.0 and 1.0.
C. between 1.0 and 1.35.
D. greater than 1.35.
E. zero or less.
Q:
The index model has been estimated for stocks A and B with the following results:
RA = 0.01 + 0.8RM + eA.
RB = 0.02 + 1.1RM + eB.
σM = 0.30 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. 0.0050.
E. 0.0792.
Q:
Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted β of Mobil stock is 1.50. A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.
A. 15.0%
B. 15.5%
C. 16.0%
D. 14.7%
Q:
The index model for stock A has been estimated with the following result:
RA = 0.01 + 0.94RM + eA
If σM = 0.30 and R2A = 0.28, the standard deviation of return of stock A is
A. 0.2025.
B. 0.2500.
C. 0.4500.
D. 0.5329.
Q:
Suppose the following equation best describes the evolution of β over time:
βt = 0.3 + 0.2βt 1
If a stock had a β of 0.8 last year, you would forecast the β to be _______ in the coming year.
A. 0.46
B. 0.60
C. 0.70
D. 0.94
Q:
Suppose the following equation best describes the evolution of β over time:
βt = 0.4 + 0.6βt 1.
If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming year.
A. 0.45
B. 0.60
C. 0.70
D. 0.94
Q:
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 0.18 and σM was 0.22, the β of the portfolio would be approximately
A. 0.64.
B. 1.19.
C. 0.82.
D. 1.56.
Q:
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 0.25 and σM was 0.21, the β of the portfolio would be approximately ________.
A. 0.64
B. 1.19
C. 1.25
D. 1.56
Q:
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 3%. The stock earns a return that exceeds the risk-free rate by 11%, and there are no firm-specific events affecting the stock performance. The β of the stock is
A. 1.57.
B. 0.75.
C. 1.17.
D. 1.33.
E. 1.50.
Q:
Assume that stock market returns do follow a single-index structure. An investment fund analyzes 60 stocks in order to construct a mean-variance efficient portfolio constrained by 60 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.
A. 200; 19,900
B. 200; 200
C. 60; 60
D. 19,900; 19.900
E. None of the options are correct.
Q:
Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate ____________ covariances.
A. 45
B. 780
C. 4,950
D. 10,000
Q:
Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.
A. 100; 100
B. 40; 40
C. 4950; 100
D. 4950; 4950
E. None of the options are correct.
Q:
The beta of a stock has been estimated as 1.8 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of
A. 1.20.
B. 1.53.
C. 1.13.
D. 1.0.
Q:
If a firm's beta was calculated as 1.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of
A. less than 0.6 but greater than zero.
B. between 0.6 and 1.0.
C. between 1.0 and 1.6.
D. greater than 1.6.
E. zero or less.