Q&A Hero

Q: In their study about predicting beta coefficients, which of the following did Rosenberg and Guy find to be factors that influence beta? I) Industry group II) Variance of cash flow III) Dividend yield IV) Growth in earnings per share A. I and II B. I and III C. I, II, and III D. I, II, and IV E. I, II, III, and IV

Q: The idea that there is a limit to the reduction of portfolio risk due to diversification is A. contradicted by both the CAPM and the single-index model. B. contradicted by the CAPM. C. contradicted by the single-index model. D. supported in theory, but not supported empirically. E. supported both in theory and by empirical evidence.

Q: The security characteristic line (SCL) associated with the single-index model is a plot of A. the security's returns on the vertical axis and the market index's returns on the horizontal axis. B. the market index's returns on the vertical axis and the security's returns on the horizontal axis. C. the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis. D. the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis. E. the security's returns on the vertical axis and Beta on the horizontal axis.

Q: One "cost" of the single-index model is that it A. is virtually impossible to apply. B. prohibits specialization of efforts within the security analysis industry. C. requires forecasts of the money supply. D. is legally prohibited by the SEC. E. allows for only two kinds of riskmacro risk and micro risk.

Q: Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE. Using a single-index model rather than the Markowitz model A. increases the number of inputs needed from about 1,400 to more than 1.4 million. B. increases the number of inputs needed from about 10,000 to more than 125,000. C. reduces the number of inputs needed from more than 125,000 to about 10,000. D. reduces the number of inputs needed from more than 5 million to about 10,000. E. increases the number of inputs needed from about 150 to more than 1,500.

Q: In the single-index model represented by the equation ri = E(ri) + βiF + ei, the term ei represents A. the impact of unanticipated macroeconomic events on security i's return. B. the impact of unanticipated firm-specific events on security i's return. C. the impact of anticipated macroeconomic events on security i's return. D. the impact of anticipated firm-specific events on security i's return. E. the impact of changes in the market on security i's return.

Q: Covariances between security returns tend to be A. positive because of SEC regulations. B. positive because of Exchange regulations. C. positive because of economic forces that affect many firms. D. negative because of SEC regulations. E. negative because of economic forces that affect many firms.

Q: The expected impact of unanticipated macroeconomic events on a security's return during the period is A. included in the security's expected return. B. zero. C. equal to the risk-free rate. D. proportional to the firm's beta. E. infinite.

Q: The security characteristic line (SCL) A. plots the excess return on a security as a function of the excess return on the market. B. allows one to estimate the beta of the security. C. allows one to estimate the alpha of the security. D. All of the options. E. None of the options are correct.

Q: The single-index model A. greatly reduces the number of required calculations relative to those required by the Markowitz model. B. enhances the understanding of systematic versus nonsystematic risk. C. greatly increases the number of required calculations relative to those required by the Markowitz model. D. greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk. E. enhances the understanding of systematic versus nonsystematic risk and greatly increases the number of required calculations

Q: Security returns A. are based on both macro events and firm-specific events. B. are based on firm-specific events only. C. are usually positively correlated with each other. D. are based on firm-specific events only and are usually positively correlated with each other. E. are based on both macro events and firm-specific events and are usually positively correlated with each other.

Q: The index model has been estimated for stock A with the following results: RA = 0.01 + 0.8RM + eA. σM = 0.20; σ(eA) = 0.10. The standard deviation of the return for stock A is A. 0.0356. B. 0.1887. C. 0.1600. D. 0.6400.

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 + 1.2RM + eB. σM = 0.20; σ(eA) = 0.20; σ(eB) = 0.10. The standard deviation for stock A is A. 0.0656. B. 0.0676. C. 0.2561. D. 0.2600.

Q: The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.5RM + eA. RB = 0.02 + 1.3RM + eB. σM = 0.25; 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. 0.4000.

Q: Suppose you forecast that the market index will earn a return of 15% in the coming year. Treasury bills are yielding 6%. The unadjusted β of Mobil stock is 1.30. 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. 16.8%

Q: The index model for stock B has been estimated with the following result: RB = 0.01 + 1.1RM + eB. If σM = 0.20 and R2B = 0.50, the standard deviation of the return on stock B is A. 0.1111. B. 0.2111. C. 0.3111. D. 0.4111.

Q: The index model for stock A has been estimated with the following result: RA = 0.01 + 0.9RM + eA. If σM = 0.25 and R2A = 0.25, the standard deviation of return of stock A is A. 0.2025. B. 0.2500. C. 0.4500. D. 0.8100.

Q: An analyst estimates the index model for a stock using regression analysis involving total returns. The estimated intercept in the regression equation is 6% and the β is 0.5. The risk-free rate of return is 12%. The true β of the stock is A. 0%. B. 3%. C. 6%. D. 9%.

Q: Suppose the following equation best describes the evolution of β over time: t = 0.18 + 0.63βt 1. If a stock had a β of 1.09 last year, you would forecast the β to be _______ in the coming year. A. 0.87 B. 0.18 C. 0.63 D. 0.81

Q: Suppose the following equation best describes the evolution of β over time: βt = 0.31 + 0.82βt 1. If a stock had a β of 0.88 last year, you would forecast the β to be _______ in the coming year. A. 0.88 B. 0.82 C. 0.31 D. 1.03

Q: Suppose the following equation best describes the evolution of β over time: βt = 0.25 + 0.75βt 1. If a stock had a β of 0.6 last year, you would forecast the β to be _______ in the coming year. A. 0.45 B. 0.60 C. 0.70 D. 0.75

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 0.24, the β of the portfolio would be approximately A. 0.75. B. 0.56. C. 0.07. D. 1.03.

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 0.22 and σM was 0.19, the β of the portfolio would be approximately A. 1.34. B. 1.16. 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 0.20 and σM was 0.16, the β of the portfolio would be approximately A. 0.64. B. 0.80. 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 16%. The risk-free rate of return is 5%. 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. 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 500 stocks in order to construct a mean-variance efficient portfolio constrained by 500 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimates for the variance of the macroeconomic factor. A. 500; 1 B. 500; 500 C. 124,750; 1 D. 124,750; 500 E. 250,000; 500

Q: Assume that stock market returns do follow a single-index structure. An investment fund analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained by 200 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. 19,900; 200 D. 19,900; 19.900

Q: Assume that stock market returns do follow 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 ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor. A. 125; 15,225 B. 15,625; 125 C. 7,750; 125 D. 125; 125

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: If a firm's beta was calculated as 0.6 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.

Q: Rosenberg and Guy found that ___________ helped to predict firms' betas. A. debt/asset ratios B. market capitalization C. variance of earnings D. all of the options E. None of the options are correct.

Q: Security X has expected return of 9% and standard deviation of 18%. Security Y has expected return of 12% and standard deviation of 21%. If the two securities have a correlation coefficient of 0.4, what is their covariance? A. 0.0388 B. 0.0706 C. 0.0184 D. 0.0133 E. 0.0151

Q: Security X has expected return of 7% and standard deviation of 14%. Security Y has expected return of 11% and standard deviation of 22%. If the two securities have a correlation coefficient of 0.45, what is their covariance? A. 0.0388 B. 0.0108 C. 0.0184 D. 0.0139 E. 0.1512

Q: Security M has expected return of 17% and standard deviation of 32%. Security S has expected return of 13% and standard deviation of 19%. If the two securities have a correlation coefficient of 0.78, what is their covariance? A. 0.038 B. 0.049 C. 0.047 D. 0.045 E. 0.054

Q: Consider two perfectly negatively correlated risky securities, K and L. K has an expected rate of return of 13% and a standard deviation of 19%. L has an expected rate of return of 10% and a standard deviation of 16%. The risk-free portfolio that can be formed with the two securities will earn _____ rate of return. A. 9.5% B. 11.4% C. 10.9% D. 9.9% E. None of the options are correct.

Q: Consider two perfectly negatively correlated risky securities, K and L. K has an expected rate of return of 13% and a standard deviation of 19%. L has an expected rate of return of 10% and a standard deviation of 16%. The weights of K and L in the global minimum variance portfolio are _____ and _____, respectively. A. 0.24; 0.76 B. 0.50; 0.50 C. 0.46; 0.54 D. 0.45; 0.55 E. 0.76; 0.24

Q: Consider the following probability distribution for stocks C and D: If you invest 25% of your money in C and 75% in D, what would be your portfolio's expected rate of return and standard deviation? A. 9.891%; 8.70% B. 9.945%; 11.12% C. 8.225%; 8.70% D. 10.275%; 11.12%

Q: Consider the following probability distribution for stocks C and D: The coefficient of correlation between C and D is A. 0.67. B. 0.50. C. 0.50. D. 0.67. E. None of the options are correct.

Q: Consider the following probability distribution for stocks C and D: The standard deviations of stocks C and D are _____ and _____, respectively. A. 7.62%; 11.24% B. 11.24%; 7.62% C. 10.35%; 12.93% D. 12.93%; 10.35%

Q: Consider the following probability distribution for stocks C and D: The expected rates of return of stocks C and D are _____ and _____, respectively. A. 4.4%; 9.5% B. 9.5%; 4.4% C. 6.3%; 8.7% D. 8.7%; 6.2% E. None of the options are correct.

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

Q: Given an optimal risky portfolio with expected return of 13%, standard deviation of 26%, and a risk free rate of 5%, 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: When borrowing and lending at a risk-free rate are allowed, which capital allocation line (CAL) should the investor choose to combine with the efficient frontier? I) The one with the highest reward-to-variability ratio. II) The one that will maximize his utility. III) The one with the steepest slope. IV) The one with the lowest slope. A. I and III B. I and IV C. II and IV D. I only E. I, II, and III

Q: A two-asset portfolio with a standard deviation of zero can be formed when A. the assets have a correlation coefficient less than zero. B. the assets have a correlation coefficient equal to zero. C. the assets have a correlation coefficient greater than zero. D. the assets have a correlation coefficient equal to one. E. the assets have a correlation coefficient equal to negative one.

Q: The standard deviation of a two-asset portfolio is a linear function of the assets' weights when A. the assets have a correlation coefficient less than zero. B. the assets have a correlation coefficient equal to zero. C. the assets have a correlation coefficient greater than zero. D. the assets have a correlation coefficient equal to one. E. the assets have a correlation coefficient less than one.

Q: In words, the covariance considers the probability of each scenario happening and the interaction between A. securities' returns relative to their variances. B. securities' returns relative to their mean returns. C. securities' returns relative to other securities' returns. D. the level of return a security has in that scenario and the overall portfolio return. E. the variance of the security's return in that scenario and the overall portfolio variance.

Q: As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation? A. It increases at an increasing rate. B. It increases at a decreasing rate. C. It decreases at an increasing rate. D. It decreases at a decreasing rate. E. It first decreases, then starts to increase as more securities are added.

Q: The risk that can be diversified away in a portfolio is referred to as ___________. I) diversifiable risk II) unique risk III) systematic risk IV) firm-specific risk A. I, III, and IV B. II, III, and IV C. III and IV D. I, II, and IV E. I, II, III, and IV

Q: Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%, and a risk free rate of 7%, what is the slope of the best feasible CAL? A. 0.64 B. 0.14 C. 0.62 D. 0.33 E. 0.54

Q: Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL? A. 0.64 B. 0.27 C. 0.08 D. 0.33 E. 0.36

Q: The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the A. risk/reward tradeoff line. B. capital allocation line. C. efficient frontier. D. portfolio opportunity set. E. Security Market Line.

Q: When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio, A. the portfolio standard deviation will be greater than the weighted average of the individual security standard deviations. B. the portfolio standard deviation will be less than the weighted average of the individual security standard deviations. C. the portfolio standard deviation will be equal to the weighted average of the individual security standard deviations. D. the portfolio standard deviation will always be equal to the securities' covariance.

Q: Security X has expected return of 12% and standard deviation of 18%. Security Y has expected return of 15% and standard deviation of 26%. If the two securities have a correlation coefficient of 0.7, what is their covariance? A. 0.038 B. 0.070 C. 0.018 D. 0.033 E. 0.054

Q: The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is A. 0.0. B. 1.0. C. 0.5. D. 1.0. E. any negative number.

Q: Which of the following is not a source of systematic risk? A. The business cycle B. Interest rates C. Personnel changes D. The inflation rate E. Exchange rates

Q: In a two-security minimum variance portfolio where the correlation between securities is greater than 1.0, A. the security with the higher standard deviation will be weighted more heavily. B. the security with the higher standard deviation will be weighted less heavily. C. the two securities will be equally weighted. D. the risk will be zero. E. the return will be zero.

Q: For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks? A. +1.00 B. +0.50 C. 0.00 D. 1.00 E. None of the options are correct.

Q: The individual investor's optimal portfolio is designated by A. the point of tangency with the indifference curve and the capital allocation line. B. the point of highest reward to variability ratio in the opportunity set. C. the point of tangency with the opportunity set and the capital allocation line. D. the point of the highest reward to variability ratio in the indifference curve. E. None of the options are correct.

Q: Which statement about portfolio diversification is correct? A. Proper diversification can eliminate systematic risk. B. The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased. C. Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return. D. Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate. E. None of the statements are correct.

Q: The unsystematic risk of a specific security A. is likely to be higher in an increasing market. B. results from factors unique to the firm. C. depends on market volatility. D. cannot be diversified away.

Q: A statistic that measures how the returns of two risky assets move together is: A. variance. B. standard deviation. C. covariance. D. correlation. E. covariance and correlation.