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Dashboard  My courses  FINS2624-5216_00225  Practice Exercises  Lectures 5 & 7- Easy Exercises

Started on Wednesday, 11 August 2021, 5:33 PM

State Finished
Completed on Wednesday, 11 August 2021, 5:58 PM
Time taken 24 mins 25 secs
Marks 36.00/37.00
Grade 9.73 out of 10.00 (97%)

Question 1
Correct

Mark 1.00 out of 1.00

________ a relationship between expected return and risk.

Select one:
A. Both CAPM and APT stipulate  Both models attempt to explain asset pricing
based on risk/return relationships.

B. CAPM stipulates
C. Neither CAPM nor APT stipulate
D. APT stipulates
E. No pricing model has been found.

Both models attempt to explain asset pricing based on risk/return relationships.

Both models attempt to explain asset pricing based on risk/return relationships.
The correct answer is: Both CAPM and APT stipulate
Question 2
Correct

Mark 1.00 out of 1.00

The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called

Select one:
A. factoring.
B. capital-asset pricing.
C. fundamental analysis.
D. arbitrage.  Arbitrage is earning of positive profits with a
zero (risk-free) investment.

E. None of the options are correct.

Arbitrage is earning of positive profits with a zero (risk-free) investment.

Arbitrage is earning of positive profits with a zero (risk-free) investment.
The correct answer is: arbitrage.

Question 3
Correct

Mark 1.00 out of 1.00

In a multifactor APT model, the coefficients on the macro factors are often called

Select one:
A. factor betas.
B. systematic risk.
C. factor sensitivities.
D. factor sensitivities and factor betas.  The coefficients are called factor betas, factor
sensitivities, or factor loadings.

E. idiosyncratic risk.

The coefficients are called factor betas, factor sensitivities, or factor loadings.
The coefficients are called factor betas, factor sensitivities, or factor loadings.
The correct answer is: factor sensitivities and factor betas.

Question 4
Correct

Mark 1.00 out of 1.00

Which of the following factors might affect stock returns?

Select one:
A. inflation rates
B. interest rate fluctuations
C. the business cycle
D. All of the options.  All of the options are likely to
affect stock returns.

All of the options are likely to affect stock returns.

All of the options are likely to affect stock returns.
The correct answer is: All of the options.
Question 5
Correct

Mark 1.00 out of 1.00

Advantage(s) of the APT is(are)

Select one:
A. that the model does not require a specific benchmark market portfolio, and that risk need not be considered.
B. that risk need not be considered.
C. that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios.
D. that the model does not require a specific  The APT provides no guidance concerning the determination of the risk premiums on
benchmark market portfolio. the factor portfolios. Risk must be considered in both the CAPM and APT. A major
advantage of APT over the CAPM is that a specific benchmark market portfolio is not
required.

E. that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios, and that the model
does not require a specific benchmark market portfolio.

The APT provides no guidance concerning the determination of the risk premiums on the factor portfolios. Risk must be considered in both the
CAPM and APT. A major advantage of APT over the CAPM is that a specific benchmark market portfolio is not required.
The APT provides no guidance concerning the determination of the risk premiums on the factor portfolios. Risk must be considered in both the
CAPM and APT. A major advantage of APT over the CAPM is that a specific benchmark market portfolio is not required.
The correct answer is: that the model does not require a specific benchmark market portfolio.

Question 6
Correct

Mark 1.00 out of 1.00

In a multifactor APT model, the coefficients on the macro factors are often called

Select one:
A. firm-specific risk.
B. factor betas.  The coefficients are called factor betas, factor
sensitivities, or factor loadings.

C. idiosyncratic risk.
D. systematic risk.

The coefficients are called factor betas, factor sensitivities, or factor loadings.
The coefficients are called factor betas, factor sensitivities, or factor loadings.
The correct answer is: factor betas.
Question 7
Correct

Mark 1.00 out of 1.00

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.

Select one:
A. I, III, and IV
B. I and IV
C. II and III
D. I and III  Only I and III are correct. II is incorrect because the beta of the
portfolio does not need to be zero. IV is incorrect because the
opposite is true.

E. II, III, and IV

Only I and III are correct. II is incorrect because the beta of the portfolio does not need to be zero. IV is incorrect because the opposite is true.
Only I and III are correct. II is incorrect because the beta of the portfolio does not need to be zero. IV is incorrect because the opposite is true.
The correct answer is: I and III

Question 8
Correct

Mark 1.00 out of 1.00

As diversification increases, the total variance of a portfolio approaches

Select one:
A. infinity.
B. 0.
C. 1.
D. the variance of the market portfolio.  As more and more securities are added to the portfolio, unsystematic risk
decreases and most of the remaining risk is systematic, as measured by the
variance of the market portfolio.

E. None of the options are correct.

As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance of the market portfolio.
As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance of the market portfolio.
The correct answer is: the variance of the market portfolio.
Question 9
Correct

Mark 1.00 out of 1.00

As diversification increases, the standard deviation of a portfolio approaches

Select one:
A. 1.
B. the standard deviation of the market portfolio.  As more and more securities are added to the portfolio, unsystematic risk
decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.

C. 0.
D. infinity.
E. None of the options are correct.

As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.
As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.
The correct answer is: the standard deviation of the market portfolio.

Question 10
Correct

Mark 1.00 out of 1.00

As diversification increases, the firm-specific risk of a portfolio approaches

Select one:
A. 0.  As more and more securities are added to the portfolio, unsystematic risk
decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.

B. 1.
C. (n – 1) × n.
D. infinity.

As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.
As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.
The correct answer is: 0.

6
 

FINS2624-Portfolio Mgmt T2 2021

Question 11
Correct

Mark 1.00 out of 1.00

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.

Select one:
A. 0.60
B. 0.70  0.25 + 0.75(0.6) =
0.70.

C. 0.75
D. 0.45

0.25 + 0.75(0.6) = 0.70.

0.25 + 0.75(0.6) = 0.70.
The correct answer is: 0.70

Question 12
Correct

Mark 1.00 out of 1.00

As diversification increases, the unsystematic risk of a portfolio approaches

Select one:
A. 1.
B. infinity.
C. (n – 1) × n.
D. 0.  As more and more securities are added to the portfolio, unsystematic risk
decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.

As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.
As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.
The correct answer is: 0.
Question 13
Correct

Mark 1.00 out of 1.00

As diversification increases, the unique risk of a portfolio approaches

Select one:
A. (n – 1) × n.
B. 1.
C. infinity.
D. 0.  As more and more securities are added to the portfolio, unsystematic risk
decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.

As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.
As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the
variance (or standard deviation) of the market portfolio.
The correct answer is: 0.

Question 14
Correct

Mark 1.00 out of 1.00

The single-index model

Select one:
A. greatly increases the number of required calculations relative to those required by the Markowitz model.
B. enhances the understanding of systematic versus nonsystematic risk.
C. greatly reduces the number of required calculations relative to those required by the Markowitz model.
D. enhances the understanding of systematic versus nonsystematic risk and greatly increases the number of required calculations relative to
those required by the Markowitz model.
E. greatly reduces the number of required calculations  The single index model both greatly reduces the number of calculations and
relative to those required by the Markowitz model and enhances the understanding of the relationship between systematic and
enhances the understanding of systematic versus unsystematic risk on security returns.
nonsystematic risk.

The single index model both greatly reduces the number of calculations and enhances the understanding of the relationship between systematic and
unsystematic risk on security returns.
The single index model both greatly reduces the number of calculations and enhances the understanding of the relationship between systematic and
unsystematic risk on security returns.
The correct answer is: greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the
understanding of systematic versus nonsystematic risk.
Question 15
Correct

Mark 1.00 out of 1.00

A single-index model uses ________ as a proxy for the systematic risk factor.

Select one:
A. a market index, such as the S&P 500  The single-index model uses a market index, such as the S&P
500, as a proxy for the market and thus for systematic risk.

B. the unemployment rate.

C. the growth rate in GNP
D. the current account deficit

The single-index model uses a market index, such as the S&P 500, as a proxy for the market and thus for systematic risk.
The single-index model uses a market index, such as the S&P 500, as a proxy for the market and thus for systematic risk.
The correct answer is: a market index, such as the S&P 500

Question 16
Correct

Mark 1.00 out of 1.00

In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is

Select one:
A. beta.  Once a portfolio is diversified, the only risk remaining
is systematic risk, which is measured by beta.

B. variance of returns.
C. unique risk.
D. standard deviation of returns.

Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.
Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.
The correct answer is: beta.

Question 17
Correct

Mark 1.00 out of 1.00

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to

Select one:
A. r​ f + β [E(rM) – rf].  The expected rate of return on any security is equal to the risk-free rate
plus the systematic risk of the security (beta) times the market risk
premium, E(rM – rf).

B. E(rM) + rf.
C. rf + β [E(rM)].
D. β [E(rM) – rf].

The expected rate of return on any security is equal to the risk-free rate plus the systematic risk of the security (beta) times the market risk premium,
E(rM – rf).

The expected rate of return on any security is equal to the risk-free rate plus the systematic risk of the security (beta) times the market risk premium,
E(rM – rf).

The correct answer is: r​ f + β [E(rM) – rf].

Question 18
Incorrect

Mark 0.00 out of 1.00

The security market line (SML) is

Select one:
A. the line that describes the expected return-beta relationship for well-  The SML is a measure of expected return per unit of risk,
diversified portfolios only. where risk is defined as beta (systematic risk).

B. the line that is tangent to the efficient frontier of all risky assets.
C. the line that represents the expected return-beta relationship.
D. also called the capital allocation line.
E. All of the options.

The SML is a measure of expected return per unit of risk, where risk is defined as beta (systematic risk).
The SML is a measure of expected return per unit of risk, where risk is defined as beta (systematic risk).
The correct answer is: the line that represents the expected return-beta relationship.

Question 19
Correct

Mark 1.00 out of 1.00

According to the Capital Asset Pricing Model (CAPM), fairly-priced securities have

Select one:
A. zero alphas.  A zero alpha results when the security is in
equilibrium (fairly priced for the level of risk).

B. positive alphas.
C. negative betas.
D. positive betas.

A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).
A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).
The correct answer is: zero alphas.
Question 20
Correct

Mark 1.00 out of 1.00

According to the Capital Asset Pricing Model (CAPM), underpriced securities have

Select one:
A. zero alphas.
B. positive betas.
C. positive alphas.  According to the Capital Asset Pricing Model (CAPM),
underpriced securities have positive alphas.

D. negative betas.
E. None of the options are correct.

According to the Capital Asset Pricing Model (CAPM), underpriced securities have positive alphas.
According to the Capital Asset Pricing Model (CAPM), underpriced securities have positive alphas.
The correct answer is: positive alphas.

Question 21
Correct

Mark 1.00 out of 1.00

According to the Capital Asset Pricing Model (CAPM), overpriced securities have

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

According to the Capital Asset Pricing Model (CAPM), overpriced securities have negative alphas.
According to the Capital Asset Pricing Model (CAPM), overpriced securities have negative alphas.
The correct answer is: negative alphas.

Question 22
Correct

Mark 1.00 out of 1.00

In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is

Select one:
A. systematic risk.  Once a portfolio is diversified, the only risk remaining
is systematic risk, which is measured by beta.

B. unique risk.
C. variance of returns.
D. standard deviation of returns.

Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.
Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.
The correct answer is: systematic risk.
Question 23
Correct

Mark 1.00 out of 1.00

In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is

Select one:
A. standard deviation of returns.
B. variance of returns.
C. market risk.  Once a portfolio is diversified, the only risk remaining
is systematic risk, which is measured by beta.

D. unique risk.

Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.
Once a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.
The correct answer is: market risk.

Question 24
Correct

Mark 1.00 out of 1.00

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of

Select one:
A. unique risk.
B. unsystematic risk.
C. market risk.  With a diversified portfolio, the only risk remaining is market, or
systematic, risk. This is the only risk that influences return according
to the CAPM.

D. reinvestment risk.
E. None of the options are correct.

With a diversified portfolio, the only risk remaining is market, or systematic, risk. This is the only risk that influences return according to the CAPM.
With a diversified portfolio, the only risk remaining is market, or systematic, risk. This is the only risk that influences return according to the CAPM.
The correct answer is: market risk.

Question 25
Correct

Mark 1.00 out of 1.00

Capital asset pricing theory asserts that portfolio returns are best explained by

Select one:
A. systematic risk.  The risk remaining in diversified portfolios is systematic risk;
thus, portfolio returns are commensurate with systematic risk.

B. reinvestment risk.
C. diversification.
D. specific risk.

The risk remaining in diversified portfolios is systematic risk; thus, portfolio returns are commensurate with systematic risk.
The risk remaining in diversified portfolios is systematic risk; thus, portfolio returns are commensurate with systematic risk.
The correct answer is: systematic risk.
Question 26
Correct

Mark 1.00 out of 1.00

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases

Select one:
A. directly with beta.  The market rewards systematic risk, which is measured by beta,
and thus, the risk premium on a stock or portfolio varies directly
with beta.

B. inversely with beta.

C. directly with alpha.
D. in proportion to its standard deviation.
E. inversely with alpha.

The market rewards systematic risk, which is measured by beta, and thus, the risk premium on a stock or portfolio varies directly with beta.
The market rewards systematic risk, which is measured by beta, and thus, the risk premium on a stock or portfolio varies directly with beta.
The correct answer is: directly with beta.

Question 27
Correct

Mark 1.00 out of 1.00

Standard deviation and beta both measure risk, but they are different in that beta measures

Select one:
A. only systematic risk, while standard deviation is a measure of  Standard deviation and beta both measure risk, but they are different in
total risk. that beta measures only systematic risk while standard deviation is a
measure of total risk.

B. both systematic and unsystematic risk.

C. only unsystematic risk, while standard deviation is a measure of total risk.
D. total risk, while standard deviation measures only nonsystematic risk.
E. both systematic and unsystematic risk, while standard deviation measures only systematic risk.

Standard deviation and beta both measure risk, but they are different in that beta measures only systematic risk while standard deviation is a
measure of total risk.
Standard deviation and beta both measure risk, but they are different in that beta measures only systematic risk while standard deviation is a
measure of total risk.
The correct answer is: only systematic risk, while standard deviation is a measure of total risk.
Question 28
Correct

Mark 1.00 out of 1.00

The expected return-beta relationship

Select one:
A. assumes that investors hold well-diversified portfolios.
B. is the most familiar expression of the CAPM to practitioners.
C. 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.
D. All of the options are true.  All of the statements describe the expected
return-beta relationship.

E. None of the options are true.

All of the statements describe the expected return-beta relationship.

All of the statements describe the expected return-beta relationship.
The correct answer is: All of the options are true.

Question 29
Correct

Mark 1.00 out of 1.00

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of

Select one:
A. reinvestment risk.
B. unique risk.
C. unsystematic risk.
D. beta risk.  With a diversified portfolio, the only risk remaining is market, beta, or
systematic, risk. This is the only risk that influences return according
to the CAPM.

E. None of the options are correct.

With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk that influences return according to the
CAPM.
With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk that influences return according to the
CAPM.
The correct answer is: beta risk.
Question 30
Correct

Mark 1.00 out of 1.00

An underpriced security will plot

Select one:
A. either above or below the security-market line depending on its standard deviation.
B. either above or below the security market line depending on its covariance with the market.
C. above the security market line.  An underpriced security will have a higher expected return
than the SML would predict; therefore it will plot above the
SML.

D. on the security market line.

E. below the security market line.

An underpriced security will have a higher expected return than the SML would predict; therefore it will plot above the SML.
An underpriced security will have a higher expected return than the SML would predict; therefore it will plot above the SML.
The correct answer is: above the security market line.

Question 31
Correct

Mark 1.00 out of 1.00

An overpriced security will plot

Select one:
A. either above or below the security-market line depending on its standard deviation.
B. above the security market line.
C. either above or below the security market line depending on its covariance with the market.
D. on the security market line.
E. below the security market line.  An overpriced security will have a lower expected return than
the SML would predict; therefore it will plot below the SML.

An overpriced security will have a lower expected return than the SML would predict; therefore it will plot below the SML.
An overpriced security will have a lower expected return than the SML would predict; therefore it will plot below the SML.
The correct answer is: below the security market line.
Question 32
Correct

Mark 1.00 out of 1.00

The capital asset pricing model assumes

Select one:
A. all investors are price takers.
B. all investors are price takers, have the same holding period, and have The CAPM assumes that investors are price takers with the same
homogeneous expectations. single holding period and that there are no taxes or transaction
costs.

C. investors have homogeneous expectations.

D. all investors are price takers and have the same holding period.
E. all investors have the same holding period.

The CAPM assumes that investors are price takers with the same single holding period and that there are no taxes or transaction costs.
The CAPM assumes that investors are price takers with the same single holding period and that there are no taxes or transaction costs.
The correct answer is: all investors are price takers, have the same holding period, and have homogeneous expectations.

Question 33
Correct

Mark 1.00 out of 1.00

According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of

Select one:
A. unique risk.
B. unsystematic risk.
C. systematic risk.  With a diversified portfolio, the only risk remaining is market, beta, or
systematic, risk. This is the only risk that influences return according
to the CAPM.

D. reinvestment risk.

With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk that influences return according to the
CAPM.
With a diversified portfolio, the only risk remaining is market, beta, or systematic, risk. This is the only risk that influences return according to the
CAPM.
The correct answer is: systematic risk.
Question 34
Correct

Mark 1.00 out of 1.00

The expected return-beta relationship of the CAPM is graphically represented by

Select one:
A. the security-market line.  The security market line shows expected return on the vertical axis
and beta on the horizontal axis. It has an intercept of rf and a slope
of E(RM) - rf.

B. the efficient frontier without a risk-free asset.

C. the efficient frontier with a risk-free asset.
D. the capital-market line.
E. the capital-allocation line.

The security market line shows expected return on the vertical axis and beta on the horizontal axis. It has an intercept of rf and a slope of E(RM) - rf.

The security market line shows expected return on the vertical axis and beta on the horizontal axis. It has an intercept of rf and a slope of E(RM) - rf.
The correct answer is: the security-market line.

Question 35
Correct

Mark 1.00 out of 1.00

The market portfolio has a beta of

Select one:
A. 1.  By definition, the beta of the
market portfolio is 1.

B. –1.
C. 0.5.
D. 0.

By definition, the beta of the market portfolio is 1.

By definition, the beta of the market portfolio is 1.
The correct answer is: 1.
Question 36
Correct

Mark 1.00 out of 1.00

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

Select one:
A. 0.06.
B. 0.132.  E(R) = 6% + 1.2(12 – 6)
= 13.2%.

C. 0.12.
D. 0.144.
E. 0.18.

E(R) = 6% + 1.2(12 – 6) = 13.2%.

E(R) = 6% + 1.2(12 – 6) = 13.2%.
The correct answer is: 0.132.

Question 37
Correct

Mark 1.00 out of 1.00

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

Select one:
A. 0.144.
B. 0.134.
C. 0.153.
D. 0.142.  E(R) = 5.6% + 1.25(12.5 – 5.6)
= 14.225%.

E. 0.117.

E(R) = 5.6% + 1.25(12.5 – 5.6) = 14.225%.

E(R) = 5.6% + 1.25(12.5 – 5.6) = 14.225%.
The correct answer is: 0.142.