Chap 007

Chapter 07 - Capital Asset Pricing and Arbitrage Pricing Theory

Chapter 07 Capital Asset Pricing and Arbitrage Pricing Theory Multiple Choice Questions

1. An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 . closer to 0

!. "a#a and "rench clai# that a$ter controlling $or $ir# si%e and the ratio o$ $ir#&s boo' (alue to #ar'et (alue) beta is ______________. *. highly signi$icant in predicting $uture stoc' returns **. relati(ely useless in predicting $uture stoc' returns ***. a good predictor o$ $ir#&s speci$ic ris' A. * only B. ** only C. * and *** only . *) ** and ***

+. ,hich o$ the $ollowing are assu#ptions o$ the si#ple CAP #odel *. *ndi(idual trades o$ in(estors do not a$$ect a stoc'&s price **. All in(estors plan $or one identical holding period ***. All in(estors analy%e securities in the sa#e way and share the sa#e econo#ic (iew o$ the world */. All in(estors ha(e the sa#e le(el o$ ris' a(ersion A. *) ** and */ only B. *) ** and *** only C. **) *** and */ only . *) **) *** and */

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. ,hen all in(estors analy%e securities in the sa#e way and share the sa#e econo#ic (iew o$ the world we say they ha(e ____________________. A. heterogeneous epectations B. e2ual ris' a(ersion C. asy##etric in$or#ation . ho#ogeneous epectations

3. *n a si#ple CAP world which o$ the $ollowing state#ents is4are correct *. All in(estors will choose to hold the #ar'et port$olio) which includes all ris'y assets in the world **. *n(estors& co#plete port$olio will (ary depending on their ris' a(ersion ***. The return per unit o$ ris' will be identical $or all indi(idual assets */. The #ar'et port$olio will be on the e$$icient $rontier and it will be the opti#al ris'y port$olio A. *) ** and *** only B. **) *** and */ only C. *) *** and */ only . *) **) *** and */

5. Consider the CAP. The ris'-$ree rate is 56 and the epected return on the #ar'et is 16. ,hat is the epected return on a stoc' with a beta o$ 1.+ A. 56 B. 13.56 C. 16 . !1.56

7. Consider the CAP. The ris'-$ree rate is 36 and the epected return on the #ar'et is 136. ,hat is the beta on a stoc' with an epected return o$ 176 A. .3 B. .7 C. 1 . 1.!

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. Consider the CAP. The epected return on the #ar'et is 16. The epected return on a stoc' with a beta o$ 1.! is !06. ,hat is the ris'-$ree rate A. !6 B. 56 C. 6 . 1!6

8. The arbitrage pricing theory was de(eloped by _________. A. 9enry ar'owit% B. :tephen ;oss C. ,illia# :harpe .
10. *n the contet o$ the capital asset pricing #odel) the syste#atic #easure o$ ris' is captured by _________. A. uni2ue ris' B. beta C. standard de(iation o$ returns . (ariance o$ returns

11. <#pirical results esti#ated $ro# historical data indicate that betas _________. A. are always close to %ero B. are constant o(er ti#e C. o$ all securities are always between %ero and one . see# to regress toward one o(er ti#e

1!. *$ enough in(estors decide to purchase stoc's they are li'ely to dri(e up stoc' prices thereby causing _____________ and ___________. A. epected returns to $all= ris' pre#iu#s to $all B. epected returns to rise= ris' pre#iu#s to $all C. epected returns to rise= ris' pre#iu#s to rise . epected returns to $all= ris' pre#iu#s to rise

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1+. The #ar'et port$olio has a beta o$ _________. A. -1.0 B. 0 C. 0.3 . 1.0

1. *n a well di(ersi$ied port$olio) __________ ris' is negligible. A. nondi(ersi$iable B. #ar'et C. syste#atic . unsyste#atic

13. The capital asset pricing #odel was de(eloped by _________. A. >enneth "rench B. :tephen ;oss C. ,illia# :harpe .
15. *$ all in(estors beco#e #ore ris' a(erse the :? will _______________ and stoc' prices will _______________. A. shi$t upward= rise B. shi$t downward= $all C. ha(e the sa#e intercept with a steeper slope= $all . ha(e the sa#e intercept with a $latter slope= rise

17. According to the capital asset pricing #odel) a security with a _________. A. negati(e alpha is considered a good buy B. positi(e alpha is considered o(erpriced C. positi(e alpha is considered underpriced . %ero alpha is considered a good buy

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1. Arbitrage is based on the idea that _________. A. assets with identical ris's #ust ha(e the sa#e epected rate o$ return B. securities with si#ilar ris' should sell at di$$erent prices C. the epected returns $ro# e2ually ris'y assets are di$$erent . #ar'ets are per$ectly e$$icient

18. *n(estors re2uire a ris' pre#iu# as co#pensation $or bearing ______________. A. unsyste#atic ris' B. alpha ris' C. residual ris' . syste#atic ris'

!0. According to the capital cap ital asset pricing #odel) a $airly priced security will plot _________. A. abo(e the security #ar'et line B. along the security #ar'et line C. below the security #ar'et line . at no relation to the security #ar'et line

!1. According to the capital asset pricing #odel) $airly priced securities ha(e _________. A. negati(e betas B. positi(e alphas C. positi(e betas . %ero alphas

!!. @ou ha(e a 30)000 port$olio consisting o$ *ntel) < and Con
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!+. The graph o$ the relationship between epected return and beta in the CAP contet is called the _________. A. C? B. CA? C. :? . :C?

!. ;esearch has re(ealed that regardless o$ what the current esti#ate o$ a $ir#&s beta is) it will tend to #o(e closer to ______ o(er ti#e. A. 1 B. 0 C. -1 . 0.3

!3. The beta o$ a security is e2ual to _________. A. the co(ariance between the security and #ar'et returns di(ided by the (ariance o$ the #ar'et&s returns B. the co(ariance between the security and #ar'et returns di(ided by the standard de(iation o$ the #ar'et&s returns C. the (ariance o$ the security&s returns di(ided by the co(ariance between the security and #ar'et returns . the (ariance o$ the security&s returns di(ided by the (ariance o$ the #ar'et&s returns

!5. According to the capital asset pricing #odel) _________. A. all securities& returns #ust lie on the capital #ar'et line B. all securities& returns #ust lie on the security #ar'et line C. the slope o$ the security #ar'et line #ust be less than the #ar'et ris' pre#iu# . any security with a beta o$ 1 #ust ha(e an ecess ec ess return o$ %ero

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!7. According to the CAP which o$ the $ollowing is not a true state#ent regarding the #ar'et port$olio. A. All securities in the #ar'et port$olio are held in propo rtion to their #ar'et (alues B. *t includes all ris'y assets in the world) including hu#an capital C. *t is always the #ini#u# (ariance port$olio on the e$$icient $rontier . *t lies on the e$$icient $rontier

!. *n a world where the CAP holds which one o$ the $ollowing is not a true state#ent regarding the capital #ar'et line A. The capital #ar'et line always has a positi(e slope B. The capital #ar'et line is also called ca lled the security #ar'et line C. The capital #ar'et line is the best attainable capital allocation line . The capital #ar'et line is the line $ro# the ris'-$ree rate through the #ar'et port$olio

!8. Consider the single $actor APT. Port$olio A has ha s a beta o$ 1.+ and an d an epected return o$ !16. Port$olio B has a beta o$ 0.7 and an epected return o$ 176. The ris'-$ree rate o$ return is 6. *$ you wanted to ta'e ad(antage o$ an arbitrage opportunity) you should ta'e a short position in port$olio __________ and a long position in port$olio _________. A. A) A B. A) B C. B) A . B) B

+0. Consider the single $actor APT. Port$olio A has ha s a beta o$ 0.! and an d an epected return o$ 1+6. Port$olio B has a beta o$ 0. and an epected return o$ 136. The ris'-$ree rate o$ return is 106. *$ you wanted to ta'e ad(antage o$ an arbitrage opportunity) you should ta'e a short position in port$olio __________ and a long position in port$olio _________. A. A) A B. A) B C. B) A . B) B

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+1. Consider the #ulti-$actor APT with two $actors. Port$olio A has a b eta o$ 0.3 on $actor 1 and a beta o$ 1.!3 on $actor !. The ris' pre#iu#s on the $actors 1 and ! port$olios are 16 and 76 respecti(ely. The ris'-$ree rate o$ return is 76. The epected return on port$olio A is __________ i$ no arbitrage opportunities eist. A. 1+.36 B. 13.06 C. 15.!36 . !+.06

+!. Consider the one-$actor APT. The (ariance o$ the return on the $actor port$olio is .0. The beta o$ a well-di(ersi$ied port$olio on the $actor is 1.!. The (ariance o$ the return on the welldi(ersi$ied port$olio is approi#ately _________. A. .113! B. .1!70 C. .13!1 . .1+!

++. :ecurity  has an epected rate o$ return o$ 1+6 and a beta o$ 1.13. The ris'-$ree rate is 36 and the #ar'et epected rate o$ return is 136. According to the capital asset pricing #odel) security  is _________. A. $airly priced B. o(erpriced C. underpriced . Done o$ the abo(e

+. The possibility o$ arbitrage arises when ____________. A. there is no consensus a#ong in(estors regarding the $uture direction o$ the #ar'et) and thus trades are #ade arbitrarily B. #is-pricing a#ong securities creates opportunities $or ris'less pro$its C. two identically ris'y securities carry the sa#e epected returns . in(estors do not di(ersi$y

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+3. Building a %ero-in(est#ent port$olio will always in(ol(e _________ ____. A. an un'nown #iture o$ short and long positions B. only short positions C. only long positions . e2ual in(est#ents in a short and a long position

+5. An i#portant characteristic o$ #ar'et e2uilibriu# is ______________ _. A. the presence o$ #any opportunities $or creating %ero-in(est#ent port$olios B. all in(estors ehibit the sa#e degree o$ o $ ris' a(ersion C. the absence o$ arbitrage opportunities op portunities . the a lac' o$ li2uidity in the #ar'et

+7. Consider the capital asset pricing #odel. The #ar'et degree o$ ris' a(ersion) A) is +. The (ariance o$ return on the #ar'et port$olio is .0!!3. *$ the ris'-$ree rate o$ return is 6) the epected return on the #ar'et port$olio is _________. A. 5.736 B. 8.06 C. 10.736 . 1!.06

+. @ou in(est 500 in security A with a beta o$ 1.3 and 00 in security B with a beta o$ .80. The beta o$ this port$olio is _________. A. 1.1 B. 1.!0 C. 1.!5 . 1.30

+8. *n a single $actor #ar'et #odel the beta o$ a stoc' ________. A. #easures the stoc'&s contribution to the standard de(iation o$ the #ar'et port$olio B. #easures the stoc'&s unsyste#atic ris' C. changes with the (ariance o$ the residuals . #easures the stoc'&s contribution to the standard de(iation o$ the stoc'

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0. :ecurity A has an epected rate o$ return o$ 1!6 and a beta o$ 1.10. The #ar'et epected rate o$ return is 6 and the ris'-$ree rate is 36. The alpha o$ the stoc' is _________. __ _______. A. -1.76 B. +.76 C. 3.36 . .76

1. The (ariance o$ the return on the #ar'et port$olio is .000 and the epected return on the #ar'et port$olio is !06. *$ the ris'-$ree rate o$ return is 106) the #ar'et degree o$ ris' a(ersion) A) is _________. A. 0.3 B. !.3 C. +.3 . 3.0

!. The ris'-$ree rate is 6. The epected ep ected #ar'et rate o$ return is 116. *$ you epect stoc'  with a beta o$ . to o$$er a rate o$ return o$ 1! percent) then you should _________. A. buy stoc'  because it is o(erpriced B. buy stoc'  because it is underpriced C. sell short stoc'  because it is o(erpriced . sell short stoc'  because it is underpriced

+. Consider the one-$actor APT. The standard de(iation o$ return on a well-di(ersi$ied port$olio is !06. The standard de(iation on the $actor port$olio is 1!6. The beta o$ the welldi(ersi$ied port$olio is approi#ately _________. A. 0.50 B. 1.00 C. 1.57 . +.!0

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. The ris'-$ree rate and the epected e pected #ar'et rate o$ return are 56 and 156 respecti(ely. According to the capital asset pricing #odel) the epected rate o$ return on security  with a beta o$ 1.! is e2ual to _________. A. 1!6 B. 176 C. 16 . !+6

3. Consider the $ollowing two stoc's) A and B. :toc' A has an epected return o$ 106 and a beta o$ 1.!0. :toc' B has an epected return o$ 16 and a beta o$ 1.0. The ep ected #ar'et rate o$ return is 86 and the ris'-$ree rate is 36. :ecurity __________ would be considered a good buy because _________. A. A) it o$$ers an epected ecess return o$ 0.!6 B. A) it o$$ers an epected ecess return o$ !.!6 C. B) it o$$ers an epected ecess e cess return o$ 1.6 . B) it o$$ers an epected return o$ !.6

5. According to the CAP) the ris' pre#iu# an in(estor epects to recei(e on any stoc' or port$olio is _______________. A. directly related to the ris' a(ersion o$ the particular in(estor B. in(ersely related to the ris' a(ersion o$ the particular in(estor C. directly related to the beta o$ the stoc' . in(ersely related to the alpha o$ the stoc'

7. *n his $a#ous criti2ue o$ the CAP) ;oll argued that the CAP ______________. A. is not testable because the true #ar'et port$olio can ne(er be obser(ed B. is o$ li#ited use because syste#atic ris' can ne(er be entirely eli#inated C. should be replaced by the APT . should be replaced by the "a#a "rench + $actor #odel

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. ,hich o$ the $ollowing (ariables do "a#a and "rench clai# do a better job eplaining stoc' returns than beta *. Boo' to #ar'et ratio **. Enepected change in industrial production ***. "ir# si%e A. * only B. * and ** only C. * and *** only . *) ** and ***

8. *n a study conducted by Fagannathan and ,ang) it was $ound that the per$or#ance o$ beta in eplaining security returns could be considerably enhanced by _____________. *. including the unsyste#atic ris' o$ a stoc' **. including hu#an capital in the #ar'et port$olio ***. allowing $or changes in beta o(er ti#e A. * and ** only B. ** and *** only C. * and *** only . *) ** and ***

30. The :? is (alid $or _______________ and the C? is (alid $or ______________. A. only indi(idual assets= well di(ersi$ied port$olios only B. only well di(ersi$ied port$olios= only indi(idual assets C. both well di(ersi$ied port$olios and indi(idual assets= both well di(ersi$ied port$olios and indi(idual assets . both well di(ersi$ied port$olios and indi(idual assets= well di(ersi$ied port$olios only

31. ?i2uidity is a ris' $actor that __________. A. has yet to be accurately #easured and incorporated into port$olio #anage#ent B. is una$$ected by trading #echanis#s on (arious stoc' echanges C. has no e$$ect on the #ar'et (alue o$ an asset . a$$ects bond prices but not stoc' prices

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3!. Beta is a #easure o$ ______________. A. total ris' B. relati(e syste#atic ris' C. relati(e non-syste#atic ris' . relati(e business ris'

3+. According to capital asset pricing theory) the 'ey deter#inant o$ port$olio returns is _________. A. the degree o$ di(ersi$ication B. the syste#atic ris' o$ the port$olio C. the $ir# speci$ic ris' o$ the port$olio . econo#ic $actors

3. The epected return o$ the ris'y asset port$olio with #ini#u# (ariance is _________. A. the #ar'et rate o$ return B. %ero C. the ris'-$ree rate . There is not enough in$or#ation to answer this 2uestion

33. According to the CAP) in(estors are co#pensated $or all but which o$ the $ollowing A. <pected in$lation B. :yste#atic ris' C. Ti#e (alue o$ #oney . ;esidual ris'

35. The #ost signi$icant conceptual di$$erence between the arbitrage pricing theory GAPTH and the capital asset pricing #odel GCAPH is that the CAP _____________. A. places less e#phasis on #ar'et ris' B. recogni%es #ultiple unsyste#atic ris' $actors C. recogni%es only one syste#atic ris' $actor . recogni%es #ultiple syste#atic ris' $actors

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37. Arbitrage is __________________________. A. is an ea#ple o$ the law o$ one price B. the creation o$ ris'less pro$its #ade possible by relati(e #ispricing a#ong securities C. is a co##on opportunity in #odern #ar'ets . an ea#ple o$ a ris'y trading strategy based on #ar'et $orecasting

3. A stoc'&s alpha #easures the stoc'&s ____________________. A. epected return B. abnor#al return C. ecess return . residual return

38. The #easure o$ unsyste#atic ris' can be $ound $ro# an inde #odel as _________. A. residual standard de(iation B. ;-s2uare C. degrees o$ $reedo# . su# o$ s2uares o$ the regression

50. :tandard de(iation o$ port$olio returns is a #easure o$ ___________. A. total ris' B. relati(e syste#atic ris' C. relati(e non-syste#atic ris' . relati(e business ris'

51. Ine o$ the #ain proble#s with the arbitrage pricing theory is __________. A. its use o$ se(eral $actors instead o$ a single #ar'et inde to eplain the ris'-return relationship B. the introduction o$ non-syste#atic ris' as a 'ey $actor in the ris'-return relationship C. that the APT re2uires an e(en larger nu#ber o$ unrealistic assu#ptions than the CAP . the #odel $ails to identi$y the 'ey #acroecono#ic (ariables in the ris'-return relationship

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5!. @ou run a regression o$ a stoc'&s returns (ersus a #ar'et inde and $ind the $ollowingJ

Based on the data you 'now that the stoc' A. earned a positi(e alpha that is statistically signi$icantly di$$erent $ro# %ero B. has a beta precisely e2ual to 0.80 C. has a beta that could be anything between 0.531 and 1.53 inclusi(e . has no syste#atic ris'

5+. The epected return on the #ar'et port$olio is 136. The ris'-$ree rate is 6. The epected return on :A Corp. co##on stoc' is 156. The beta o$ :A Corp. co##on stoc' is 1.!3. ,ithin the contet o$ the capital asset pricing #odel) _________. A. :A Corp. stoc' is underpriced B. :A Corp. stoc' is $airly priced C. :A Corp. stoc'&s alpha is -0.736 . :A Corp. stoc' alpha is 0.736

5. Assu#e that both  and @ are well-di(ersi$ied port$olios and the ris'-$ree rate is 6. Port$olio  has an epected return o$ 16 and a beta o$ 1.00. Port$olio @ has an epected return o$ 8.36 and a beta b eta o$ 0.!3. *n this situation) you would conclude that port$olios  and @ _________. A. are in e2uilibriu# B. o$$er an arbitrage opportunity C. are both underpriced . are both $airly priced

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53. ,hat is the epected return on the #ar'et A. 06 B. 36 C. 106 . 136

55. ,hat is the beta $or a port$olio with an epected return o$ 1!.36 A. 0 B. 1 C. 1.3 . !

57. ,hat is the epected return $or a port$olio with a beta o$ 0.3 A. 36 B. 7.36 C. 1!.36 . 136

5. ,hat is the alpha o$ a port$olio with a beta o$ ! and actual return o$ 136 A. 06 B. 1+6 C. 136 . 176

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58. *$ the si#ple CAP is (alid and all port$olios are priced correctly) which o$ the situations below are possible Consider each situation independently and assu#e the ris' $ree rate is 36.

A. Ipiton A B. Ipiton B C. Ipiton C . Ipiton 

70. Two in(est#ent ad(isors are co#paring per$or#ance. Ad(isor A a(eraged a !06 return with a port$olio beta o$ 1.3 and Ad(isor B a(eraged a 136 return with a port$olio beta o$ 1.!. *$ the T-bill rate was 36 and the #ar'et return during the period was 1+6) which ad(isor was the better stoc' pic'er A. Ad(isor A was better because he generated a larger alpha B. Ad(isor B was better because he generated a larger alpha C. Ad(isor A was better because he generated a higher return . Ad(isor B was better because he achie(ed a good return with a lower beta

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71. The epected return on the #ar'et is the ris' $ree rate plus the _____________. A. di(ersi$ied returns B. e2uilibriu# ris' pre#iu# C. historical #ar'et return . unsyste#atic return

7!. @ou consider buying a share o$ stoc' at a price o$ !3. The stoc' is epected to pay a di(idend o$ 1.30 net year and your ad(isory ser(ice tells you that you can epect to sell the stoc' in one year $or !. The stoc'&s beta is 1.1) r$ is 56 and
7+. *$ the beta o$ the #ar'et inde is 1.0 and the standard de(iation o$ the #ar'et inde increases $ro# 1!6 to 16) what is the new ne w beta o$ the #ar'et inde A. 0. B. 1.0 C. 1.! . 1.3

7. According to the CAP) what is the #ar'et ris' pre#iu# gi(en an epected ep ected return on a security o$ 1+.56) a stoc' beta o$ o $ 1.!) and a ris' $ree interest rate o$ .06 A. .06 B. .6 C. 5.56 . .06

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73. According to the CAP) what is the epected #ar'et return gi(en an epected return on a security o$ 13.6) a stoc' beta o$ o $ 1.!) and a ris' $ree interest rate o$ 3.06 A. 3.06 B. 8.06 C. 1+.06 . 1.06

75. ,hat is the epected return on a stoc' with a beta o$ 0.) gi(en a ris' $ree rate o$ +.36 and an epected #ar'et return o$ 13.36 A. +.6 B. 1+.16 C. 13.56 . 18.16

77. ;esearch has identi$ied two syste#atic $actors that a$$ect E.:. stoc' returns. The $actors are growth in industrial production and changes in long ter# interest rates. *ndustrial production growth is epected to be +6 and long ter# interest rates are epected to increase by 16. @ou are analy%ing a stoc' is that has a beta o$ 1.! on the industrial production $actor and 0.3 on the interest rate $actor. *t currently has an epected return o$ 1!6. 9owe(er) i$ industrial production actually grows 36 and interest rates drop !6 wha t is your best guess o$ the stoc'&s return A. 13.86 B. 1!.86 C. 1+.!6 . 1!.06

7. A stoc' has a beta b eta o$ 1.+. The unsyste#atic ris' o$ this stoc' is ____________ __ __________ the stoc' #ar'et as a whole. A. higher than B. lower than C. e2ual to . indeter#inable co#pared to

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78. There are two independent independ ent econo#ic $actors 1 and !. The ris'-$ree rate is 36 and all stoc's ha(e independent $ir#-speci$ic co#ponents with a standard de(iation o$ !36. Port$olios A and B are well di(ersi$ied. i(en the data d ata below which e2uation pro(ides the correct pricing #odel

A.
0. Esing the inde #odel) the alpha o$ a stoc' is +.06) the beta i$ 1.1 and the #ar'et return is 106. ,hat is the residual gi(en an actual return o$ 136 A. 0.06 B. 1.06 C. !.06 . +.06

1. The ris' pre#iu# $or eposure to alu#inu# co##odity prices is 6 and the $ir# has a beta relati(e to alu#inu# co##odity prices o$ 0.5. The ris' pre#iu# $or eposure to P changes is 56 and the $ir# has a beta relati(e to P o$ 1.!. *$ the ris' $ree rate is .06) what is the epected return on this stoc' A. 10.06 B. 11.36 C. 1+.56 . 1.06

!. The two $actor #odel on a stoc' pro(ides a ris' pre#iu# $or eposure ep osure to #ar'et ris' o$ 86) a ris' pre#iu# $or eposure to interest rate o$ G-1.+6H) and a ris' $ree rate o$ +.36. ,hat is the epected return on the stoc' A. .76 B. 11.!6 C. 1+.6 . 13.!6

7-!0


+. The ris' pre#iu# $or eposure to echange rates is 36 and the $ir# has a beta relati(e to echanges rates o$ 0.. The ris' pre#iu# $or eposure to the consu#er price inde is -56 and the $ir# has a beta relati(e to the CP* o$ 0.. *$ the ris' $ree rate is +.06) what is the epected return on this stoc' A. 0.!6 B. 1.36 C. +.56 . .06

. The two $actor #odel on a stoc' pro(ides a ris' pre#iu# $or eposure ep osure to #ar'et ris' o$ 1!6) a ris' pre#iu# $or eposure to sil(er co##odity prices o$ +.36 and a ris' $ree rate o$ .06. ,hat is the epected return on the stoc' A. 11.56 B. 1+.06 C. 13.+6 . 18.36

3. The #easure o$ ris' used in the Capital Asset Pricing odel is ___________. A. speci$ic ris' B. the standard de(iation o$ returns C. rein(est#ent ris' . beta

Chapter 07 Capital Asset Pricing and Arbitrage Pricing Theory Answer >ey

Multiple Choice Questions

7-!1


1. An adjusted beta will be ______ than the unadjusted beta. A. lower A. lower B. higher B. higher C. closer to 1 . closer . closer to 0

Difficulty: Medium

!. "a#a and "rench clai# that a$ter controlling $or $ir# si%e and the ratio o$ $ir#&s boo' (alue to #ar'et (alue) beta is ______________. *. highly signi$icant in predicting $uture stoc' returns **. relati(ely useless in predicting $uture stoc' returns ***. a good predictor o$ $ir#&s speci$ic ris' A. * A. * only B. ** only C. * C. * and *** only . *) . *) ** and ***

Difficulty: Medium

+. ,hich o$ the $ollowing are assu#ptions o$ the si#ple CAP #odel *. *ndi(idual trades o$ in(estors do not a$$ect a stoc'&s price **. All in(estors plan $or one identical holding period ***. All in(estors analy%e securities in the sa#e way and share the sa#e econo#ic (iew o$ the world */. All in(estors ha(e the sa#e le(el o$ ris' a(ersion A. *) A. *) ** and */ only B. *) ** and *** only C. **) C. **) *** and */ only . *) . *) **) *** and */

Difficulty: Medium

7-!!


. ,hen all in(estors analy%e securities in the sa#e way and share the sa#e econo#ic (iew o$ the world we say they ha(e ____________________. A. heterogeneous A. heterogeneous epectations B. e2ual B. e2ual ris' a(ersion C. asy##etric C. asy##etric in$or#ation D. ho#ogeneous epectations

Difficulty: Easy

3. *n a si#ple CAP world which o$ the $ollowing state#ents is4are correct *. All in(estors will choose to hold the #ar'et port$olio) which includes all ris'y assets in the world **. *n(estors& co#plete port$olio will (ary depending on their ris' a(ersion ***. The return per unit o$ ris' will be identical $or all indi(idual assets */. The #ar'et port$olio will be on the e$$icient $rontier and it will be the opti#al ris'y port$olio A. *) A. *) ** and *** only B. **) B. **) *** and */ only C. *) C. *) *** and */ only D. *) **) *** and */

Difficulty: Hard

5. Consider the CAP. The ris'-$ree rate is 56 and the epected return on the #ar'et is 16. ,hat is the epected return on a stoc' with a beta o$ 1.+ A. 56 A. 56 B. 13.56 B. 13.56 C. 16 C. 16 D. !1.56
Difficulty: Medium

7-!+


7. Consider the CAP. The ris'-$ree rate is 36 and the epected return on the #ar'et is 136. ,hat is the beta on a stoc' with an epected return o$ 176 A. .3 A. .3 B. .7 B. .7 C. 1 C. 1 D. 1.! 176 M 36 N K136 - 36L βs= βs M 1.!

Difficulty: Medium

. Consider the CAP. The epected return on the #ar'et is 16. The epected return on a stoc' with a beta o$ 1.! is !06. ,hat is the ris'-$ree rate A. !6 A. !6 B. 56 B. 56 C. 6 . 1!6 . 1!6 !06 M r " N G1 - r "HG1.!H= r " M 6

Difficulty: Medium

8. The arbitrage pricing theory was de(eloped by _________. A. 9enry A. 9enry ar'owit% B. :tephen ;oss C. ,illia# C. ,illia# :harpe .
Difficulty: Easy

7-!


10. *n the contet o$ the capital asset pricing #odel) the syste#atic #easure o$ ris' is captured by _________. A. uni2ue A. uni2ue ris' B. beta C. standard C. standard de(iation o$ returns . (ariance . (ariance o$ returns

Difficulty: Easy

11. <#pirical results esti#ated $ro# historical data indicate that betas _________. A. are A. are always close to %ero B. are B. are constant o(er ti#e C. o$ C. o$ all securities are always between %ero and one D. see# to regress toward one o(er ti#e

Difficulty: Easy

1!. *$ enough in(estors decide to purchase stoc's they are li'ely to dri(e up stoc' prices thereby causing _____________ and ___________. A. epected returns to $all= ris' pre#iu#s to $all B. epected B. epected returns to rise= ris' pre#iu#s to $all C. epected C. epected returns to rise= ris' pre#iu#s to rise . epected . epected returns to $all= ris' pre#iu#s to rise

Difficulty: Medium

1+. The #ar'et port$olio has a beta o$ _________. A. -1.0 A. -1.0 B. 0 B. 0 C. 0.3 C. 0.3 D. 1.0

Difficulty: Easy

7-!3


1. *n a well di(ersi$ied port$olio) __________ ris' is negligible. A. nondi(ersi$iable A. nondi(ersi$iable B. #ar'et B. #ar'et C. syste#atic C. syste#atic D. unsyste#atic

Difficulty: Easy

13. The capital asset pricing #odel was de(eloped by _________. A. >enneth A. >enneth "rench B. :tephen B. :tephen ;oss C. ,illia# :harpe .
Difficulty: Easy

15. *$ all in(estors beco#e #ore ris' a(erse the :? will _______________ and stoc' prices will _______________. A. shi$t A. shi$t upward= rise B. shi$t B. shi$t downward= $all C. ha(e the sa#e intercept with a steeper slope= $all . ha(e . ha(e the sa#e intercept with a $latter slope= rise

Difficulty: Medium

17. According to the capital asset pricing #odel) a security with a _________. A. negati(e A. negati(e alpha is considered a good buy B. positi(e B. positi(e alpha is considered o(erpriced C. positi(e alpha is considered underpriced . %ero . %ero alpha is considered a good buy

Difficulty: Easy

7-!5


1. Arbitrage is based on the idea that _________. A. assets with identical ris's #ust ha(e the sa#e epected rate o$ return B. securities B. securities with si#ilar ris' should sell at di$$erent prices C. the C. the epected returns $ro# e2ually ris'y assets are di$$erent . #ar'ets . #ar'ets are per$ectly e$$icient

Difficulty: Easy

18. *n(estors re2uire a ris' pre#iu# as co#pensation $or bearing ______________. A. unsyste#atic A. unsyste#atic ris' B. alpha B. alpha ris' C. residual C. residual ris' D. syste#atic ris'

Difficulty: Easy

!0. According to the capital cap ital asset pricing #odel) a $airly priced security will plot _________. A. abo(e A. abo(e the security #ar'et line B. along the security #ar'et line C. below C. below the security #ar'et line . at . at no relation to the security #ar'et line

Difficulty: Easy

!1. According to the capital asset pricing #odel) $airly priced securities ha(e _________. A. negati(e A. negati(e betas B. positi(e B. positi(e alphas C. positi(e C. positi(e betas D. %ero alphas

Difficulty: Medium

7-!7


!!. @ou ha(e a 30)000 port$olio consisting o$ *ntel) < and Con
Difficulty: Medium

!+. The graph o$ the relationship between epected return and beta in the CAP contet is called the _________. A. C? A. C? B. CA? B. CA? C. :? . :C? . :C?

Difficulty: Easy

!. ;esearch has re(ealed that regardless o$ what the current esti#ate o$ a $ir#&s beta is) it will tend to #o(e closer to ______ o(er ti#e. A. 1 B. 0 B. 0 C. -1 C. -1 . 0.3 . 0.3

Difficulty: Easy

7-!


!3. The beta o$ a security is e2ual to _________. A. the co(ariance between the security and #ar'et returns di(ided by the (ariance o$ the #ar'et&s returns B. the B. the co(ariance between the security and #ar'et returns di(ided by the standard de(iation o$ the #ar'et&s returns C. the C. the (ariance o$ the security&s returns di(ided by the co(ariance between the security and #ar'et returns . the . the (ariance o$ the security&s returns di(ided by the (ariance o$ the #ar'et&s returns

Difficulty: Medium

!5. According to the capital asset pricing #odel) _________. A. all A. all securities& returns #ust lie on the capital #ar'et line B. all securities& returns #ust lie on the security #ar'et line C. the C. the slope o$ the security #ar'et line #ust be less than the #ar'et ris' pre#iu# . any . any security with a beta o$ 1 #ust ha(e an ecess ec ess return o$ %ero

Difficulty: Medium

!7. According to the CAP which o$ the $ollowing is not a true state#ent regarding the #ar'et port$olio. A. All A. All securities in the #ar'et port$olio are held in propo rtion to their #ar'et (alues B. *t B. *t includes all ris'y assets in the world) including hu#an capital C. *t is always the #ini#u# (ariance port$olio on the e$$icient $rontier . *t . *t lies on the e$$icient $rontier

Difficulty: Medium

!. *n a world where the CAP holds which one o$ the $ollowing is not a true state#ent regarding the capital #ar'et line A. The A. The capital #ar'et line always has a positi(e slope ca lled the security #ar'et line B. The capital #ar'et line is also called C. The C. The capital #ar'et line is the best attainable capital allocation line . The . The capital #ar'et line is the line $ro# the ris'-$ree rate through the #ar'et port$olio

Difficulty: Medium

7-!8


!8. Consider the single $actor APT. Port$olio A has ha s a beta o$ 1.+ and an d an epected return o$ !16. Port$olio B has a beta o$ 0.7 and an epected return o$ 176. The ris'-$ree rate o$ return is 6. *$ you wanted to ta'e ad(antage o$ an arbitrage opportunity) you should ta'e a short position in port$olio __________ and a long position in port$olio _________. A. A) A. A) A B. A) B C. B) C. B) A . B) . B) B

Difficulty: Medium

+0. Consider the single $actor APT. Port$olio A has ha s a beta o$ 0.! and an d an epected return o$ 1+6. Port$olio B has a beta o$ 0. and an epected return o$ 136. The ris'-$ree rate o$ return is 106. *$ you wanted to ta'e ad(antage o$ an arbitrage opportunity) you should ta'e a short position in port$olio __________ and a long position in port$olio _________. A. A) A. A) A B. A) B. A) B C. B) A . B) . B) B

Difficulty: Medium

7-+0


+1. Consider the #ulti-$actor APT with two $actors. Port$olio A has a b eta o$ 0.3 on $actor 1 and a beta o$ 1.!3 on $actor !. The ris' pre#iu#s on the $actors 1 and ! port$olios are 16 and 76 respecti(ely. The ris'-$ree rate o$ return is 76. The epected return on port$olio A is __________ i$ no arbitrage opportunities eist. A. 1+.36 A. 1+.36 B. 13.06 B. 13.06 C. 15.!36 . !+.06 . !+.06

Difficulty: Medium

+!. Consider the one-$actor APT. The (ariance o$ the return on the $actor port$olio is .0. The beta o$ a well-di(ersi$ied port$olio on the $actor is 1.!. The (ariance o$ the return on the welldi(ersi$ied port$olio is approi#ately _________. A. .113! B. .1!70 B. .1!70 C. .13!1 C. .13!1 . .1+! . .1+!

Difficulty: Medium

++. :ecurity  has an epected rate o$ return o$ 1+6 and a beta o$ 1.13. The ris'-$ree rate is 36 and the #ar'et epected rate o$ return is 136. According to the capital asset pricing #odel) security  is _________. A. $airly A. $airly priced B. o(erpriced C. underpriced C. underpriced . Done . Done o$ the abo(e

Difficulty: Medium

7-+1


+. The possibility o$ arbitrage arises when ____________. A. there A. there is no consensus a#ong in(estors regarding the $uture direction o$ the #ar'et) and thus trades are #ade arbitrarily B. #is-pricing a#ong securities creates opportunities $or ris'less pro$its C. two C. two identically ris'y securities carry the sa#e epected returns . in(estors . in(estors do not di(ersi$y

Difficulty: Easy

+3. Building a %ero-in(est#ent port$olio will always in(ol(e _________ ____. A. an A. an un'nown #iture o$ short and long positions B. only B. only short positions C. only C. only long positions D. e2ual in(est#ents in a short and a long position

Difficulty: Easy

+5. An i#portant characteristic o$ #ar'et e2uilibriu# is ______________ _. A. the A. the presence o$ #any opportunities $or creating %ero-in(est#ent port$olios B. all B. all in(estors ehibit the sa#e degree o$ o $ ris' a(ersion C. the absence o$ arbitrage opportunities . the . the a lac' o$ li2uidity in the #ar'et

Difficulty: Easy

7-+!


+7. Consider the capital asset pricing #odel. The #ar'et degree o$ ris' a(ersion) A) is +. The (ariance o$ return on the #ar'et port$olio is .0!!3. *$ the ris'-$ree rate o$ return is 6) the epected return on the #ar'et port$olio is _________. A. 5.736 A. 5.736 B. 8.06 B. 8.06 C. 10.736 . 1!.06 . 1!.06

Difficulty: Medium

+. @ou in(est 500 in security A with a beta o$ 1.3 and 00 in security B with a beta o$ .80. The beta o$ this port$olio is _________. A. 1.1 A. 1.1 B. 1.!0 B. 1.!0 C. 1.!5 . 1.30 . 1.30

Difficulty: Medium

+8. *n a single $actor #ar'et #odel the beta o$ a stoc' ________. A. #easures the stoc'&s contribution to the standard de(iation o$ the #ar'et port$olio B. #easures B. #easures the stoc'&s unsyste#atic ris' C. changes C. changes with the (ariance o$ the residuals . #easures . #easures the stoc'&s contribution to the standard de(iation o$ the stoc'

Difficulty: Medium

7-++


0. :ecurity A has an epected rate o$ return o$ 1!6 and a beta o$ 1.10. The #ar'et epected rate o$ return is 6 and the ris'-$ree rate is 36. The alpha o$ the stoc' is _________. __ _______. A. -1.76 A. -1.76 B. +.76 C. 3.36 C. 3.36 . .76 . .76

Difficulty: Medium

1. The (ariance o$ the return on the #ar'et port$olio is .000 and the epected return on the #ar'et port$olio is !06. *$ the ris'-$ree rate o$ return is 106) the #ar'et degree o$ ris' a(ersion) A) is _________. A. 0.3 A. 0.3 B. !.3 C. +.3 C. +.3 . 3.0 . 3.0 A M G.!0 - .10H4.0 M !.3

Difficulty: Medium

!. The ris'-$ree rate is 6. The epected ep ected #ar'et rate o$ return is 116. *$ you epect stoc'  with a beta o$ . to o$$er a rate o$ return o$ 1! percent) then you should _________. A. buy A. buy stoc'  because it is o(erpriced B. buy stoc'  because it is underpriced C. sell C. sell short stoc'  because it is o(erpriced . sell . sell short stoc'  because it is underpriced

Difficulty: Medium

7-+


+. Consider the one-$actor APT. The standard de(iation o$ return on a well-di(ersi$ied port$olio is !06. The standard de(iation on the $actor port$olio is 1!6. The beta o$ the welldi(ersi$ied port$olio is approi#ately _________. A. 0.50 A. 0.50 B. 1.00 B. 1.00 C. 1.57 . +.!0 . +.!0

Difficulty: Medium

. The ris'-$ree rate and the epected e pected #ar'et rate o$ return are 56 and 156 respecti(ely. According to the capital asset pricing #odel) the epected rate o$ return on security  with a beta o$ 1.! is e2ual to _________. A. 1!6 A. 1!6 B. 176 B. 176 C. 16 . !+6 . !+6

Difficulty: Medium

7-+3


3. Consider the $ollowing two stoc's) A and B. :toc' A has an epected return o$ 106 and a beta o$ 1.!0. :toc' B has an epected return o$ 16 and a beta o$ 1.0. The ep ected #ar'et rate o$ return is 86 and the ris'-$ree rate is 36. :ecurity __________ would be considered a good buy because _________. A. A) A. A) it o$$ers an epected ecess return o$ 0.!6 B. A) B. A) it o$$ers an epected ecess return o$ !.!6 C. B) it o$$ers an epected ecess return o$ 1.6 . B) . B) it o$$ers an epected return o$ !.6

Difficulty: Hard

5. According to the CAP) the ris' pre#iu# an in(estor epects to recei(e on any stoc' or port$olio is _______________. A. directly A. directly related to the ris' a(ersion o$ the particular in(estor B. in(ersely B. in(ersely related to the ris' a(ersion o$ the particular in(estor C. directly related to the beta o$ the stoc' . in(ersely . in(ersely related to the alpha o$ the stoc'

Difficulty: Easy

7. *n his $a#ous criti2ue o$ the CAP) ;oll argued that the CAP ______________. A. is not testable because the true #ar'et port$olio can ne(er be obser(ed B. is B. is o$ li#ited use because syste#atic ris' can ne(er be entirely eli#inated C. should C. should be replaced by the APT . should . should be replaced by the "a#a "rench + $actor #odel

Difficulty: Medium

7-+5


. ,hich o$ the $ollowing (ariables do "a#a and "rench clai# do a better job eplaining stoc' returns than beta *. Boo' to #ar'et ratio **. Enepected change in industrial production ***. "ir# si%e A. * A. * only B. * B. * and ** only C. * and *** only . *) . *) ** and ***

Difficulty: Medium

8. *n a study conducted by Fagannathan and ,ang) it was $ound that the per$or#ance o$ beta in eplaining security returns could be considerably enhanced by _____________. *. including the unsyste#atic ris' o$ a stoc' **. including hu#an capital in the #ar'et port$olio ***. allowing $or changes in beta o(er ti#e A. * A. * and ** only B. ** and *** only C. * C. * and *** only . *) . *) ** and ***

Difficulty: Medium

30. The :? is (alid $or _______________ and the C? is (alid $or ______________. A. only A. only indi(idual assets= well di(ersi$ied port$olios only B. only B. only well di(ersi$ied port$olios= only indi(idual assets C. both C. both well di(ersi$ied port$olios and indi(idual assets= both well di(ersi$ied port$olios and indi(idual assets D. both well di(ersi$ied port$olios and indi(idual assets= well di(ersi$ied port$olios only

Difficulty: Medium

7-+7


31. ?i2uidity is a ris' $actor that __________. A. has yet to be accurately #easured and incorporated into port$olio #anage#ent B. is B. is una$$ected by trading #echanis#s on (arious stoc' echanges C. has C. has no e$$ect on the #ar'et (alue o$ an asset . a$$ects . a$$ects bond prices but not stoc' prices

Difficulty: Medium

3!. Beta is a #easure o$ ______________. A. total A. total ris' B. relati(e syste#atic ris' C. relati(e C. relati(e non-syste#atic ris' . relati(e . relati(e business ris'

Difficulty: Easy

3+. According to capital asset pricing theory) the 'ey deter#inant o$ port$olio returns is _________. A. the A. the degree o$ di(ersi$ication B. the syste#atic ris' o$ the port$olio C. the C. the $ir# speci$ic ris' o$ the port$olio . econo#ic . econo#ic $actors

Difficulty: Easy

3. The epected return o$ the ris'y asset port$olio with #ini#u# (ariance is _________. A. the A. the #ar'et rate o$ return B. %ero B. %ero C. the C. the ris'-$ree rate D. There is not enough in$or#ation to answer this 2uestion

Difficulty: Medium

7-+


33. According to the CAP) in(estors are co#pensated $or all but which o$ the $ollowing A. <pected A. <pected in$lation B. :yste#atic B. :yste#atic ris' C. Ti#e C. Ti#e (alue o$ #oney D. ;esidual ris'

Difficulty: Medium

35. The #ost signi$icant conceptual di$$erence between the arbitrage pricing theory GAPTH and the capital asset pricing #odel GCAPH is that the CAP _____________. A. places A. places less e#phasis on #ar'et ris' B. recogni%es B. recogni%es #ultiple unsyste#atic ris' $actors C. recogni%es only one syste#atic ris' $actor . recogni%es . recogni%es #ultiple syste#atic ris' $actors

Difficulty: Medium

37. Arbitrage is __________________________. A. is A. is an ea#ple o$ the law o$ one price B. the creation o$ ris'less pro$its #ade possible by relati(e #ispricing a#ong securities C. is C. is a co##on opportunity in #odern #ar'ets . an . an ea#ple o$ a ris'y trading strategy based on #ar'et $orecasting

Difficulty: Easy

3. A stoc'&s alpha #easures the stoc'&s ____________________. A. epected A. epected return B. abnor#al return C. ecess C. ecess return . residual . residual return

Difficulty: Hard

7-+8


38. The #easure o$ unsyste#atic ris' can be $ound $ro# an inde #odel as _________. A. residual standard de(iation B. ;-s2uare B. ;-s2uare C. degrees C. degrees o$ $reedo# . su# . su# o$ s2uares o$ the regression

Difficulty: Medium

50. :tandard de(iation o$ port$olio returns is a #easure o$ ___________. A. total ris' B. relati(e B. relati(e syste#atic ris' C. relati(e C. relati(e non-syste#atic ris' . relati(e . relati(e business ris'

Difficulty: Easy

51. Ine o$ the #ain proble#s with the arbitrage pricing theory is __________. A. its A. its use o$ se(eral $actors instead o$ a single #ar'et inde to eplain the ris'-return relationship B. the B. the introduction o$ non-syste#atic ris' as a 'ey $actor in the ris'-return relationship C. that C. that the APT re2uires an e(en larger nu#ber o$ unrealistic assu#ptions than the CAP D. the #odel $ails to identi$y the 'ey #acroecono#ic (ariables in the ris'-return relationship

Difficulty: Medium

7-0


5!. @ou run a regression o$ a stoc'&s returns (ersus a #ar'et inde and $ind the $ollowingJ

Based on the data you 'now that the stoc' A. earned A. earned a positi(e alpha that is statistically signi$icantly di$$erent $ro# %ero B. has B. has a beta precisely e2ual to 0.80 C. has a beta that could be anything between 0.531 and 1.53 inclusi(e . has . has no syste#atic ris'

Difficulty: Hard

5+. The epected return on the #ar'et port$olio is 136. The ris'-$ree rate is 6. The epected return on :A Corp. co##on stoc' is 156. The beta o$ :A Corp. co##on stoc' is 1.!3. ,ithin the contet o$ the capital asset pricing #odel) _________. A. :A A. :A Corp. stoc' is underpriced B. :A B. :A Corp. stoc' is $airly priced C. :A Corp. stoc'&s alpha is -0.736 . :A . :A Corp. stoc' alpha is 0.736

Difficulty: Medium

7-1


5. Assu#e that both  and @ are well-di(ersi$ied port$olios and the ris'-$ree rate is 6. Port$olio  has an epected return o$ 16 and a beta o$ 1.00. Port$olio @ has an epected return o$ 8.36 and a beta b eta o$ 0.!3. *n this situation) you would conclude that port$olios  and @ _________. A. are in e2uilibriu# B. o$$er B. o$$er an arbitrage opportunity C. are C. are both underpriced . are . are both $airly priced

Thus) there are no arbitrage opportunities) oppo rtunities) and  and @ are in e2uilibriu#.

Difficulty: Medium

53. ,hat is the epected return on the #ar'et A. 06 A. 06 B. 36 B. 36 C. 106 . 136 . 136

Difficulty: Easy

7-!


55. ,hat is the beta $or a port$olio with an epected return o$ 1!.36 A. 0 A. 0 B. 1 B. 1 C. 1.3 . ! . ! :ince 106 return corresponds to beta M 1) and 136 corresponds to beta M !) 1!.36 return will e2ual to beta G1 N !H4! M 1.3

Difficulty: Medium

57. ,hat is the epected return $or a port$olio with a beta o$ 0.3 A. 36 A. 36 B. 7.36 C. 1!.36 C. 1!.36 . 136 . 136

Difficulty: Medium

5. ,hat is the alpha o$ a port$olio with a beta o$ ! and actual return o$ 136 A. 06 B. 1+6 B. 1+6 C. 136 C. 136 . 176 . 176 alpha M actual return - epected return M 136 - 136 M 06 A port$olio with a return o$ 136 and a beta o$ ! lies on the :? and there$ore has an alpha o$ %ero.

Difficulty: Medium

7-+


58. *$ the si#ple CAP is (alid and all port$olios are priced correctly) which o$ the situations below are possible Consider each situation independently and assu#e the ris' $ree rate is 36.

A. Ipiton A A. Ipiton B. Ipiton B. Ipiton B C. Ipiton C. Ipiton C D. Ipiton  AH Dot possible) two port$olios with di$$erent betas can not ha(e the sa#e epected return. BH Dot possible) under CAP #ar'et port$olio #ust yield highest CA?. CH Dot possible) port$olio A and the #ar'et ha(e di$$erent ecess returns per unit o$ ris'. H Possible

Difficulty: Hard

7-


70. Two in(est#ent ad(isors are co#paring per$or#ance. Ad(isor A a(eraged a !06 return with a port$olio beta o$ 1.3 and Ad(isor B a(eraged a 136 return with a port$olio beta o$ 1.!. *$ the T-bill rate was 36 and the #ar'et return during the period was 1+6) which ad(isor was the better stoc' pic'er A. Ad(isor A was better because he generated a larger alpha B. Ad(isor B. Ad(isor B was better because he generated a larger alpha C. Ad(isor C. Ad(isor A was better because he generated a higher return . Ad(isor . Ad(isor B was better because he achie(ed a good return with a lower beta

;e2uired return A M 36 N G1+6 - 36HG1.3H M 176 ;e2uired return B M 36 N G1+6 - 36HG1.!H M 1.56 αA M Actual return A - re2uired return A M !06 - 176 M +6 0. 6 αB M Actual return B - re2uired return B M 136 - 1.56 M 0.6 Difficulty: Hard

71. The epected return on the #ar'et is the ris' $ree rate plus the _____________. A. di(ersi$ied A. di(ersi$ied returns B. e2uilibriu# ris' pre#iu# C. historical C. historical #ar'et return . unsyste#atic . unsyste#atic return

Difficulty: Easy

7-3


7!. @ou consider buying a share o$ stoc' at a price o$ !3. The stoc' is epected to pay a di(idend o$ 1.30 net year and your ad(isory ser(ice tells you that you can epect to sell the stoc' in one year $or !. The stoc'&s beta is 1.1) r$ is 56 and
;e2uired return M 56 N G156 - 56HG1.1H M 176 Abnor#al return M 16 - 176 M 16

Difficulty: Hard

7+. *$ the beta o$ the #ar'et inde is 1.0 and the standard de(iation o$ the #ar'et inde increases $ro# 1!6 to 16) what is the new ne w beta o$ the #ar'et inde A. 0. A. 0. B. 1.0 C. 1.! C. 1.! . 1.3 . 1.3 ar'et beta always e2uals to 1 regardless o$ #ar'et (olatility.

Difficulty: Easy

7. According to the CAP) what is the #ar'et ris' pre#iu# gi(en an epected ep ected return on a security o$ 1+.56) a stoc' beta o$ o $ 1.!) and a ris' $ree interest rate o$ .06 A. .06 A. .06 B. .6 B. .6 C. 5.56 C. 5.56 D. .06 1+.5 M .0 N 1.!  G;PH) ;P M .06

Difficulty: Medium

7-5


73. According to the CAP) what is the epected #ar'et return gi(en an epected return on a security o$ 13.6) a stoc' beta o$ o $ 1.!) and a ris' $ree interest rate o$ 3.06 A. 3.06 A. 3.06 B. 8.06 B. 8.06 C. 1+.06 C. 1+.06 D. 1.06 13. M 3.0 N 1.!  G;PH) ;P M 8.06) <pected #ar'et return M 3.0 N 8.0 M 1.06

Difficulty: Medium

75. ,hat is the epected return on a stoc' with a beta o$ 0.) gi(en a ris' $ree rate o$ +.36 and an epected #ar'et return o$ 13.36 A. +.6 A. +.6 B. 1+.16 C. 13.56 C. 13.56 . 18.16 . 18.16 <pected return M +.3 N G0.HG13.3 - +.3H M 1+.16

Difficulty: Medium

77. ;esearch has identi$ied two syste#atic $actors that a$$ect E.:. stoc' returns. The $actors are growth in industrial production and changes in long ter# interest rates. *ndustrial production growth is epected to be +6 and long ter# interest rates are epected to increase by 16. @ou are analy%ing a stoc' is that has a beta o$ 1.! on the industrial production $actor and 0.3 on the interest rate $actor. *t currently has an epected return o$ 1!6. 9owe(er) i$ industrial production actually grows 36 and interest rates drop !6 wha t is your best guess o$ the stoc'&s return A. 13.86 A. 13.86 B. 1!.86 C. 1+.!6 C. 1+.!6 . 1!.06 . 1!.06
Difficulty: Hard

7-7


7. A stoc' has a beta b eta o$ 1.+. The unsyste#atic ris' o$ this stoc' is ____________ __ __________ the stoc' #ar'et as a whole. A. higher than B. lower B. lower than C. e2ual C. e2ual to . indeter#inable . indeter#inable co#pared to

Difficulty: Medium

78. There are two independent independ ent econo#ic $actors 1 and !. The ris'-$ree rate is 36 and all stoc's ha(e independent $ir#-speci$ic co#ponents with a standard de(iation o$ !36. Port$olios A and B are well di(ersi$ied. i(en the data d ata below which e2uation pro(ides the correct pricing #odel

A.
Difficulty: Hard

7-


0. Esing the inde #odel) the alpha o$ a stoc' is +.06) the beta i$ 1.1 and the #ar'et return is 106. ,hat is the residual gi(en an actual return o$ 136 A. 0.06 A. 0.06 B. 1.06 C. !.06 C. !.06 . +.06 . +.06 ;esidual M 13 - G+ N 1.1  10H M 16

Difficulty: Medium

1. The ris' pre#iu# $or eposure to alu#inu# co##odity prices is 6 and the $ir# has a beta relati(e to alu#inu# co##odity prices o$ 0.5. The ris' pre#iu# $or eposure to P changes is 56 and the $ir# has a beta relati(e to P o$ 1.!. *$ the ris' $ree rate is .06) what is the epected return on this stoc' A. 10.06 A. 10.06 B. 11.36 B. 11.36 C. 1+.56 . 1.06 . 1.06 ;eturn M .0 N 0.5G0.0H N 1.!G.05H M .1+5

Difficulty: Medium

!. The two $actor #odel on a stoc' pro(ides a ris' pre#iu# $or eposure ep osure to #ar'et ris' o$ 86) a ris' pre#iu# $or eposure to interest rate o$ G-1.+6H) and a ris' $ree rate o$ +.36. ,hat is the epected return on the stoc' A. .76 B. 11.!6 B. 11.!6 C. 1+.6 C. 1+.6 . 13.!6 . 13.!6 ;eturn M +.3 N 8 - 1.+ M 11.!6

Difficulty: Medium

7-8


+. The ris' pre#iu# $or eposure to echange rates is 36 and the $ir# has a beta relati(e to echanges rates o$ 0.. The ris' pre#iu# $or eposure to the consu#er price inde is -56 and the $ir# has a beta relati(e to the CP* o$ 0.. *$ the ris' $ree rate is +.06) what is the epected return on this stoc' A. 0.!6 B. 1.36 B. 1.36 C. +.56 C. +.56 . .06 . .06 ;eturn M .0+ N 0.G0.03H N 0.G-.05H M .00!

Difficulty: Medium

. The two $actor #odel on a stoc' pro(ides a ris' pre#iu# $or eposure ep osure to #ar'et ris' o$ 1!6) a ris' pre#iu# $or eposure to sil(er co##odity prices o$ +.36 and a ris' $ree rate o$ .06. ,hat is the epected return on the stoc' A. 11.56 A. 11.56 B. 1+.06 B. 1+.06 C. 13.+6 C. 13.+6 D. 18.36 ;eturn M +.3 N  N 1! M 18.36

Difficulty: Medium

3. The #easure o$ ris' used in the Capital Asset Pricing odel is ___________. A. speci$ic A. speci$ic ris' B. the B. the standard de(iation o$ returns C. rein(est#ent C. rein(est#ent ris' D. beta

Difficulty: Easy

7-30

Chap 007

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