46) In his famous critique of the CAPM, Roll argued that the CAPM ________.
A) is not testable because the true market portfolio can never be observed
B) is of limited use because systematic risk can never be entirely eliminated
C) should be replaced by the APT
D) should be replaced by the Fama-French three-factor model
47) Which of the following variables do Fama and French claim do a better job explaining stock
returns than beta?
I. Book-to-market ratio
II. Unexpected change in industrial production
III. Firm size
A) I only
B) I and II only
C) I and III only
D) I, II, and III
48) In a study conducted by Jagannathan and Wang, it was found that the performance of beta in
explaining security returns could be considerably enhanced by:
I. Including the unsystematic risk of a stock
II. Including human capital in the market portfolio
III. Allowing for changes in beta over time
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III
49) The SML is valid for ________, and the CML is valid for ________.
A) only individual assets; well-diversified portfolios only
B) only well-diversified portfolios; only individual assets
C) both well-diversified portfolios and individual assets; both well-diversified portfolios and
individual assets
D) both well-diversified portfolios and individual assets; well-diversified portfolios only
50) Liquidity is a risk factor that ________.
A) has yet to be accurately measured and incorporated into portfolio management
B) is unaffected by trading mechanisms on various stock exchanges
C) has no effect on the market value of an asset
D) affects bond prices but not stock prices
51) Beta is a measure of ________.
A) total risk
B) relative systematic risk
C) relative nonsystematic risk
D) relative business risk
52) According to capital asset pricing theory, the key determinant of portfolio returns is
________.
A) the degree of diversification
B) the systematic risk of the portfolio
C) the firm-specific risk of the portfolio
D) economic factors
53) The expected return of the risky-asset portfolio with minimum variance is ________.
A) the market rate of return
B) zero
C) the risk-free rate
D) The answer cannot be determined from the information given.
54) According to the CAPM, investors are compensated for all but which of the following?
A) expected inflation
B) systematic risk
C) time value of money
D) residual risk
55) The most significant conceptual difference between the arbitrage pricing theory (APT) and
the capital asset pricing model (CAPM) is that the CAPM ________.
A) places less emphasis on market risk
B) recognizes multiple unsystematic risk factors
C) recognizes only one systematic risk factor
D) recognizes multiple systematic risk factors
56) Arbitrage is ________.
A) an example of the law of one price
B) the creation of riskless profits made possible by relative mispricing among securities
C) a common opportunity in modern markets
D) an example of a risky trading strategy based on market forecasting
57) A stock’s alpha measures the stock’s ________.
A) expected return
B) abnormal return
C) excess return
D) residual return
58) The measure of unsystematic risk can be found from an index model as ________.
A) residual standard deviation
B) R-square
C) degrees of freedom
D) sum of squares of the regression
59) Standard deviation of portfolio returns is a measure of ________.
A) total risk
B) relative systematic risk
C) relative nonsystematic risk
D) relative business risk
60) One of the main problems with the arbitrage pricing theory is ________.
A) its use of several factors instead of a single market index to explain the risk-return
relationship
B) the introduction of nonsystematic risk as a key factor in the risk-return relationship
C) that the APT requires an even larger number of unrealistic assumptions than does the CAPM
D) the model fails to identify the key macroeconomic variables in the risk-return relationship
61) You run a regression of a stock’s returns versus a market index and find the following:
Coefficients
Lower 95%
Upper 95%
Intercept
0.789
-1.556
3.457
Slope
0.890
0.6541
1.465
Based on the data, you know that the stock ________.
A) earned a positive alpha that is statistically significantly different from zero
B) has a beta precisely equal to .890
C) has a beta that is likely to be anything between .6541 and 1.465 inclusive
D) has no systematic risk
62) The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected
return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25.
Within the context of the capital asset pricing model, ________.
A) SDA Corp. stock is underpriced
B) SDA Corp. stock is fairly priced
C) SDA Corp. stock’s alpha is -.75%
D) SDA Corp. stock alpha is .75%
63) Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.
Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of
9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y ________.
A) are in equilibrium
B) offer an arbitrage opportunity
C) are both underpriced
D) are both fairly priced
64)
What is the expected return on the market?
A) 0%
B) 5%
C) 10%
D) 15%
65)
What is the beta for a portfolio with an expected return of 12.5%?
A) 0
B) 1
C) 1.5
D) 2
66)
What is the expected return for a portfolio with a beta of .5?
A) 5%
B) 7.5%
C) 12.5%
D) 15%
67)
What is the alpha of a portfolio with a beta of 2 and actual return of 15%?
A) 0%
B) 13%
C) 15%
D) 17%