Use the table for the question(s) below.
Consider the following stock price and shares outstanding data:
Stock
Name
Price per
Share
Shares
Outstanding
(Billions)
Lowes $28.80 1.53
Wal–Mart $47.90 4.17
Intel $19.60 5.77
Boeing $75.00 0.79
40)
The total market capitalization for all four stocks is closest to:
40)
A)
$479 Billion
B)
$2,100 Billion
C)
$415 Billion
D)
$200 Billion
41)
The beta for the risk free investment is closest to:
41)
A)
0
B)
1
C)
Unable to answer this question without knowing the risk free rate
D)
Unable to answer this question without knowing the markets volatility
A
C
42)
Which of the following statements is false?
42)
A)
If a firm where to change industries, using its historical beta would be inferior to using the
beta of other firms in the new industry.
B)
Many practitioners analyze other financial characteristics of a firm, when they forecast betas.
C)
When using historical returns to forecast future betas, we must be mindful of changes in the
environment that might cause the future to differ from the past.
D)
U.S. Treasuries are never subject to interest rate risk unless we select a maturity equal to our
investment horizon.
43)
Assume that the Wilshire 5000 currently has a dividend yield of 2% and that on average, the
dividends of Wilshire 5000 firms have increased by about 7% per year. If the risk–free interest rate
is 4%, then your estimate for the future market risk premium is:
43)
A)
8%
B)
5%
C)
4%
D)
7%
44)
Which of the following statements is false?
44)
A)
If all investors demand the efficient portfolio, and since the supply of securities is the market
portfolio, then two portfolios must coincide.
B)
Because every security is owned by someone, the sum of all investors’ portfolios must equal
the portfolio of all risky securities available in the market.
C)
The efficient portfolio, the portfolio that all investors should hold, must be the same portfolio
as the market portfolio of all risky securities.
D)
If some security were not part of the efficient portfolio, then every investor would want to
own it, and demand for this security would increase causing its expected return to fall until it
is no longer an attractive investment.
45)
Which of the following statements is false?
45)
A)
We should be suspicious of beta estimates that are extreme relative to industry norms.
B)
Evidence suggests that betas tend to revert toward zero over time.
C)
For stocks, common practice is to use at least two years of weekly return data or five years of
monthly return data when estimating beta.
D)
When using historical data, there is always the possibility of estimation error.
Use the information for the question(s) below.
Tom’s portfolio consists solely of an investment in Merck stock. Merck has an expected return of 13% and a volatility of 25%.
The market portfolio has an expected return of 12% and a volatility of 18%. The risk–free rate is 4%. Assume that the CAPM
assumptions hold in the market.
46)
Assuming that Tom wants to maintain the current expected return on his portfolio, then the
minimum volatility that Tom could achieve by investing in the market portfolio and risk–free
investment is closest to:
46)
A)
18%
B)
20%
C)
22%
D)
25%
Use the table for the question(s) below.
Consider the following three individuals portfolios consisting of investments in four stocks:
Stock Beta
Peter’s
Investment
Paul’s
Investment
Mary’s
Investment
Eenie 1.3 2500 5000 10000
Meenie 1.0 2500 5000 10000
Minie 0.8 2500 5000 –5000
Moe –0.5 2500 –5000 –5000
47)
Assuming that the risk–free rate is 4% and the expected return on the market is 12%, then required
return on Peter’s Portfolio is closest to:
47)
A)
9%
B)
8%
C)
12%
D)
10%
48)
Which of the following statements is false?
48)
A)
When buying a value–weighted portfolio, we end up purchasing the same percentage of
shares of each firm.
B)
A value–weighted portfolio is an equal–ownership portfolio: We hold an equal fraction of the
total number of shares outstanding of each security in the portfolio.
C)
To maintain a value–weighted portfolio, we do not need to trade securities and rebalance the
portfolio unless the number of shares outstanding of some security changes.
D)
In a value weighted portfolio the fraction of money invested in any security corresponds to its
share of the total number of shares outstanding of all securities in the portfolio.
Use the equation for the question(s) below.
Consider the following linear regression model:
(Ri–rf) =ai+bi(RMkt –rf) +ei
49)
The ai in the regression
49)
A)
measures the deviation from the best fitting line and is zero on average.
B)
measures the diversifiable risk in returns.
C)
measures the historical performance of the security relative to the expected return predicted
by the SML.
D)
measures the sensitivity of the security to market risk.
50)
Which of the following is not considered a difficulty with regards to the CAPM?
50)
A)
Investors risk preferences are not observed.
B)
Expected returns are not observed.
C)
The market proxy is not correct.
D)
Betas are not observed.
Use the information for the question(s) below.
Suppose that the risk–free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.
Monsters Inc. has a 24% volatility and a correlation with the market of .60, while California Gold Mining has a 32% volatility
and a correlation with the market of –.7. Assume the CAPM assumptions hold.
51)
California Gold Mining’s Beta with the market is closest to:
51)
A)
–1.25
B)
1.25
C)
–0.9
D)
0.9
52)
Which of the following statements is false?
52)
A)
Graphically, when the tangent line goes through the market portfolio, it is called the security
market line (SML).
B)
A portfolio’s risk premium and volatility are determined by the fraction that is invested in the
market.
C)
Because all investors should hold the risky securities in the same proportions as the efficient
portfolio, their combined portfolio will also reflect the same proportions as the efficient
portfolio.
D)
When the CAPM assumptions hold, choosing an optimal portfolio is relatively
straightforward: it is the combination of the risk–free investment and the market portfolio.
Use the information for the question(s) below.
Tom’s portfolio consists solely of an investment in Merck stock. Merck has an expected return of 13% and a volatility of 25%.
The market portfolio has an expected return of 12% and a volatility of 18%. The risk–free rate is 4%. Assume that the CAPM
assumptions hold in the market.
53)
Assuming that Tom wants to maintain the current expected return on his portfolio, then the
amount that Tom should invest in the market portfolio to minimize his volatility is closest to:
53)
A)
110%
B)
90%
C)
125%
D)
100%
54)
Which of the following statements is false?
54)
A)
Beta measures the diversifiable risk of a security, as opposed to its market risk, and is the
appropriate measure of the risk of a security for an investor holding the market portfolio.
B)
It is common practice to estimate beta based on the historical correlation and volatilities.
C)
Beta represents the amount by which risks that affect the overall market are amplified for a
given stock or investment.
D)
Beta is the expected percent change in the excess return of the security for a 1% change in the
excess return of the market portfolio.
55)
Which of the following statements is false?
55)
A)
Graphically the line through the risk–free investment and the market portfolio is called the
capital market line (CML).
B)
The beta of a portfolio is the weighted average beta of the securities in the portfolio.
C)
The expected return of a portfolio should correspond to the portfolio’s beta.
D)
By holding a negative beta security, an investor can reduce the overall market risk of her
portfolio.
56)
Which of the following statements is false?
56)
A)
The statistical technique that identifies the bets–fitting line through a set of points is called
linear regression.
B)
Beta corresponds to the slope of the best fitting line in the plot of the securities excess returns
versus the market excess return.
C)
Securities whose returns tend to move in tandem with the market on average have a beta of 1.
D)
Securities that tend to move more than the market have betas higher than 0.
Use the information for the question(s) below.
Tom’s portfolio consists solely of an investment in Merck stock. Merck has an expected return of 13% and a volatility of 25%.
The market portfolio has an expected return of 12% and a volatility of 18%. The risk–free rate is 4%. Assume that the CAPM
assumptions hold in the market.
57)
Assuming that Tom wants to maintain the current volatility of his portfolio, then the maximum
expected return that Tom could achieve by investing in the market portfolio and risk–free
investment is closest to:
57)
A)
15%
B)
16%
C)
12.%
D)
13%
58)
In practice which market index would best be used as a proxy for the market portfolio in the
CAPM?
58)
A)
Wilshire 5000
B)
Dow Jones Industrial Average
C)
S&P 500
D)
U.S. Treasury Bill
59)
Which of the following is not an assumption used in deriving the Capital Asset Pricing Model
(CAPM)?
59)
A)
Investors have homogeneous expectations regarding the volatilities, correlation, and expected
returns of securities.
B)
Investors can buy and sell all securities at competitive market prices without incurring taxes
or transactions cost and can borrow and lend at the risk–free interest rate.
C)
Investors have homogeneous risk adverse preferences toward taking on risk.
D)
Investors hold only efficient portfolios of traded securities, that is portfolios that yield the
maximum expected return for the given level of volatility.
60)
Which of the following statements is false?
60)
A)
One difficulty when trying to estimate beta for a security is that beta depends on the
correlation and volatilities of the security’s and market’s returns in the future.
B)
It is common practice to estimate beta based on the expectations of future correlations and
volatilities.
C)
Securities that tend to move less than the market have betas below 1.
D)
One difficulty when trying to estimate beta for a security is that beta depends on investors
expectations of the correlation and volatilities of the security’s and market’s returns.
Use the table for the question(s) below.
Consider the following stock price and shares outstanding data:
Stock
Name
Price per
Share
Shares
Outstanding
(Billions)
Lowes $28.80 1.53
Wal–Mart $47.90 4.17
Intel $19.60 5.77
Boeing $75.00 0.79
61)
The market capitalization for Wal–Mart is closest to:
61)
A)
$276 Billion
B)
$415 Billion
C)
$479 Billion
D)
$200 Billion
62)
Assume that the S&P 500 currently has a dividend yield of 3% and that on average, the dividends
of S&P 500 firms have increased by about 5% per year. If the risk–free interest rate is 4%, then your
estimate for the future market risk premium is:
62)
A)
6%
B)
4%
C)
8%
D)
7%
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
63)
You currently own $100,000 worth of Wal–Mart stock. Suppose that Wal–Mart has an expected return of 14%
and a volatility of 23%. The market portfolio has an expected return of 12% and a volatility of 16%. The
risk–free rate is 5%. Assuming the CAPM assumptions hold, what alternative investment has the lowest
possible volatility while having the same expected return as Wal–Mart? What is the volatility of this portfolio?
Use the table for the question(s) below.
Consider the following three individuals portfolios consisting of investments in four stocks:
Stock Beta
Peter’s
Investment
Paul’s
Investment
Mary’s
Investment
Eenie 1.3 2500 5000 10000
Meenie 1.0 2500 5000 10000
Minie 0.8 2500 5000 –5000
Moe –0.5 2500 –5000 –5000
64)
Assuming that the risk–free rate is 4% and the expected return on the market is 12%, then calculate the required
return on Mary’s Portfolio.
65)
You currently own $100,000 worth of Wal–Mart stock. Suppose that Wal–Mart has an expected return of 14%
and a volatility of 23%. The market portfolio has an expected return of 12% and a volatility of 16%. The
risk–free rate is 5%. Assuming the CAPM assumptions hold, what alternative investment has the highest
possible expected return while having the same volatility as Wal–Mart? What is the expected return of this
portfolio?
66)
Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.
67)
Suppose that the risk–free rate is 5% and the market portfolio has an expected return of 13% with a volatility of
18%. Luther Industries has a volatility of 24% and a correlation with the market of .5. If you assume that the
CAPM assumptions hold, then what is the expected return on Luther stock?
26
Use the table for the question(s) below.
Consider the following stock price and shares outstanding data:
Stock
Name
Price per
Share
Shares
Outstanding
(Billions)
Lowes $28.80 1.53
Wal–Mart $47.90 4.17
Intel $19.60 5.77
Boeing $75.00 0.79
68)
Assume that you have $250,000 to invest and you are interested in creating a value–weighted portfolio of these
four stocks. How many shares of each of the four stocks will you hold? What percentage of the shares
outstanding of each stock will you hold?
Answer Key
Testname: C12
Answer Key
Testname: C12
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Answer Key
Testname: C12
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