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47. The index model has been estimated for stocks A and B with the following results:
RA = 0.01 + 0.8RM + eA
RB = 0.02 + 1.2RM + eB
M = 0.20 (eA) = 0.20 (eB) = 0.10
The standard deviation for stock A is __________.
A. 0.0656
B. 0.0676
Difficulty: Difficult
48. The index model has been estimated for stock A with the following results:
RA = 0.01 + 0.8RM + eA
M = 0.20 (eA) = 0.10
The standard deviation of the return for stock A is __________.
A. 0.0356
Difficulty: Difficult
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49. Security returns
A. are based on both macro events and firm-specific events.
B. are based on firm-specific events only.
Difficulty: Easy
50. The single-index model
A. greatly reduces the number of required calculations, relative to those required by the
Markowitz model.
Difficulty: Easy
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51. The Security Characteristic Line (SCL)
A. plots the excess return on a security as a function of the excess return on the market.
B. allows one to estimate the beta of the security.
Difficulty: Easy
52. The expected impact of unanticipated macroeconomic events on a security’s return during
the period is
A. included in the security’s expected return.
Difficulty: Moderate
53. Covariances between security returns tend to be
A. positive because of SEC regulations.
B. positive because of Exchange regulations.
Difficulty: Moderate
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54. In the single-index model represented by the equation ri = E(ri) + iF + ei, the term ei
represents
A. the impact of unanticipated macroeconomic events on security i’s return.
Difficulty: Moderate
55. Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE.
Using a single-index model rather than the Markowitz model _______ the number of inputs
needed from _______ to ________.
A. increases, about 1,400, more than 1.4 million
B. increases, about 10,000, more than 125,000
Difficulty: Moderate
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56. One “cost” of the single-index model is that it
A. is virtually impossible to apply.
B. prohibits specialization of efforts within the security analysis industry.
Difficulty: Moderate
57. The Security Characteristic Line (SCL) associated with the single-index model is a plot
of
A. the security’s returns on the vertical axis and the market index’s returns on the horizontal
axis.
B. the market index’s returns on the vertical axis and the security’s returns on the horizontal
axis.
Difficulty: Moderate
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58. The idea that there is a limit to the reduction of portfolio risk due to diversification is
A. contradicted by both the CAPM and the single-index model.
B. contradicted by the CAPM.
Difficulty: Moderate
59. In their study about predicting beta coefficients, which of the following did Rosenberg
and Guy find to be factors that influence beta?
I) industry group
II) variance of cash flow
III) dividend yield
IV) growth in earnings per share
A. I and II
B. I and III
Difficulty: Moderate
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60. If a firm’s beta was calculated as 1.6 in a regression equation, Merrill Lynch would state
the adjusted beta at a number
A. less than 0.6 but greater than zero.
B. between 0.6 and 1.0.
Difficulty: Moderate
61. The beta of a stock has been estimated as 1.8 by Merrill Lynch using regression analysis
on a sample of historical returns. The Merrill Lynch adjusted beta of the stock would be
___________.
A. 1.20
Difficulty: Moderate
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62. Assume that stock market returns do not resemble a single-index structure. An investment
fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained
by 40 investments. They will need to calculate _____________ expected returns and
___________ variances of returns.
A. 100, 100
Difficulty: Moderate
63. Assume that stock market returns do not resemble a single-index structure. An investment
fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained
by 40 investments. They will need to calculate ____________ covariances.
A. 45
Difficulty: Moderate
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64. Assume that stock market returns do follow a single-index structure. An investment fund
analyzes 60 stocks in order to construct a mean-variance efficient portfolio constrained by 60
investments. They will need to calculate ________ estimates of expected returns and
________ estimates of sensitivity coefficients to the macroeconomic factor.
A. 200; 19,900
B. 200; 200
Difficulty: Moderate
65. Consider the single-index model. The alpha of a stock is 0%. The return on the market
index is 10%. The risk-free rate of return is 3%. The stock earns a return that exceeds the risk-
free rate by 11% and there are no firm-specific events affecting the stock performance. The
of the stock is _______.
D. 1.33
E. 1.50
Difficulty: Moderate
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66. Suppose you held a well-diversified portfolio with a very large number of securities, and
that the single index model holds. If the of your portfolio was 0.25 and M was 0.21, the
of the portfolio would be approximately ________.
A. 0.64
Difficulty: Difficult
67. Suppose you held a well-diversified portfolio with a very large number of securities, and
that the single index model holds. If the of your portfolio was 0.18 and M was 0.22, the
of the portfolio would be approximately ________.
A. 0.64
B. 1.19
Difficulty: Difficult
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68. Suppose the following equation best describes the evolution of over time:
t = 0.4 + 0.6t-1
If a stock had a of 0.9 last year, you would forecast the to be _______ in the coming year.
A. 0.45
B. 0.60
Difficulty: Easy
69. Suppose the following equation best describes the evolution of over time:
t = 0.3 + 0.2t-1
If a stock had a of 0.8 last year, you would forecast the to be _______ in the coming year.
D. 0.94
E. none of the above
Difficulty: Easy