Chapter 08 Index Models Answer Key
Multiple Choice Questions
1.
As diversification increases, the total variance of a portfolio approaches
2.
As diversification increases, the standard deviation of a portfolio approaches
3.
As diversification increases, the firm-specific risk of a portfolio approaches
4.
As diversification increases, the unsystematic risk of a portfolio approaches
5.
As diversification increases, the unique risk of a portfolio approaches
6.
The index model was first suggested by
7.
A single-index model uses __________ as a proxy for the systematic risk factor.
8.
Beta books typically rely on the __________ most recent monthly observations to calculate
regression parameters.
9.
The index model has been estimated for stocks A and B with the following results:
RA
= 0.03 + 0.7
RM
+
eA
.
RB
= 0.01 + 0.9
RM
+
eB
.
σ
M
= 0.35; σ(
eA
) = 0.20; σ(
eB
) = 0.10.
The covariance between the returns on stocks A and B is
10.
According to the index model, covariances among security pairs are
11.
The intercept in the regression equations calculated by beta books is equal to
12.
Analysts may use regression analysis to estimate the index model for a stock. When doing
so, the slope of the regression line is an estimate of
13.
Analysts may use regression analysis to estimate the index model for a stock. When doing
so, the intercept of the regression line is an estimate of
14.
In a factor model, the return on a stock in a particular period will be related to
15.
Rosenberg and Guy found that __________ helped to predict a firm’s beta.
16.
If the index model is valid, _________ would be helpful in determining the covariance
between assets
GM
and
GE
.
17.
If the index model is valid, _________ would be helpful in determining the covariance
between assets
HPQ
and
KMP
.
Topic: Index Models
18.
If the index model is valid, _________ would be helpful in determining the covariance
between assets
K
and
L
.
19.
Rosenberg and Guy found that ___________ helped to predict firms’ betas.
20.
If a firm’s beta was calculated as 0.6 in a regression equation, a commonly used
adjustment technique would provide an adjusted beta of
21.
If a firm’s beta was calculated as 0.8 in a regression equation, a commonly used
adjustment technique would provide an adjusted beta of
22.
If a firm’s beta was calculated as 1.3 in a regression equation, a commonly used
adjustment technique would provide an adjusted beta of
23.
The beta of Exxon stock has been estimated as 1.6 using regression analysis on a sample
of historical returns. A commonly used adjustment technique would provide an adjusted
beta of
Topic: Index Models
24.
Topic: Index Models
The beta of Apple stock has been estimated as 2.3 using regression analysis on a sample
of historical returns. A commonly used adjustment technique would provide an adjusted
beta of
25.
The beta of JCP stock has been estimated as 1.2 using regression analysis on a sample of
historical returns. A commonly used adjustment technique would provide an adjusted beta
of
26.
Assume that stock market returns do not resemble a single-index structure. An investment
fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio
constrained by 150 investments. They will need to calculate _____________ expected
returns and ___________ variances of returns.
27.
Assume that stock market returns do not resemble a single-index structure. An investment
fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio
constrained by 100 investments. They will need to calculate _____________ expected
returns and ___________ variances of returns.
28.
Assume that stock market returns do not resemble a single-index structure. An investment
fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio
constrained by 150 investments. They will need to calculate ____________ covariances.
Topic: Index Models
29.
Topic: Index Models
Assume that stock market returns do not resemble a single-index structure. An investment
fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio
constrained by 125 investments. They will need to calculate ____________ covariances.
30.
Assume that stock market returns do not resemble a single-index structure. An investment
fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio
constrained by 100 investments. They will need to calculate ____________ covariances.
31.
Assume that stock market returns do follow a single-index structure. An investment fund
analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained
by 175 investments. They will need to calculate ________ estimates of expected returns
and ________ estimates of sensitivity coefficients to the macroeconomic factor.
32.
Assume that stock market returns do follow a single-index structure. An investment fund
analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained
by 125 investments. They will need to calculate ________ estimates of expected returns
and ________ estimates of sensitivity coefficients to the macroeconomic factor.
33.
Assume that stock market returns do follow a single-index structure. An investment fund
analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained
by 200 investments. They will need to calculate ________ estimates of expected returns
and ________ estimates of sensitivity coefficients to the macroeconomic factor.