21
54. Refer to Exhibit 7-3. What is the covariance between Radtron and the proxy index?
a.
57.30
b.
86.50
c.
88.00
d.
92.50
e.
107.90
55. Refer to Exhibit 7-3. What is the covariance between Radtron and the true index?
a.
57.30
b.
86.50
c.
88.00
d.
92.50
e.
107.90
56. Refer to Exhibit 7-3. What is the beta for Radtron using the proxy index?
a.
0.87
b.
0.97
c.
1.02
d.
1.15
e.
1.28
22
57. Refer to Exhibit 7-3. What is the beta for Radtron using the true index?
a.
0.87
b.
0.97
c.
1.02
d.
1.15
e.
1.28
58. Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5% and the expected
return on the stock index is 15%. The estimated return on the asset is 20%. Calculate the alpha for the
asset.
a.
19.25%
b.
0.75%
c.
−0.75%
d.
9.75%
e.
9.0%
59. The variance of returns for a risky asset is 25%. The variance of the error term, Var(e) is 8%. What
portion of the total risk of the asset, as measured by variance, is systematic?
a.
32%
b.
8%
c.
68%
d.
25%
e.
75%
23
60. An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30%
allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the
stock index is 12%. The standard deviation of returns on the stock index 6%. Calculate the expected
standard deviation of the portfolio.
a.
4.20%
b.
25.20%
c.
3.29%
d.
10.80%
e.
5.02%
61. An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all
the money in a stock index. The return on the risk-free asset is 4.0% and the expected return on the
stock index is 15%. Calculate the expected return on the portfolio.
a.
18.25%
b.
18.85%
c.
9.50%
d.
15.00%
e.
11.15%
62. An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30%
allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the
stock index is 12%. Calculate the expected return on the portfolio.
a.
8.25%
b.
16.50%
c.
17.50%
d.
9.75%
e.
14.38%
24
63. A stock has a beta of the stock is 1.25. The risk free rate is 5% and the return on the market is 6%. The
estimated return for the stock is 14%. According to the CAPM you should
a.
Sell because it is overvalued.
b.
Sell because it is undervalued.
c.
Buy because it overvalued.
d.
Buy because it is undervalued.
e.
Short because it is undervalued.
64. Consider a risky asset that has a standard deviation of returns of 15. Calculate the correlation between
the risky asset and a risk free asset.
a.
1.0
b.
0.0
c.
−1.0
d.
0.5
e.
−0.5
65. The expected return for a stock, calculated using the CAPM, is 10.5%. The market return is 9.5% and
the beta of the stock is 1.50. Calculate the implied risk-free rate.
a.
7.50%
b.
13.91%
c.
17.50%
d.
21.88%
e.
14.38%
66. The expected return for a stock, calculated using the CAPM, is 25%. The risk free rate is 7.5% and the
beta of the stock is 0.80. Calculate the implied return on the market.
a.
7.50%
b.
13.91%
c.
17.50%
d.
21.88%
e.
14.38%
25
67. The expected return for Zbrite stock calculated using the CAPM is 15.5%. The risk free rate is 3.5%
and the beta of the stock is 1.2. Calculate the implied market risk premium.
a.
5.5%
b.
6.5%
c.
10.0%
d.
15.5%
e.
12.0%
Exhibit 7-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Beta
Current Price
Expected Price
Expected Dividend
0.8
$12.50
$13.10
$0.80
1.1
$ 8.25
$ 9.76
$0.20
2.1
$25.70
$30.04
$0.00
68. Refer to Exhibit 7-4. What are the expected returns for stocks X, Y, and Z for the next period based on
the above prices and dividends?
X
Y
Z
I.
4.8%
18.3%
16.9%
II.
10.7%
17.5%
14.4%
III.
11.2%
20.7%
16.9%
IV.
12.3%
22.5%
22.3%
V.
13.1%
24.3%
18.2%
a.
I
b.
II
c.
III
d.
IV
e.
V
26
69. Refer to Exhibit 7-4. If the expected return on the market is 11.5% and the risk-free rate of return is
4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM?
X
Y
Z
I.
4.8%
18.3%
16.9%
II.
7.2%
20.7%
22.3%
III.
10.7%
17.5%
14.4%
IV.
10.1%
12.2%
19.2%
V.
11.1%
12.2%
21.3%
a.
I
b.
II
c.
III
d.
IV
e.
V
70. Refer to Exhibit 7-4. Which of the following statements is correct?
a.
Stocks X, Y, and Z are undervalued.
b.
Stocks X, Y and Z are overvalued.
c.
Stocks X and Y are overvalued and stock Z is undervalued.
d.
Stocks X and Y are undervalued and stock Z is overvalued.
e.
Stocks X, Y, and Z are all properly valued.
27
Exhibit 7-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Portfolio
Expected Return
Standard Deviation
A
9.8%
14.0%
B
6.7%
9.8%
C
11.2%
18.5%
71. Refer to Exhibit 7-5. Calculate the risk premium per unit of risk for the three portfolios above
assuming the risk-free rate is 4.0%.
Portfolio:
A
B
C
0.068
0.027
0.072
0.414
0.276
0.389
0.700
0.680
0.605
0.300
0.280
0.205
0.650
0.580
0.480
a.
I
b.
II
c.
III
d.
IV
e.
V
72. Refer to Exhibit 7-5. Which of the three portfolios are most likely to be the market portfolio?
a.
Portfolio A
b.
Portfolio B
c.
Portfolio C
d.
All of the portfolios are equally likely to be the market portfolio
e.
There is insufficient information to differentiate between the three portfolios
28
73. Assume that the risk-free rate of return is 3% and the market portfolio on the Capital Market Line
(CML) has an expected return of 11% and a standard deviation of 14%. How should you invest
$100,000 if you are only willing to accept a total portfolio risk of 8%?
a.
Invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate.
b.
Invest $80,000 in the market portfolio and the remainder in the risk-free security.
c.
Invest $63,636.36 in the market portfolio and the remainder in the risk-free security.
d.
Invest $36,363.64 in the market portfolio and the remainder in the risk-free security.
e.
Invest $100,000 on another portfolio on the CML that does not contain any of the market
portfolio or the risk-free security, but has a standard deviation of 8%.
PTS: 1 OBJ: LO2
Exhibit 7-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual
return of 12.6% with a standard deviation of 13% and a beta of 1.3. The market risk premium for this
period of time was 6% and the risk-free rate of return was 5%.
74. Refer to Exhibit 7-6. Based on the Capital Asset Pricing Model (CAPM), what is the required rate of
return for this portfolio?
a.
6.3%
b.
7.8%
c.
10.6%
d.
12.8%
e.
15.4%
29
75. Refer to Exhibit 7-6. How does Jonathan Crowley’s portfolio compare to the market portfolio?
a.
Crowley’s portfolio is less risky than the market portfolio.
b.
Crowley’s portfolio significantly outperformed the market portfolio.
c.
On a risk-adjusted basis Crowley’s portfolio performed similar to the market portfolio.
d.
On a risk-adjusted basis Crowley’s portfolio significantly underperformed the market.
e.
On a risk-adjusted basis Crowley’s portfolio significantly outperformed the market.
76. Assume the risk-free rate is 4.5% and the expected return on the market is 11%. You anticipate Stock
XYZ to sell for $28 at the end of next year and pay a dividend of $2. The stock is currently selling for
$26.50 with a beta of 1.2. You currently hold stock XYZ in a well-diversified portfolio. Assuming you
have money to invest, what should you do?
a.
Buy stock XYZ.
b.
Sell stock XYZ.
c.
Do nothing because it is properly valued.
d.
Invest your money in the risk-free rate of return.
e.
Choices c and d.
Exhibit 7-7
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
(1)
Capital markets are perfectly competitive.
(2)
Quadratic utility function.
(3)
Investors prefer more wealth to less wealth with certainty.
(4)
Normally distributed security returns.
(5)
Representation as a K factor model.
(6)
A market portfolio that is mean-variance efficient.
77. Refer to Exhibit 7-7 In the list above which are assumptions of the Arbitrage Pricing Model?
a.
1 and 4
b.
1, 2, and 3
c.
1, 3, and 5
d.
2, 3, 4, and 6
e.
All six are assumptions
30
78. Refer to Exhibit 7-7. Which are not assumptions of the Arbitrage Pricing model?
a.
1 and 3
b.
1, 2, and 3
c.
1, 2, and 5
d.
2, 4, and 6
e.
All six are assumptions
79. To date, the results of empirical tests of the Arbitrage Pricing Model have been
a.
Clearly favourable.
b.
Clearly unfavourable.
c.
Mixed.
d.
Unavailable.
e.
Biased.
80. Unlike the capital asset pricing model, the arbitrage pricing theory requires only the following
assumption(s):
a.
A quadratic utility function.
b.
Normally distributed returns.
c.
The stochastic process generating asset returns can be represented by a factor model.
d.
A mean-variance efficient market portfolio consisting of all risky assets.
e.
All of the above
81. Consider the following two factor APT model
E(R) = 0 + 1b1 + 2b2
a.
1 is the expected return on the asset with zero systematic risk.
b.
1 is the expected return on asset 1.
c.
1 is the pricing relationship between the risk premium and the asset.
d.
1 is the risk premium.
e.
1 is the factor loading.
82. In the APT model the idea of riskless arbitrage is to assemble a portfolio that
a.
requires some initial wealth, will bear no risk, and still earn a profit.
b.
requires no initial wealth, will bear no risk, and still earn a profit.
c.
requires no initial wealth, will bear no systematic risk, and still earn a profit.
d.
requires no initial wealth, will bear no unsystematic risk, and still earn a profit.
e.
requires some initial wealth, will bear no systematic risk, and still earn a profit.
31
83. In one of their empirical tests of the APT, Roll and Ross examined the relationship between a
security’s returns and its own standard deviation. A finding of a statistically significant relationship
would indicate that
a.
APT is valid because a security’s unsystematic component would be eliminated by
diversification.
b.
APT is valid because non-diversifiable components should explained by factor
sensitivities.
c.
APT is invalid because a security’s unsystematic component would be eliminated by
diversification.
d.
APT is invalid because standard deviation is not an appropriate factor.
e.
None of the above.
84. Consider the following list of risk factors:
1.
monthly growth in industrial production
2.
return on high book to market value portfolio minus return on low book to market value
portfolio
3.
change in inflation
4.
excess return on stock market portfolio
5.
return on small cap portfolio minus return on big cap portfolio
6.
unanticipated change in bond credit spread
Which of the following factors would you use to develop a macroeconomic-based risk factor model?
a.
1, 2, and 3.
b.
1, 3, and 5.
c.
2, 4, and 5.
d.
1, 3, and 6.
e.
4, 5, and 6.
85. Consider the following list of risk factors:
1.
monthly growth in industrial production
2.
return on high book to market value portfolio minus return on low book to market value
portfolio
3.
change in inflation
4.
excess return on stock market portfolio
5.
return on small cap portfolio minus return on big cap portfolio
6.
unanticipated change in bond credit spread
Which of the following factors would you use to develop a microeconomic-based risk factor model?
a.
1, 2, and 3
b.
1, 3, and 5
c.
2, 4, and 5
d.
1, 3, and 6
e.
4, 5, and 6