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Flashcards in ch7 kawncehpts Deck (49):
1

An adjusted beta will be ______ than the unadjusted beta.

 A. , lower
B. , higher
C. , closer to 1
D. , closer to 0

C. , closer to 1

2

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is:
I. Highly significant in predicting future stock returns
II. Relatively useless in predicting future stock returns
III. A good predictor of the firm's specific risk
A. , I only
B. , II only
C. , I and III only
D. , I, II, and III

B. , II only

3

Which of the following are assumptions of the simple CAPM model?

I. Individual trades of investors do not affect a stock's price.

II. All investors plan for one identical holding period.

III. All investors analyze securities in the same way and share the same economic view of the world.

IV. All investors have the same level of risk aversion.

A. , I, II, and IV only
B. , I, II, and III only
C. , II, III, and IV only
D. , I, II, III, and IV

B. , I, II, and III only

4

When all investors analyze securities in the same way and share the same economic view of the world, we say they have ____________________.


A. , heterogeneous expectations
B. , equal risk aversion
C. , asymmetric information
D. , homogeneous expectations

D. , homogeneous expectations

5

In a simple CAPM world which of the following statements is (are) correct?

I. All investors will choose to hold the market portfolio, which includes all risky assets in the world.
II. Investors' complete portfolio will vary depending on their risk aversion.
III. The return per unit of risk will be identical for all individual assets.
IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio.

A. , I, II, and III only
B. , II, III, and IV only
C. , I, III, and IV only
D. , I, II, III, and IV

D. , I, II, III, and IV

6

The arbitrage pricing theory was developed by _________.
A. , Henry Markowitz
B. , Stephen Ross
C. , William Sharpe
D. , Eugene Fama

B. , Stephen Ross

7

In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.

A. , unique risk
B. , beta
C. , the standard deviation of returns
D. , the variance of returns

B. , beta

8

Empirical results estimated from historical data indicate that betas _________.

A. , are always close to zero
B. , are constant over time
C. , of all securities are always between zero and 1
D. , seem to regress toward 1 over time

D. , seem to regress toward 1 over time

9

The market portfolio has a beta of _________.

A. , -1
B. , 0
C. , .5
D. , 1

D. , 1

10

In a well-diversified portfolio, __________ risk is negligible.

A. , nondiversifiable
B. , market
C. , systematic
D. , unsystematic

D. , unsystematic

11

The capital asset pricing model was developed by _________.

A. , Kenneth French
B. , Stephen Ross
C. , William Sharpe
D. , Eugene Fama

C. , William Sharpe

12

If all investors become more risk averse, the SML will _______________ and stock prices will _______________.

A. , shift upward; rise
B. , shift downward; fall
C. , have the same intercept with a steeper slope; fall
D. , have the same intercept with a flatter slope; rise

C. , have the same intercept with a steeper slope; fall

13

According to the capital asset pricing model, a security with a _________.

A. , negative alpha is considered a good buy
B. , positive alpha is considered overpriced
C. , positive alpha is considered underpriced
D. , zero alpha is considered a good buy

C. , positive alpha is considered underpriced

14

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________.

A. , expected returns to fall; risk premiums to fall
B. , expected returns to rise; risk premiums to fall
C. , expected returns to rise; risk premiums to rise
D. , expected returns to fall; risk premiums to rise

A. , expected returns to fall; risk premiums to fall

15

Arbitrage is based on the idea that _________.

A. , assets with identical risks must have the same expected rate of return
B. , securities with similar risk should sell at different prices
C. , the expected returns from equally risky assets are different
D. , markets are perfectly efficient

A. , assets with identical risks must have the same expected rate of return

16

Investors require a risk premium as compensation for bearing ______________.

A. , unsystematic risk
B. , alpha risk
C. , residual risk
D. , systematic risk

D. , systematic risk

17

According to the capital asset pricing model, a fairly priced security will plot _________.

A. , above the security market line
B. , along the security market line
C. , below the security market line
D. , at no relation to the security market line

B. , along the security market line

18

According to the capital asset pricing model, fairly priced securities have _________.

A. , negative betas
B. , positive alphas
C. , positive betas
D. , zero alphas

D. , zero alphas

19

The graph of the relationship between expected return and beta in the CAPM context is called the _________.

A. , CML
B. , CAL
C. , SML
D. , SCL

C. , SML

20

Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ______ over time.

A. , 1
B. , 0
C. , -1
D. , .5

A. , 1

21

The beta of a security is equal to _________.

A. , the covariance between the security and market returns divided by the variance of the market's returns

B. , the covariance between the security and market returns divided by the standard deviation of the market's returns

C. , the variance of the security's returns divided by the covariance between the security and market returns

D. , the variance of the security's returns divided by the variance of the market's returns

A. , the covariance between the security and market returns divided by the variance of the market's returns

22

According to the capital asset pricing model, in equilibrium _________.

A. , all securities' returns must lie below the capital market line
B. , all securities' returns must lie on the security market line
C. , the slope of the security market line must be less than the market risk premium
D. , any security with a beta of 1 must have an excess return of zero

B. , all securities' returns must lie on the security market line

23

According to the CAPM, which of the following is not a true statement regarding the market portfolio.

A. , All securities in the market portfolio are held in proportion to their market values.
B. , It includes all risky assets in the world, including human capital.
C. , It is always the minimum-variance portfolio on the efficient frontier.
D. , It lies on the efficient frontier.

C. , It is always the minimum-variance portfolio on the efficient frontier.

24

In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line?

A. , The capital market line always has a positive slope.
B. , The capital market line is also called the security market line
C. , The capital market line is the best-attainable capital allocation line.
D. , The capital market line is the line from the risk-free rate through the market portfolio.

B. , The capital market line is also called the security market line.

25

The possibility of arbitrage arises when ____________.

A. , there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily
B. , mispricing among securities creates opportunities for riskless profits
C. , two identically risky securities carry the same expected returns
D. , investors do not diversify

B. , mispricing among securities creates opportunities for riskless profits

26

Building a zero-investment portfolio will always involve _____________.

A. , an unknown mixture of short and long positions
B. , only short positions
C. , only long positions
D. , equal investments in a short and a long position

D. , equal investments in a short and a long position

27

An important characteristic of market equilibrium is _______________.

A. , the presence of many opportunities for creating zero-investment portfolios
B. , all investors exhibit the same degree of risk aversion
C. , the absence of arbitrage opportunities
D. , the lack of liquidity in the market

C. , the absence of arbitrage opportunities

28

In a single-factor market model the beta of a stock ________.

A. , measures the stock's contribution to the standard deviation of the market portfolio

B. , measures the stock's unsystematic risk

C. , changes with the variance of the residuals

D. , measures the stock's contribution to the standard deviation of the stock

A. , measures the stock's contribution to the standard deviation of the market portfolio

29

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________.

A. , buy stock X because it is overpriced

B. , buy stock X because it is underpriced

C. , sell short stock X because it is overpriced

D. , sell short stock X because it is underpriced

B. , buy stock X because it is underpriced

30

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________.

A. , directly related to the risk aversion of the particular investor
B. , inversely related to the risk aversion of the particular investor
C. , directly related to the beta of the stock
D. , inversely related to the alpha of the stock

C. , directly related to the beta of the stock

31

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

A. , is not testable because the true market portfolio can never be observed

32

Which of the following variables do Fama and French claim do a better job explaining stock returns than beta?I. Book-to-market ratioII. Unexpected change in industrial productionIII. Firm size

A. , I only

B. , I and II only

C. , I and III only

D. , I, II, and III

C. , I and III only

33

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 stockII. Including human capital in the market portfolioIII. 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

B. , II and III only

34

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

D. , both well-diversified portfolios and individual assets; well-diversified portfolios only

35

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

A. , has yet to be accurately measured and incorporated into portfolio management

36

Beta is a measure of ______________.

A. , total risk

B. , relative systematic risk

C. , relative nonsystematic risk

D. , relative business risk

B. , relative systematic risk

37

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

B. , the systematic risk of the portfolio

38

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.

D. , The answer cannot be determined from the information given.

39

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

D. , Residual risk

40

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

C. , recognizes only one systematic risk factor

41

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

B. , the creation of riskless profits made possible by relative mispricing among securities

42

A stock's alpha measures the stock's ____________________.

A. , expected return

B. , abnormal return

C. , excess return

D. , residual return

B. , abnormal return

43

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

A. , residual standard deviation

44

Standard deviation of portfolio returns is a measure of ___________.

A. , total risk

B. , relative systematic risk

C. , relative nonsystematic risk

D. , relative business risk

A. , total risk

45

The expected return on the market is the risk-free rate plus the _____________.

A. , diversified returns

B. , equilibrium risk premium

C. , historical market return

D. , unsystematic return

B. , equilibrium risk premium

46

If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index?

A. , .8

B. , 1

C. , 1.2

D. , 1.5

B. , 1


Market beta always equals 1 regardless of market volatility.

47

A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole.

A. , higher than

B. , lower than

C. , equal to

D. , indeterminable compared to

A. , higher than

48

The measure of risk used in the capital asset pricing model is ___________.

A. , specific risk

B. , the standard deviation of returns

C. , reinvestment risk

D. , beta

D. , beta

49

61. 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

D. the model fails to identify the key macroeconomic variables in the risk-return relationship