MCQs for the midterm Flashcards
According to the Capital Asset Pricing Model (CAPM), fairly priced securities
A) have positive betas.
B) have zero alphas.
C) have negative betas.
D) have positive alphas.
E) none of the above.
B) have zero alphas.
The security market line depicts
A) A security’s expected return as a function of its systematic risk
B) The market portfolio as the optimal portfolio of risky securities
C) The relationship between a security’s return and the return on an index
D) The complete portfolio as a combination of the market portfolio and the risk-
free asset
E) Investment opportunity set, that is the combination of available expected
returns and corresponding standard deviations of security’s return
A) A security’s expected return as a function of its systematic risk
Which statement is not true regarding the market portfolio?
A) It includes all publicly traded financial assets.
B) It lies on the efficient frontier.
C) All securities in the market portfolio are held in proportion to their market
values.
D) It is the tangency point between the capital market line and the indifference curve.
E) all of the above are true.
D) It is the tangency point between the capital market line and the indifference curve.
Which of the following assumptions are not used in CAPM?
A) Each investor in the market is a price-taker
B) Investments are limited to publicly traded financial assets (stocks and bonds)
C) No taxes and transaction costs
D) Investors are rational mean-variance optimizers
E) Investors may have different beliefs about future returns.
E) Investors may have different beliefs about future returns.
Which of the following statements regarding risk-averse investors is true?
A) They only care about the rate of return.
B) They accept investments that are fair games.
C) They only accept risky investments that offer risk premiums over the risk-free
rate.
D) They are willing to accept lower returns and high risk.
E) a and b
C) They only accept risky investments that offer risk premiums over the risk-free
rate.
Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,
A) for the same risk, David requires a higher rate of return than Elias.
B) for the same return, Elias tolerates higher risk than David.
C) for the same risk, Elias requires a lower rate of return than David.
D) for the same return, David tolerates higher risk than Elias.
E) cannot be determined.
D) for the same return, David tolerates higher risk than Elias.
Assume that short selling is allowed. Which of the following statements is (are) true regarding the variance of a portfolio of two risky securities?
A) The higher the coefficient of correlation between securities, the greater the
reduction in the portfolio variance.
B) It is impossible to create risk-free portfolio if securities have perfect negative
correlation
C) An investor can make a risk-free portfolio from two risky securities even if they are perfectly positively correlated
D) a and c.
E) None of the above
C) An investor can make a risk-free portfolio from two risky securities even if they are perfectly positively correlated
Which statement is not true regarding the Capital Market Line (CML)?
A) The CML is the line from the risk-free rate through the market portfolio.
B) The CML is the best attainable capital allocation line.
C) The CML is also called the security market line.
D) The CML always has a positive slope.
E) All of the above statements are true.
C) The CML is also called the security market line.
Assume that an investor can trade many risky securities and a risk- free asset. Assume also that an investor has found her efficiency frontier and tries to find her optimal risky portfolio comprised with only risky assets. What she will have to do?
A) Find point of tangency of her indifference curve and the efficiency frontier
B) Use formula for y*
C) Find CAL with the highest possible slope
D) She cannot know because more information is required
E) Find an input list
C) Find CAL with the highest possible slope
When wealth is shifted from the risky portfolio to the risk-free asset, what happens to the relative proportions of the various risky assets within the risky portfolio?
A) They all decrease.
B) Some increase and some decrease.
C) They all increase.
D) They are not changed.
E) The answer depends on the specific circumstances.
D) They are not changed.
Efficient portfolios of N risky securities are portfolios that
A) are formed with the securities that have the highest rates of return regardless of their standard deviations.
B) have the highest rates of return for a given level of risk.
C) are selected from those securities with the lowest standard deviations regardless of their returns.
D) have the highest risk and rates of return and the highest standard deviations.
E) have the lowest standard deviations and the lowest rates of return.
B) have the highest rates of return for a given level of risk.
Assume that a lot of investors become more risk averse in the result of the liquidity crises. What should happen with the equilibrium risk premium of the stock market and why?
A) The premium will stay the same because it is independent from risk
aversions of investors
B) It will increase because market will clear only at a smaller price of the stock market
C) It will increase because market will clear only at a higher price of the stock market
D) It will decrease because market will clear only at higher price of the stock market
E) None of the above
B) It will increase because market will clear only at a smaller price of the stock market
Consider a portfolio with two risky assets such that each asset has positive Sharpe ratio.
Is it possible that an investor will short one of these two assets in this portfolio to take a leveraged position in the other? Why?
A) No it is not possible because y* is positive if the Sharpe ratio of an asset is positive
B) No it is not possible because an investor cannot short an asset in the market
C) No it is not possible because an investor will not short an asset which price
is likely to increase in the future
D) Yes it is possible because the price of the shorted asset is likely to fall in the future
E) Yes it is possible if correlation between two assets is significant since shorting will improve the portfolio return-to-risk characteristics
E) Yes it is possible if correlation between two assets is significant since shorting will improve the portfolio return-to-risk characteristics
