FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 25: Portfolio Theory and Asset Pricing Models

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 21

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements is CORRECT?

A) Richard Roll has argued that it is possible to test the CAPM to see if it is correct.
B) Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM.
C) Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.
D) The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.
E) Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

F) B) and C)
G) A) and E)

Correct Answer

verified

Show Answer

Question 22

True/False

Review LaterAdd Note

Review Later

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.

A) True
B) False

Correct Answer

verified

Show Answer

Question 23

Multiple Choice

Review LaterAdd Note

You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks.The portfolio beta is equal to 1.12.You have decided to sell a coal mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00) .What is the new beta of the portfolio?

Which of the following statements is CORRECT?

For markets to be in equilibrium (that is,for there to be no strong pressure for prices to depart from their current levels) ,

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by managerial actions.

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.

A stock you are holding has a beta of 2.0 and the stock is currently in equilibrium.The required rate of return on the stock is 15% versus a required return on an average stock of 10%.Now the required return on an average stock increases by 30.0% (not percentage points) .The risk-free rate is unchanged.By what percentage (not percentage points) would the required return on your stock increase as a result of this event?

Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20.She is in the process of buying 100 shares of Safety Corp.at $10 a share and adding it to her portfolio.Safety has an expected return of 15.0% and a beta of 2.00.The total value of your current portfolio is $9,000.What will the expected return and beta on the portfolio be after the purchase of the Safety stock? r_p b_p

If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the low standard deviation stock.

The CAPM is a multi-period model which takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.

Which of the following statements is CORRECT?

You plan to invest in Stock X,Stock Y,or some combination of the two.The expected return for X is 10% and $\sigma$ _X = 5%.The expected return for Y is 12% and $\sigma$ _Y = 6%.The correlation coefficient,r_XY,is 0.75. a. Calculate r_p and $\sigma$ _p for 100%, 75%, 50%, 25%, and 0% in Stock X. b. Use the values you calculated for r_p and $\sigma$ _p to graph the attainable set of portfolios. Which part of the attainable set is efficient? Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where r_p = 11%. c. Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfolios? d. Suppose r_M = 12%, $\sigma$ _M = 4%, and r_RF = 6%. What would be the required and expected return on a portfolio with $\sigma$ _P = 10%? e. Suppose the correlation of Stock X with the market, r_XM, is 0.8, while r_YM = 0.9. Use this information, along with data given previously, to determine Stock X's and Stock Y's beta coefficients. f. What is the required rate of return on Stocks X and Y? Do these stocks appear to be in equilibrium? If not, what would happen to bring about an equilibrium?

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are interested in ex ante (future)data.

You are given the following returns on "the market" and Stock F during the last three years.We could calculate beta using data for Years 1 and 2 and then,after Year 3,calculate a new beta for Years 2 and 3.How different are those two betas,i.e.,what's the value of beta 2 - beta 1? (Hint: You can find betas using the Rise-Over-Run method,or using your calculator's regression function.) $\begin{array}{ccc}\text { Year } &\text { Market }& {\text { Stock F }} \\1 & 6.10 \% & 6.50 \% \\2 & 12.90 \% & -3.70 \% \\3 & 1620 \% & 2171 \%\end{array}$