1.

In the context of the Capital Asset Pricing Model (CAPM) the relevant measure
of risk is:
Beta, once, a portfolio is diversified, the only risk remaining is systematic risk,
which is measured by beta
2. According to the Capital Asset Pricing Model (CAPM) a well diversified
portfolio's rate of return is a function of:
Market risk, with a diversified portfolio , the only risk remaining is
market, or systematic, risk. This is the only risk that influences return according to the
CAPM.

3. The market portfolio has a beta of

1, By definition, the beta of the market portfolio is 1

4. Which statement is not true regarding the market portfolio?

. A It includes all assets of the universe.

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.

The tangency point between the capital market line and the indifference curve is the

optimal portfolio for a particular investor.

5. The market risk, beta, of a security is equal to

the covariance between the security's return and the market return
divided by the variance of the market's returns. Beta is a measure of
how a security's return covaries with the market returns, normalized
by the market variance.
 6. According to the Capital Asset Pricing Model (CAPM), the expected rate of
return on any security is equal to:

R*Bf + β [E(R*BM - R*Bf)

The expected rate of return on any security is equal to the risk free rate
plus the systematic risk of the security (beta) times the market risk
premium, E(rM - Rf).

7. The Security Market Line (SML) is

the line that represents the expected return-beta relationship. The
SML is a measure of expected return per unit of risk, where risk is
defined as beta (systematic risk).

8. According to the Capital Asset Pricing Model (CAPM), fairly priced securities

Have zero alpha. A zero alpha results when the security is in

equilibrium (fairly priced for the level of risk).

9. According to the Capital Asset Pricing Model (CAPM),

a security with a positive alpha is consider to be underpriced.

A security with a positive alpha is one that is expected to yield an abnormal
rate of return, based on the perceived risk of the security, and thus is
underpriced.
10.Empirical results regarding betas estimated from historical data indicate that

betas appear to regress toward one over time.

Betas vary over time, betas may be negative or less than one, betas are not always
near zero; however, betas do appear to regress toward one over time.

11.The risk-free rate is 7 percent. The expected market rate of return is 15

percent. If you expect stock X with a beta of 1.3 to offer a rate of return of 12
percent, you should

sell short stock X because it is overpriced.

12% < 7% + 1.3(15% - 7%) = 17.40%; therefore, stock is overpriced and should be
shorted.

12.You invest $600 in security A with a beta of 1.2 and $400 in security B with a
beta of -0.20. The beta of the resulting portfolio

0.6(1.2) + 0.4(0.90) = 1.08.

13.What is the expected return of a zero-beta security?

 The risk-free rate.

14.Standard deviation and beta both measure risk, but they are different in that:

beta measures only systematic risk while standard deviation is a measure of

total risk

15.
Which of the following statements is (are) true about initial public offerings?

Underpricing of IPOs is generally a substantial part of the issue cost.

16.
The geometric average rate of return is
also called the time-weighted average return

17.
A passive investment strategy is based on the premise that

Securities are fairly priced

18. Which one of the following stocks is relatively more risky when held in a well-diversified
portfolio?
Stock Standard Deviation Beta

ABC 30% 1.2

XYZ 40% 1.6

XYZ because its beta is higher.

19.
Portfolio diversification benefits

exist whenever security returns are less than perfectly positively correlated.

20.
The complete portfolio is

a combination of the risk-free asset and the optimal risky portfolio, and
is dependent on each investor's risk aversion

21. Which of the following portfolios cannot lie on the efficient frontier?
Portfolio Expected Standard Deviation
Return

X 10% 15%

Y 10% 25%

Z 15% 25%

Portfolio Y

22. The optimal risky portfolio formed by combining a risky portfolio and a risk-free asset is the
portfolio that has the

highest reward-to-volatility ratio

23.The slope of the security characteristic line

measures the average response of an individual security's return to

changes in the market return

24. The investment opportunity set is

the set of all available portfolio risk-return combinations

25.
The risk that can be eliminated by diversification is called _______risk, while the risk that
remains even after diversification is called _________risk.

nonsystematic; market

26.
According to the CAPM

A stock's risk premium depends on its beta

27.
If a stock's expected return plots under the Security Market Line, then the stock should have

a negative alpha

28.
According to the SML, a stock's return is expected to _rise by 3%___________ if the stock
has a beta of 1.5 and the market return is expected to increase by 2%.
29.The Security Market Line represents the relationship between

the systematic risk and expected return on a security

30.
The capital asset pricing model (CAPM) is useful in

utility rate-making cases because it can be used to establish the allowable rate of return for a
regulated utility

31. You invest $8,000 in stock A with a beta of 1.4 and $12,000 in stock B with a beta of 0.8. The
beta of this formed portfolio

1.04

32.
A Stock has an estimated rate of return of 15.5% and a beta of 1.5. The market expected rate
of return is 10% and the risk-free rate is 3%. The alpha of the stock is

2%

33. In a regression of an individual stock's excess return against the excess return for a market
index, systematic risk is approximated by the regression equation _slope___and
nonsystematic risk is approximated by the regression equation residual variance_.

34.According to the CAPM, overvalued securities should have

Negative alpha

35. Which of the following is not a simplifying assumption in the development of the capital asset
pricing model?

All investors choose to hold the market portfolio

36.If the CAPM is valid, which of the following is correct regarding the
ratio of risk premium to systematic risk?
Stock Standard Deviation Systematic Risk

X 30% 1.2

Y 28% 1.4

X and Y should have the same ratio

37. In Fama and French's three-factor model, __firm size_and _ book value
to market value ratio are added to the market index model to explain
stock returns.

38.
The real world data always support the CAPM.

False

39.
The book-to-market effect refers to the finding that firms with high ratios of book value to
market value tend to have annual returns ___greater than__returns for firms with lower
ratios.

40. If stock returns exhibit positive but small serial correlation, this means that
____positive__________ returns tend to follow ________positive______ returns.

41.
The strong-form version of the efficient market hypothesis states that stock prices reflect _all
publically available as well as insider___ information relevant to the firm.

42. Which one of the following forms of market efficiency is violated if you can earn excess return
by buying stocks of firms which make positive surprise earnings announcements?

Weak form
43. Empirical findings generally show that a typical common stock mutual
fund has a Zero alpha.

44.
The __ semi-strong form____________ of the efficient market hypothesis implies that there
is little or nothing to be gained from technical analysis

45.
The efficient market hypothesis suggests that investors should

Adopt a passive portfolio management strategy

46.Studies of stock market analysts and mutual fund performance indicate that:
Stock market analysts are more likely to issue "buy" recommendations than
"sell" recommendations.
47.
The semistrong-form of the efficient market hypothesis is inconsistent with the notion of
successful investment strategies based on

both technical analysis and fundamental analysis

48. Which of the following is not a source of bias that leads to investor errors in information
processing?
Fundamental risk

49. When a stock's market price breaks through its moving average line from below, a technical
analyst interprets this as a

bullish signal

50.Technical analysts _ do not deny the value of fundamental information_.

51.relatively low value of Barron's confidence index is a(n):

bearish signal.

52. When stock price falls below a support level, technical analysts interpret this as a(n)

bearish signal

53.
Which of the following is the more appropriate measure of portfolio
performance if you have only one mutual fund in your investment portfolio?

Sharpe measure

54.
The Jensen measure and the Sharpe measure are most likely to provide different rankings for
portfolio performance if portfolios

are not well diversified

55. If mutual fund managers were successful at market timing, we would expect to observe that
portfolio betas _increase___________ during market advances; empirical studies of beta
values during market advances generally reveal _little or no___________ evidence of
market timing ability.
56.
A portfolio manager realized an average annual return of 15%. The beta of the portfolio is 1.2
and the standard deviation of returns is 25%. The average annual return for the market index
was 11% and the standard deviation of the market returns is 20%. The risk-free rate is 4%.
 Calculate the Sharpe measure for the portfolio.

44%

57. A portfolio manager realized an average annual return of 10%. The beta of the portfolio is 0.8
and the standard deviation of returns is 20%. The average annual return for the market index
was 12% and the standard deviation of the market returns is 25%. The risk-free rate is 3%.
Calculate the Treynor measure for the portfolio.
8.75

58. A portfolio manager realized an average annual return of 12%. The beta of the portfolio is 1.1
and the standard deviation of returns is 30%. The average annual return for the market index
is 10% and the standard deviation of the market returns is 25%. The risk-free rate is 5%.
Calculate Jensen's alpha for the portfolio.

1.5%

59.
The Treynor-Black model for portfolio construction is based on the use of ____________ in
securities markets that are presumed to be ____________.

security analysis of relatively few stocks; nearly efficient

60. The two attributes of a benchmark against which a portfolio manager's performance is
assessed are ____________.

a neutral allocation across asset sectors and a standard for risk measurement

61. Style analysis has led to the conclusion that 90% or more of the variation in mutual fund
returns can be explained by the mutual funds

Asset allocation

62.
When a pension fund is large and has a number of managers, then an appropriate measure of
each manager's performance is the ________ because it represents excess return per unit of
____________.
Treynor measure; systematic risk

63. In the Treynor-Black model, one of the components of the optimal risky portfolio is the
____________ which is composed of ____________.
active portfolio; analyzed stocks with positive alphas

64.An example of a passive investment management style is ____________.

passive asset allocation with adjustments in asset-class weights dependent
only on changes in risk tolerance over time
 65.A variable life insurance policy provides a death benefit
plus cash value that can be invested in mutual funds

66. For a corporate defined benefit pension plan, __shareholders__________ bear investment
performance risk, while _employees___________ bear investment performance risk for a
defined contribution pension plan.
67. Which of the following statements is correct about investors' risk aversion

Personal trust managers typically display greater risk aversion than do

individual investors.

68. Prior to formulating a suitable investment policy, an investor should identify ____________;
the next step for an investor subsequent to formulating an investment policy should be
____________.
69. A(n) ____ life insurance company________ is an example of a financial institution that
has the following investment constraints: low need for liquidity, a long investment horizon,
subject to an income taxes.
70. Some important regulatory constraints affecting ---------institutional investors are prudent
investor laws, which affect primarily ____________, and ERISA, which affects
personal trusts; pension funds

71.For institutional investors, the first step of a top-down investment policy is

______________ which is the responsibility of ____________.

asset allocation; the investment committee

72.Investors must view investment management as a dynamic process because

______
investors' circumstances change, affecting objectives and constraints
asset allocation within a portfolio changes over time as investment
performance of asset classes differs allocation of individual securities within a
portfolio changes over time as security performance differs
• The expected rate of return of a portfolio is the weighted average of the
component asset expected returns with the investment proportions as weights.
• The variance of a portfolio is a sum of the contributions of the component-
security variances plus terms involving the correlation among assets.
• Even if correlations are positive, the portfolio standard deviation will be less
than the weighted average of the component standard deviations, as long as the
assets are not perfectly positively correlated. Thus, portfolio diversification is of
value as long as assets are less than perfectly correlated.
• The contribution of an asset to portfolio variance depends on its correlation with
the other assets in the portfolio, as well as on its own variance. An asset that is
perfectly negatively correlated with a portfolio can be used to reduce the
portfolio variance to zero. Thus, it can serve as a perfect hedge.
• The efficient frontier of risky assets is the graphical representation of the set of
portfolios that maximizes portfolio expected return for a given level of portfolio
standard deviation. Rational investors will choose a portfolio on the efficient
frontier.
• A portfolio manager identifies the efficient frontier by first establishing
estimates for the expected returns and standard deviations and determining the
correlations among them. The input data are then fed into an optimization
program that produces the investment proportions, expected returns, and
standard deviations of the portfolios on the efficient frontier.
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excess return. This regression line is called the security
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(SCL). The intercept of the SCL, called alpha, represents
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return on thezero
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as thewhen the index
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morereturn is zero.
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diversified.
that alphas should be zero.
• The CAPM and the security market line can be used to establish benchmarks for
evaluation of investment performance or to determine appropriate discount rates
for capital budgeting applications. They are also used in regulatory proceedings
• The CAPM is usually implemented as a single-factor model, with all systematic
risk summarized by the return on a broad market index. However, multifactor
generalizations of the basic model may be specified to accommodate multiple
sources of systematic risk. In such multifactor extensions of the CAPM, the risk
premium of any security is determined by its sensitivity to each systematic risk
factor as well as the risk premium associated with that source of risk.
• There are two general approaches to finding extra-market systematic risk
factors. One is characteristics based and looks for factors that are empirically
associated with high average returns and so may be proxies for relevant
measures of systematic risk. The other focuses on factors that are plausibly
important sources of risk to wide segments of investors and may thus command
risk premiums.
• An arbitrage opportunity arises when the disparity between two or more
security prices enables investors to construct a zero net investment portfolio that
will yield a sure profit. The presence of arbitrage opportunities and the resulting
volume of trades will create pressure on security prices that will persist until
prices reach levels that preclude arbitrage. Only a few investors need to become
aware of arbitrage opportunities to trigger this process because of the large
volume of trades in which they will engage.
• When securities are priced so that there are no arbitrage opportunities, the
market satisfies the no-arbitrage condition. Price relationships that satisfy the
no-arbitrage condition are important because we expect them to hold in real-
world markets.
• Portfolios are called well diversified if they include a large number of securities
in such proportions that the residual or diversifiable risk of the portfolio is
negligible.
• In a single-factor security market, all well-diversified portfolios must satisfy the
expected return–beta relationship of the SML in order to satisfy the no-arbitrage
condition. If all well-diversified portfolios satisfy the expected return–beta
relationship, then all but a small number of securities also must satisfy this
relationship.
• The APT implies the same expected return–beta relationship as the CAPM, yet
does not require that all investors be mean-variance optimizers. The price of this
generality is that the APT does not guarantee this relationship for all securities
at all times.
• A multifactor APT generalizes the single-factor model to accommodate several
sources of systematic risk.