Student-Submitted Questions

Finance 450

Spring 2002

Test #2

1. The APT model doesn't specify or identify what the risk factors are. If, however, there were ________ factor(s), the APT would equal the CAPM.

a. Zero/none

b. Only one/market

c. Two/event and market

d. Three/event, market, and statistics

e. Many other

2. Studies by Ross, Roll, and Chen support APT because the model is able to explain different rates of return.

a. True

b. False

3. As you increase the number of stocks in a portfolio the systematic risk will, _________________________

a. Remain constant

b. Increase at a decreasing rate

c. Decrease at a decreasing rate

d. Decrease at an increasing rate

e. Become unstable depending on the existing market condition

4. What would happen to the SML if the risk-free rate remained constant while the market rate of return increased?

a. The SML would remain constant

b. The SML would have a parallel shift upward

c. The SML would have a parallel shilft downward

d. The Y intercept would remain the same, but the SML would rotate clockwise

e. The Y intercept would remain the same, but the SML would rotate counterclockwise

5. A stock selling for $50 now that is expected to increase in price to $55 by year end and pay a $1 dividend would be considered _______________ if it had a bata of 0.7, the expected market return is 15 percent, and the risk-free rate is 8 percent.

a. Overpriced

b. Underpriced

c. Properly priced

d. A good deal

e. Unable to identify with the given informaton

Answers:

1. b

2. a

3. a Systematic risk can't be diversified away

4. e

5. a 8+.7(15-8)=12.9%(SML) compare to (55-50+1)/50=12%

since below the SML line

*******************************************************************************

6. Which one of these does not describe a risk free asset?

A. An investment with no risk

B. An asset with no variance

C. Zero correlation with all other risky assets

D. Provides the risk-free rate of return

E. Will lie on the horizontal axis of a portfolio graph ***

7. At least how many months of data is needed to obtain reasonable stable estimates for individual betas?

A. 12 months

B. 24

C. 36 ***

D. 48

8. Which one of these factors do not appear to affect risk/return

relationship?

A. skewness on relationship

B. size, P/E, and leverage

C. Book to market value

D. All of the above affect the risk/return relationship****

E. None of the above

9. Who referred to using a model when evaulating portfolio performance as benchmark error?

A. Fama-French

B. Roll****

C. Ross

D. Black and Scholes

*******************************************************************************

Exam questions

10) When two assets are perfectly correlated, a set of portfolio possibilities falls:

a) A long a straight line

b) In the efficient frontier portfolio

c) Above the CML

d) Below the CML

11) The relevant risk measure for an individual risky asset is:

a) The systematic risk “Beta”

b) The covariance with the “M” portfolio

c) All of the above

e) None of the above

12) The expected Rate of Return for a risky asset is determined by:

a) The RFR

b) The risk premium

c) Its covariance

d) A+B

13) Can we use the Dividend Discount Model to valuate companies with:

a) Growth companies

b) Constant growth rate companies

c) The firm’s weight average of capital

d) None of the above

14) If the firm reduces its payout ratio, what of the following can happen:

a) Dividends will grow slower than earnings for a period of time

b) Dividends will grow faster

c) Dividends will remain the same

d) Dividends will decreases the same percentage

15) Which of the following is not a necessary assumption of APT

a) Investor can borrow and lend any money at the risk-free rate of return

b) Capital markets are perfectly competitive

c) Investors always prefer more wealth to less with certainty

d) The stochastic process generating assets returns can be presented as a “K” factor model

16) Which of the following statements is true for a Weak-Form of EMH

a) Current securities prices reflect all public information

b) Current securities prices reflect all security-market information

c) Stock prices fully reflect all information from public and private sources

d) All of the above