07 MCQ For Investment Course

lOMoARcPSD|5044536
07 - MCQ for Investment course
Security Analysis and Portfolio Management (University of Business and Technology)
StuDocu is not sponsored or endorsed by any college or university

Downloaded by Arushi Singh ([email protected])
lOMoARcPSD|5044536
07 KEY
1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is
A. unique risk.
B. beta.
C. standard deviation of returns.
D. variance of returns.
E. none of these.
Once, a portfolio is diversified, the only risk remaining is systematic risk, which is measured by beta.
Accessibility: Keyboard Navigation
Bodie Chapter 07 #1
Difficulty: Basic

2. According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is
a function of
A. market risk.
B. unsystematic risk.
C. unique risk.
D. reinvestment risk.
E. none of these.
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.
Bodie Chapter 07 #2
Difficulty: Basic

3. The market portfolio has a beta of
A. 0.
B. 1.
C. 1.
D. 0.5.
E. none of these
By definition, the beta of the market portfolio is 1.
Bodie Chapter 07 #3
Difficulty: Basic


lOMoARcPSD|5044536
4. The riskfree rate and the expected market rate of return are 0.06 and 0.12, respectively. According to
the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is
equal to
A. 0.06.
B. 0.144.
C. 0.12.
D. 0.132
E. 0.18
E(R) = 6% + 1.2(12% 6%) = 13.2%.
Bodie Chapter 07 #4
Difficulty: Basic

5. The riskfree rate and the expected market rate of return are 0.056 and 0.125, respectively. According
to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of
1.25 is equal to
A. 0.142.
B. 0.144.
C. 0.153.
D. 0.134.
E. 0.117.
E(R) = 5.6% + 1.25(12.5% 5.6%) = 14.225%.
Bodie Chapter 07 #5
Difficulty: Basic

6. Which of the following statement(s) is (are) 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 these are true.
The tangency point between the capital market line and the indifference curve is the optimal portfolio for
a particular investor.
Bodie Chapter 07 #6
Difficulty: Moderate


lOMoARcPSD|5044536
7. Which of the following statement(s) is (are) 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 includes all publicly traded financial assets, lies on the efficient frontier, and all securities in the
market portfolio are held in proportion to their market values.
All the options are true by the definition of the market portfolio discussed under "Why do investors hold
the market portfolio" section in the text.
Bodie Chapter 07 #7

8. Which of the following statement(s) is (are) not true regarding the Capital Market Line (CML)?
A. The CML is the line constructed from 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 these statements are true.
Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the
risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus c is not
true; the other statements are true).
Bodie Chapter 07 #8

9. Which of the following statement(s) is (are) true regarding the Capital Market Line (CML)?
A. The CML is the line constructed from the market portfolio.
B. The CML is the best attainable capital allocation line.
C. The CML is the line constructed from the money market account or TBills.
D. The CML always has a positive slope.
All the options are true according to the definition of the CML.
Bodie Chapter 07 #9


lOMoARcPSD|5044536
10. The market risk, beta, of a security is equal to
A. the covariance between the security's return and the market return 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.
E. none of these.
Beta is a measure of how a security's return covaries with the market returns, normalized by the market
variance.
Bodie Chapter 07 #10

11. According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is
equal to
A. Rf + β[E(RM)].
B. Rf + σ[E(RM) Rf].
C. Rf + β[E(RM) Rf].
D. E(RM) + Rf.
E. none of these.
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).

12. The Security Market Line (SML) is
A. the line that describes the expected returnbeta relationship for welldiversified portfolios only.
B. also called the Capital Allocation Line.
C. the line that is tangent to the efficient frontier of all risky assets.
D. the line that represents the expected returnbeta relationship.
E. the line that represents the relationship between an individual security's return and the market's return.
The SML is a measure of expected return per unit of risk, where risk is defined as beta (systematic risk).


lOMoARcPSD|5044536
13. 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 these.
A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).

14. According to the Capital Asset Pricing Model (CAPM),
A. a security with a positive alpha is considered overpriced.
B. a security with a zero alpha is considered to be a good buy.
C. a security with a negative alpha is considered to be a good buy.
D. a security with a positive alpha is considered to be underpriced.
E. none of these.
A security with a positive alpha is one that is expected to yield an abnormal positive rate of return, based
on the perceived risk of the security, and thus is underpriced.

15. According to the Capital Asset Pricing Model (CAPM), which one of the following statements is
false?
A. The expected rate of return on a security decreases in direct proportion to a decrease in the riskfree
rate.
B. The expected rate of return on a security increases as its beta increases.
C. A fairly priced security has an alpha of zero.
D. In equilibrium, all securities lie on the security market line.
E. All of these statements are true.
Statements b, c, and d are true, but statement a is false.


lOMoARcPSD|5044536
16. In a well diversified portfolio
A. market risk is negligible.
B. systematic risk is negligible.
C. unsystematic risk is negligible.
D. nondiversifiable risk is negligible.
E. none of these.
Market, or systematic, or nondiversifiable, risk is present in a diversified portfolio; the unsystematic risk
can be eliminated.

17. Empirical results regarding betas estimated from historical data indicate that
A. betas are constant over time.
B. betas of all securities are always greater than one.
C. betas are always near zero.
D. betas appear to regress toward one over time.
E. betas are always positive.
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.

18. Your personal opinion is that security X has an expected rate of return of 0.11. It has a beta of 1.5.
The riskfree rate is 0.05 and the market expected rate of return is 0.09. According to the Capital
Asset Pricing Model, this security is
A. underpriced.
B. overpriced.
C. fairly priced.
D. cannot be determined from data provided.
E. none of these.
11% = 5% + 1.5(9% 5%) = 11.0%; therefore, the security is fairly priced.


lOMoARcPSD|5044536
19. The riskfree 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
A. buy stock X because it is overpriced.
B. sell short stock X because it is overpriced.
C. sell stock short X because it is underpriced.
D. buy stock X because it is underpriced.
E. none of these, as the stock is fairly priced.
12% < 7% + 1.3(15% 7%) = 17.40%; therefore, stock is overpriced and should be shorted.

20. Assume that a security is fairly priced and has an expected rate of return of 0.13. The market
expected rate of return is 0.13 and the riskfree rate is 0.04. The beta of the stock is
A. 1.25.
B. 1.7.
C. 1.
D. 0.95.
E. none of these
Since the expected rate of return of the security is identical with the market's expected return, beta has to
be 1.
Difficulty: Basic

21. You invest $600 in security A with a beta of 1.2 and $400 in security B with a beta of 0.90. The beta
of the resulting portfolio is
A. 1.40
B. 1.00
C. 0.36
D. 1.08
E. 0.80
0.6(1.2) + 0.4(0.90) = 1.08.


lOMoARcPSD|5044536
22. You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security
B with a beta of 0.7. The beta of the resulting portfolio is
A. 1.40.
B. 1.15.
C. 0.36.
D. 1.08.
E. 0.80.
0.5(1.6) + 0.5(0.7) = 1.15.
Difficulty: Basic

23. Security A has an expected rate of return of 0.10 and a beta of 1.1. The market expected rate of return
is 0.08 and the riskfree rate is 0.05. The alpha of the stock is
A. 1.7%.
B. 1.7%.
C. 8.3%.
D. 5.5%.
E. none of these.
10% [5% + 1.1(8% 5%)] = 1.7%.

24. Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3. The riskfree
rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing
Model, this security is
A. underpriced by 10%.
B. overpriced.
C. fairly priced.
E. underpriced by 5%.
13.75% = 4% + 1.3(11.5% 4%) = 13.75%; therefore, the security is fairly priced.


lOMoARcPSD|5044536
A. underpriced.
B. overpriced.
C. fairly priced.
D. Cannot be determined from data provided
13% < 4% + 1.3(11.5% 4%) = 13.75%; therefore, the security is overpriced.

A. underpriced.
B. overpriced.
C. fairly priced.
D. Cannot be determined from data provided
E. None of the options
15% > 4% + 1.3(11.5% 4%) = 13.75%; therefore, the security is underpriced.

27. Given the following two stocks A and B

If the expected market rate of return is 0.09 and the riskfree rate is 0.05, which security would be
considered the better buy and why?
A. A because it offers an expected excess return of 1.2%.
B. B because it offers an expected excess return of 1.8%.
C. A because it offers an expected excess return of 2.2%.
D. B because it offers an expected return of 14%.
E. B because it has a higher beta.
A's excess return is expected to be 12% [5% + 1.2(9% 5%)] = 2.2%.
B's excess return is expected to be 14% [5% + 1.8(9% 5%)] = 1.8%.


lOMoARcPSD|5044536
28. Capital Asset Pricing Theory asserts that portfolio returns are best explained by:
A. economic factors.
B. specific risk.
C. systematic risk.
D. diversification.
E. none of these.
The risk remaining in diversified portfolios is systematic risk; thus, portfolio returns are commensurate
with systematic risk.
Difficulty: Basic

29. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio
increases:
A. directly with alpha.
B. inversely with alpha.
C. directly with beta.
D. inversely with beta.
E. in proportion to its standard deviation.
The market rewards systematic risk, which is measured by beta, and thus, the risk premium on a stock or
portfolio varies directly with beta.
Difficulty: Basic

30. What is the expected return of a zerobeta security?
A. The market rate of return.
B. Zero rate of return.
C. A negative rate of return.
D. The riskfree rate.
E. None of these.
E(RS) = rf + 0(RM rf) = rf.


lOMoARcPSD|5044536
31. Standard deviation and beta both measure risk, but they are different in that
A. beta measures both systematic and unsystematic risk while standard deviation measures only
systematic risk..
B. beta measures only systematic risk while standard deviation is a measure of total risk.
C. beta measures only unsystematic risk while standard deviation is a measure of total risk.
D. There is no difference since both measure total risk.
E. beta measures total risk while standard deviation measures only nonsystematic risk.
b is the only true statement.
Difficulty: Basic

32. The market price of risk
A. is the market risk premium divided by the standard deviation of the market returns.
B. has a rewardtorisk ratio of [E(rM) rf]/σ2Mfor investment in the market portfolio.
C. is the price of a U. S. Tbill.
D. a and b.
E. a and c.
a and b quantify the extra return investors demand to bear portfolio risk. The textbook notes that the
denominator is sometimes shown as the standard deviation and sometimes the variance of the market's
returns.

33. The expected returnbeta relationship
A. is the most familiar expression of the CAPM to practitioners.
B. refers to the way in which the covariance between the returns on a stock and returns on the market
measures the contribution of the stock to the variance of the market portfolio, which is beta.
C. assumes that investors hold welldiversified portfolios
D. all of these are true.
E. none of these are true.
Statements a, b and c all describe the expected returnbeta relationship.


lOMoARcPSD|5044536
34. The security market line (SML)
A. can be portrayed graphically as the expected returnbeta relationship.
B. can be portrayed graphically as the expected returnstandard deviation of market returns relationship.
C. provides a benchmark for evaluation of investment performance.
D. a and c.
E. b and c.
The SML is a measure of expected returnbeta (the CML is a measure of expected returnstandard
deviation of market returns). The SML provides the expected returnbeta relationship for "fairly priced"
securities; thus if a portfolio manager selects securities that are underpriced and produces a portfolio with
a positive alpha, this portfolio manager would receive a positive evaluation.

35. Research by Jeremy Stein of MIT resolves the dispute over whether beta is a sufficient pricing factor
by suggesting that managers should use beta to estimate
A. longterm returns but not shortterm returns.
B. shortterm returns but not longterm returns.
C. both longand shortterm returns.
D. booktomarket ratios.
E. None of these was suggested by Stein.
See text box ("Tales from the FAR Side").
Difficulty: Difficult

36. Studies of liquidity spreads in security markets have shown that
A. liquid stocks earn higher returns than illiquid stocks.
B. illiquid stocks earn higher returns than liquid stocks.
C. both liquid and illiquid stocks earn the same returns.
D. illiquid stocks are good investments for frequent, shortterm traders.
E. None of these are true.
See text box ("Stock Investors Pay High Price for Liquidity").
Difficulty: Difficult


lOMoARcPSD|5044536
37. An underpriced security will plot
A. on the Security Market Line.
B. below the Security Market Line.
C. above the Security Market Line.
D. either above or below the Security Market Line depending on its covariance with the market.
E. either above or below the Security Market Line depending on its standard deviation.
An underpriced security will have a higher expected return than the SML would predict; therefore it will
plot above the SML.
Difficulty: Basic

38. The risk premium on the market portfolio will be proportional to
A. the average degree of risk aversion of the investor population.
B. the risk of the market portfolio as measured by its variance.
C. the risk of the market portfolio as measured by its beta.
D. both a and b are true.
E. both a and c are true.
The risk premium on the market portfolio is proportional to the average degree of risk aversion of the
investor population and the risk of the market portfolio measured by its variance.

39. In equilibrium, the marginal price of risk for a risky security must be
A. equal to the marginal price of risk for the market portfolio.
B. greater than the marginal price of risk for the market portfolio.
C. less than the marginal price of risk for the market portfolio.
D. adjusted by its degree of nonsystematic risk.
In equilibrium, the marginal price of risk for a risky security must be equal to the marginal price of risk
for the market. If not, investors will buy or sell the security until they are equal.


lOMoARcPSD|5044536
40. The Capital Asset Pricing Model (CAPM) assumes
A. all investors are price takers.
B. all investors have the same holding period.
C. investors pay taxes on capital gains.
D. both a and b are true.
E. a, b and c are all true.
The CAPM assumes that investors are pricetakers with the same single holding period and that there are
no taxes or transaction costs.
Difficulty: Basic

41. If investors do not know their investment horizons for certain
A. the CAPM is no longer valid.
B. the CAPM underlying assumptions are not violated.
C. the implications of the CAPM are not violated as long as investors' liquidity needs are not priced.
D. the implications of the CAPM are no longer useful.
This is discussed in the chapter's section about "Extensions to the CAPM". It examines what will be the
consequences if the assumptions are removed.

42. The value of the market portfolio equals
A. the sum of the values of all equity securities.
B. the sum of the values of all equity and fixed income securities.
C. the sum the values of all equity, fixed income, and derivative securities.
D. the sum of the values of all equity, fixed income, and derivative securities plus the value of all mutual
funds.
E. the entire wealth of the economy.
The market portfolio includes all assets in existence.


lOMoARcPSD|5044536
43. The amount that an investor allocates to the market portfolio is negatively related to
I) the expected return on the market portfolio.
II) the investor's risk aversion coefficient.
III) the riskfree rate of return.
IV) the variance of the market portfolio
A. I and II
B. II and III
C. II and IV
D. II, III, and IV
E. I, III, and IV
The optimal proportion is given by y = (E(rM) rf)/(.01 x Aσ2M). This amount will decrease as rf, A, and
σ2M decrease.

44. One of the assumptions of the CAPM is that investors exhibit myopic behavior. What does this
mean?
A. They plan for one identical holding period.
B. The are pricetakers who can't affect market prices through their trades.
C. They are meanvariance optimizers.
D. They have the same economic view of the world.
E. They pay no taxes or transactions costs.
Myopic behavior is shortsighted, with no concern for mediumterm or longterm implications.

45. The CAPM applies to
A. portfolios of securities only.
B. individual securities only.
C. efficient portfolios of securities only.
D. efficient portfolios and efficient individual securities only.
E. all portfolios and individual securities.
The CAPM is an equilibrium model for all assets. Each asset's risk premium is a function of its beta
coefficient and the risk premium on the market portfolio.


lOMoARcPSD|5044536
46. Which of the following statements about the mutual fund theorem is true?
I) It is similar to the separation property.
II) It implies that a passive investment strategy can be efficient.
III) It implies that efficient portfolios can be formed only through active strategies.
IV) It means that professional managers have superior security selection strategies.
A. I and IV
B. I, II, and IV
C. I and II
D. III and IV
E. II and IV
The mutual fund theorem is similar to the separation property. The technical task of creating mutual
funds can be delegated to professional managers; then individuals combine the mutual funds with risk
free assets according to their preferences. The passive strategy of investing in a market index fund is
efficient.

47. Your opinion is that Boeing has an expected rate of return of 0.0952. It has a beta of 0.92. The risk
free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital Asset Pricing
A. underpriced by 7%.
B. overpriced.
C. fairly priced.
E. underpriced by 5%.
9.52% = 4% + 0.92(10% 4%) = 9.52%; therefore, the security is fairly priced.


lOMoARcPSD|5044536
48. As a financial analyst, you are tasked with evaluating a capital budgeting project. You were
instructed to use the IRR method and you need to determine an appropriate hurdle rate. The riskfree
rate is 4 percent and the expected market rate of return is 11 percent. Your company has a beta of 1.0
and the project that you are evaluating is considered to have risk equal to the average project that the
company has accepted in the past. According to CAPM, the appropriate hurdle rate would be
______%.
A. 4
B. 7
C. 15
D. 11
E. 1
The hurdle rate should be the required return from CAPM or (R = 4% + 1.0(11% 4%) = 11%.

rate is 4% and the expected market rate of return is 11%. Your company has a beta of 1.4 and the
project that you are evaluating is considered to have risk equal to the average project that the
A. 13.8%.
B. 7%.
C. 15%.
D. 4%.
E. 1.4%.
The hurdle rate should be the required return from CAPM, or (R = 4% + 1.4(11% 4%) = 13.8%.

A. 4%.
B. 9.25%.
C. 15%.
D. 11%.
E. 0.75%.


lOMoARcPSD|5044536
A. 4%.
B. 8.69%.
C. 15%.
D. 11%.
E. 0.75%.

A. 10%.
B. 5%.
C. 8.35%.
D. 28.35%.
E. 0.67%.

53. The expected returnbeta relationship of the CAPM is graphically represented by
A. the security market line.
B. the capital market line.
C. the capital allocation line.
D. the efficient frontier with a riskfree asset.
E. the efficient frontier without a riskfree asset.
The security market line shows expected return on the vertical axis and beta on the horizontal axis. It has
an intercept of rf and a slope of E(RM) rf.
Difficulty: Basic


lOMoARcPSD|5044536
54. A "fairly priced" asset lies
A. above the security market line.
B. on the security market line.
C. on the capital market line.
D. above the capital market line.
E. below the security market line.
Securities that lie on the SML earn exactly the expected return generated by the CAPM. Their prices are
proportional to their beta coefficients and they have alphas equal to zero.
Difficulty: Basic

55. For the CAPM that examines illiquidity premiums, if there is correlation among assets due to
common systematic risk factors, the illiquidity premium on asset i is a function of
A. the market's volatility.
B. asset i's volatility.
C. the trading costs of security i.
D. the riskfree rate.
E. the money supply.
The formula for this extension to the CAPM relaxes the assumption that trading is costless.

56. Discuss the differences between the capital market line and the security market line.
The capital market line measures the excess return (return of the portfolio over the riskfree return) per
unit of total risk, as measured by standard deviation. The CML applies to efficient portfolios only. The
security market line measures the excess returns of a portfolio or a security per unit of systematic risk
(beta). The SML applies to individual securities and to all portfolios (whether efficiently diversified or
not). Thus, the SML has much general applications than the CML and is more broadly used. The SML is
frequently used to evaluate the performance of portfolio managers.
Feedback: The rational of this question is to determine whether the students understand the basic
differences between these two common risk/return relationships resulting from the capital asset pricing
model.


07 MCQ For Investment Course

Uploaded by

Copyright:

Available Formats

07 MCQ For Investment Course

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

07 MCQ For Investment Course

Uploaded by

Copyright:

Available Formats

lOMoARcPSD|5044536

07 - MCQ for Investment course

Security Analysis and Portfolio Management (University of Business and Technology)

StuDocu is not sponsored or endorsed by any college or university

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

Downloaded by Arushi Singh ([email protected])

You might also like