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Dashboard  My courses  FINS2624-5216_00225  Practice Exercises  Lectures 5 & 7 - Hard Exercises

Started on Wednesday, 11 August 2021, 5:34 PM

State Finished
Completed on Wednesday, 11 August 2021, 6:57 PM
Time taken 1 hour 23 mins
Marks 19.00/20.00
Grade 9.50 out of 10.00 (95%)

Question 1
Correct

Mark 1.00 out of 1.00

Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of
15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio
________ and a long position in portfolio ________.

Select one:
A. A; A
B. A; B
C. B; B
D. B; A  A: 13% = 10% + 0.2F; F = 15%; B: 15% = 10% + 0.4F; F =
12.5%; therefore, short B and take a long position in A.

A: 13% = 10% + 0.2F; F = 15%; B: 15% = 10% + 0.4F; F = 12.5%; therefore, short B and take a long position in A.
A: 13% = 10% + 0.2F; F = 15%; B: 15% = 10% + 0.4F; F = 12.5%; therefore, short B and take a long position in A.
The correct answer is: B; A

6
 

FINS2624-Portfolio Mgmt T2 2021

Question 2
Correct

Mark 1.00 out of 1.00

Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1, and a beta of .8 on factor 2. The risk
premium on the factor-1 portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

Select one:
A. 7.75%  16.4% = 1.4(3%) + 0.8x +
6%; x = 7.75.

B. 3%
C. 4%
D. 2%

16.4% = 1.4(3%) + 0.8x + 6%; x = 7.75.

16.4% = 1.4(3%) + 0.8x + 6%; x = 7.75.
The correct answer is: 7.75%

Question 3
Correct

Mark 1.00 out of 1.00

Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1, and a beta of .86 on factor 2. The
risk premium on the factor 1 portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no arbitrage opportunities
exist?

Select one:
A. 7.75%
B. 9.26%  17.6% = 1.45(3.2%) + 0.86x +
5%; x = 9.26.

C. 3%
D. 4%

17.6% = 1.45(3.2%) + 0.86x + 5%; x = 9.26.

17.6% = 1.45(3.2%) + 0.86x + 5%; x = 9.26.
The correct answer is: 9.26%
Question 4
Correct

Mark 1.00 out of 1.00

Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The betas of portfolios A and B are 1.0 and 1.5, respectively.
The expected returns on portfolios A and B are 19% and 24%, respectively. Assuming no arbitrage opportunities exist, the risk-free rate of return
must be

Select one:
A. 14.0%.
B. 16.5%.
C. 4.0%.
D. 9.0%.  A: 19% = rf + 1(F); B: 24% = rf + 1.5(F); 5% = .5(F);
F = 10%; 24% = rf + 1.5(10); rf = 9%.

A: 19% = rf + 1(F); B: 24% = rf + 1.5(F); 5% = .5(F); F = 10%; 24% = rf + 1.5(10); rf = 9%.

A: 19% = rf + 1(F); B: 24% = rf + 1.5(F); 5% = .5(F); F = 10%; 24% = rf + 1.5(10); rf = 9%.

The correct answer is: 9.0%.

Question 5
Correct

Mark 1.00 out of 1.00

A zero-investment portfolio with a positive expected return arises when

Select one:
A. a risk-free arbitrage opportunity exists.  When an investor can create a zero-investment portfolio (by using none of
the investor's own funds) with a possibility of a positive profit, a risk-free
arbitrage opportunity exists.

B. the opportunity set is not tangent to the capital-allocation line.

C. an investor has downside risk only.
D. the law of prices is not violated.

When an investor can create a zero-investment portfolio (by using none of the investor's own funds) with a possibility of a positive profit, a risk-free
arbitrage opportunity exists.
When an investor can create a zero-investment portfolio (by using none of the investor's own funds) with a possibility of a positive profit, a risk-free
arbitrage opportunity exists.
The correct answer is: a risk-free arbitrage opportunity exists.
Question 6
Correct

Mark 1.00 out of 1.00

An important difference between CAPM and APT is

Select one:
A. CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition.
B. implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments.
C. Both CAPM depends on risk-  Under the risk-return dominance argument of CAPM, when an equilibrium price is violated many
return dominance; APT investors will make small portfolio changes, depending on their risk tolerance, until equilibrium is
depends on a no-arbitrage restored. Under the no-arbitrage argument of APT, each investor will take as large a position as
condition and CAPM assumes possible so only a few investors must act to restore equilibrium. Implications derived from APT are
many small changes are much stronger than those derived from CAPM.
required to bring the market
back to equilibrium; APT
assumes a few large changes
are required to bring the
market back to equilibrium.
D. CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to
bring the market back to equilibrium.
E. All of the options are true.

Under the risk-return dominance argument of CAPM, when an equilibrium price is violated many investors will make small portfolio changes,
depending on their risk tolerance, until equilibrium is restored. Under the no-arbitrage argument of APT, each investor will take as large a position as
possible so only a few investors must act to restore equilibrium. Implications derived from APT are much stronger than those derived from CAPM.
Under the risk-return dominance argument of CAPM, when an equilibrium price is violated many investors will make small portfolio changes,
depending on their risk tolerance, until equilibrium is restored. Under the no-arbitrage argument of APT, each investor will take as large a position as
possible so only a few investors must act to restore equilibrium. Implications derived from APT are much stronger than those derived from CAPM.
The correct answer is: Both CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition and CAPM assumes many small
changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium.

Question 7
Correct

Mark 1.00 out of 1.00

Which of the following is true about the security market line (SML) derived from the APT?

Select one:
A. The SML is not relevant for the APT.
B. The SML for the APT has an intercept equal to the expected return on the market portfolio.
C. The benchmark portfolio for the SML may be any well-  The benchmark portfolio does not need to be the (unobservable) market
diversified portfolio. portfolio under the APT, but can be any well-diversified portfolio. The
intercept still equals the risk-free rate.

D. The SML has a downward slope.

E. The SML for the APT shows expected return in relation to portfolio standard deviation.

The benchmark portfolio does not need to be the (unobservable) market portfolio under the APT, but can be any well-diversified portfolio. The
intercept still equals the risk-free rate.
The benchmark portfolio does not need to be the (unobservable) market portfolio under the APT, but can be any well-diversified portfolio. The
intercept still equals the risk-free rate.
The correct answer is: The benchmark portfolio for the SML may be any well-diversified portfolio.
Question 8
Correct

Mark 1.00 out of 1.00

Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2. The portfolios have expected returns of 15% and 6%, respectively.
Based on this information, what would be the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor and 0.50 on the
second factor? The risk-free rate is 3%.

Select one:
A. 14.1%  E(RA) = 3 + 0.8 × (15 – 3) + 0.5 ×
(6 – 3) = 14.1.

B. 15.2%
C. 8.4%
D. 13.3%
E. 10.7%

E(RA) = 3 + 0.8 × (15 – 3) + 0.5 × (6 – 3) = 14.1.

E(RA) = 3 + 0.8 × (15 – 3) + 0.5 × (6 – 3) = 14.1.

The correct answer is: 14.1%

Question 9
Correct

Mark 1.00 out of 1.00

Consider the single-factor APT. Stocks A and B have expected returns of 12% and 14%, respectively. The risk-free rate of return is 5%. Stock B has a
beta of 1.2. If arbitrage opportunities are ruled out, stock A has a beta of

Select one:
A. 0.93.  A: 12% = 5% + bF; B: 14% = 5% + 1.2F; F =
7.5%; Thus, beta of A = 7/7.5 = 0.93.

B. 0.67.
C. 1.30.
D. 1.69.

A: 12% = 5% + bF; B: 14% = 5% + 1.2F; F = 7.5%; Thus, beta of A = 7/7.5 = 0.93.

A: 12% = 5% + bF; B: 14% = 5% + 1.2F; F = 7.5%; Thus, beta of A = 7/7.5 = 0.93.
The correct answer is: 0.93.
Question 10
Correct

Mark 1.00 out of 1.00

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio
was 0.20 and σM was 0.16, the β of the portfolio would be approximately

Select one:
A. 1.56.
B. 1.25.  s2p/s2m = b2; (0.2)2/(0.16)2 =
1.56; b = 1.25.

C. 0.80.
D. 0.64.

s2p/s2m = b2; (0.2)2/(0.16)2 = 1.56; b = 1.25.

s2p/s2m = b2; (0.2)2/(0.16)2 = 1.56; b = 1.25.

The correct answer is: 1.25.

Question 11
Correct

Mark 1.00 out of 1.00

An analyst estimates the index model for a stock using regression analysis involving total returns. The estimated intercept in the regression equation
is 6% and the β is 0.5. The risk-free rate of return is 12%. The true α of the stock is

Select one:
A. 6%.

B. 9%.

C. 0%.  6% = a + 12% (1 – 0.5);

a = 0%.

D. 3%.

6% = a + 12% (1 – 0.5); a = 0%.

6% = a + 12% (1 – 0.5); a = 0%.
The correct answer is: 0%.
Question 12
Correct

Mark 1.00 out of 1.00

Suppose you forecast that the market index will earn a return of 15% in the coming year. Treasury bills are yielding 6%. The unadjusted β of Mobil
stock is 1.30. A reasonable forecast of the return on Mobil stock for the coming year is ________ if you use a common method to derive adjusted betas.

Select one:
A. 15.0%
B. 16.0%
C. 15.5%
D. 16.8%  Adjusted beta = 2/3(1.3) + 1/3 = 1.20; E(rM)
= 6% + 1.20(9%) = 16.8%.

Adjusted beta = 2/3(1.3) + 1/3 = 1.20; E(rM) = 6% + 1.20(9%) = 16.8%.

Adjusted beta = 2/3(1.3) + 1/3 = 1.20; E(rM) = 6% + 1.20(9%) = 16.8%.

The correct answer is: 16.8%

Question 13
Correct

Mark 1.00 out of 1.00

The index model has been estimated for stocks A and B with the following results:

RA = 0.01 + 0.5RM + eA.

RB = 0.02 + 1.3RM + eB.

σM = 0.25; σ(eA) = 0.20; σ(eB) = 0.10.

The covariance between the returns on stocks A and B is

Select one:
A. 0.1920.
B. 0.4000.
C. 0.0384.
D. 0.0406.  Cov(RA, RB) = bAbBs2M = 0.5(1.3)
(0.25)2 = 0.0406.

E. 0.0050.

Cov(RA, RB) = bAbBs2M = 0.5(1.3)(0.25)2 = 0.0406.

Cov(RA, RB) = bAbBs2M = 0.5(1.3)(0.25)2 = 0.0406.

The correct answer is: 0.0406.

Question 14
Correct

Mark 1.00 out of 1.00

The index model has been estimated for stocks A and B with the following results:

RA = 0.01 + 0.8RM + eA.

RB = 0.02 + 1.2RM + eB.

σM = 0.20; σ(eA) = 0.20; σ(eB) = 0.10.

The standard deviation for stock A is

Select one:
A. 0.2561.  σA = [(0.8)2(0.2)2 +
(0.2)2]1/2 = 0.2561.

B. 0.2600.
C. 0.0656.
D. 0.0676.

σA = [(0.8)2(0.2)2 + (0.2)2]1/2 = 0.2561.

σA = [(0.8)2(0.2)2 + (0.2)2]1/2 = 0.2561.

The correct answer is: 0.2561.

Question 15
Correct

Mark 1.00 out of 1.00

Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio
was 0.25 and σM was 0.21, the β of the portfolio would be approximately ________.

Select one:
A. 1.19  s2p/s2m = b2; (0.25)2/(0.21)2 =
1.417; b = 1.19.

B. 1.56
C. 1.25
D. 0.64

s2p/s2m = b2; (0.25)2/(0.21)2 = 1.417; b = 1.19.

s2p/s2m = b2; (0.25)2/(0.21)2 = 1.417; b = 1.19.

The correct answer is: 1.19
Question 16
Correct

Mark 1.00 out of 1.00

Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted β of Mobil
stock is 1.50. A reasonable forecast of the return on Mobil stock for the coming year is ________ if you use a common method to derive adjusted betas.

Select one:
A. 15.0%
B. 14.7%  Adjusted beta = 2/3(1.5) + 1/3 = 1.33; E(rM)
= 4% + 1.33(8%) = 14.66%.

C. 16.0%
D. 15.5%

Adjusted beta = 2/3(1.5) + 1/3 = 1.33; E(rM) = 4% + 1.33(8%) = 14.66%.

Adjusted beta = 2/3(1.5) + 1/3 = 1.33; E(rM) = 4% + 1.33(8%) = 14.66%.

The correct answer is: 14.7%

Question 17
Correct

Mark 1.00 out of 1.00

The index model has been estimated for stocks A and B with the following results:

RA = 0.01 + 0.8RM + eA.

RB = 0.02 + 1.1RM + eB.

σM = 0.30 σ(eA) = 0.20 σ(eB) = 0.10.

The covariance between the returns on stocks A and B is

Select one:
A. 0.0050.
B. 0.0406.
C. 0.1920.
D. 0.0384.
E. 0.0792.  Cov(RA, RB) = bAbBs2M = 0.8(1.1)
(0.30)2 = 0.0792.

Cov(RA, RB) = bAbBs2M = 0.8(1.1)(0.30)2 = 0.0792.

Cov(RA, RB) = bAbBs2M = 0.8(1.1)(0.30)2 = 0.0792.

The correct answer is: 0.0792.
Question 18
Correct

Mark 1.00 out of 1.00

The index model has been estimated for stocks A and B with the following results:

RA = 0.03 + 0.7RM + eA.

RB = 0.01 + 0.9RM + eB.

σM = 0.35; σ(eA) = 0.20; σ(eB) = 0.10.

The covariance between the returns on stocks A and B is

Select one:
A. 0.0406.
B. 0.0772.  Cov(RA, RB) = bAbBs2M = 0.7(0.9)
(0.35)2 = 0.0772.

C. 0.0384.
D. 0.1920.
E. 0.4000.

Cov(RA, RB) = bAbBs2M = 0.7(0.9)(0.35)2 = 0.0772.

Cov(RA, RB) = bAbBs2M = 0.7(0.9)(0.35)2 = 0.0772.

The correct answer is: 0.0772.

Question 19
Incorrect

Mark 0.00 out of 1.00

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 risk-free rate of return.

IV) the variance of the market portfolio.

Select one:
A. I, III, and IV.  The optimal proportion is given by y = (E(RM) – rf)/(0.01 ×
Aσ2M). This amount will decrease as rf, A, and σ2M decrease.

B. I and II.
C. II and III.
D. II, III, and IV.
E. II and IV.

The optimal proportion is given by y = (E(RM) – rf)/(0.01 × Aσ2M). This amount will decrease as rf, A, and σ2M decrease.

The optimal proportion is given by y = (E(RM) – rf)/(0.01 × Aσ2M). This amount will decrease as rf, A, and σ2M decrease.

The correct answer is: II, III, and IV.

Question 20
Correct

Mark 1.00 out of 1.00

The CAPM applies to

Select one:
A. efficient portfolios of securities only.
B. portfolios of securities only.
C. efficient portfolios and efficient individual securities only.
D. 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.

E. individual securities only.

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.
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.
The correct answer is: all portfolios and individual securities.