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Chapter 8 - Chapter 8 Index Models Multiple Choice...

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Chapter 8 Index Models Multiple Choice Questions 1. As diversification increases, the total variance of a portfolio approaches ____________. A) 0 B) 1 C) the variance of the market portfolio D) infinity E) none of the above Answer: C Difficulty: Easy Rationale: As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the variance of the market portfolio. 2. The index model was first suggested by ____________. 3. A single-index model uses __________ as a proxy for the systematic risk factor. 163
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4. The Security Risk Evaluation book published by Merrill Lynch relies on the __________ most recent monthly observations to calculate regression parameters. 5. The Security Risk Evaluation book published by Merrill Lynch uses the __________ as a proxy for the market portfolio. A) Dow Jones Industrial Average B) Dow Jones Transportation Average C) S&P 500 Index D) Wilshire 5000 E) none of the above Answer: C Difficulty: Easy Rationale: The Merrill Lynch data (and much of the other published data sets) are based on the S&P 500 index as a market proxy. 6. According to the index model, covariances among security pairs are
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Chapter 8 Index Models 7. The intercept calculated by Merrill Lynch in the regression equations is equal to
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