(Difficulty Levels:
Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject
lines.
Multiple Choice:
Conceptual
(8A) Zero coupon bond concepts
C N
Answer: b
MEDIUM
1
.
Which of the following statements is CORRECT?
a.
The CAPM is an ex ante model, which means that all of the variables
should be historical values that can reasonably be projected into
the future.
b.
The beta coefficient used in the SML equation should reflect the
expected volatility of a given stock's return versus the return on
the market during some future period.
c.
The general equation:
Y = a + bX + e, is the standard form of a
simple linear regression where b = beta, and X equals the
independent return on an individual security being compared to Y,
the return on the market, which is the dependent variable.
d.
The riseoverrun method is not a legitimate method of estimating
beta because it measures changes in an individual security's return
regressed against time.
Web App. 8A:
Beta Coefficients
Conceptual M/C
Page 93
WEB APPENDIX 8A
CALCULATING BETA COEFFICIENTS
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Problems
Problems with * in the topic line are nonalgorithmic.
(8A) Beta calculation
C N
Answer: c
MEDIUM
2
.
Given the following returns on Stock J and the "market" during the last
three years, what is the beta coefficient of Stock J?
(Hint:
Think
rise over run.)
Year
Stock J
Market
1
13.85%
8.63%
2
22.90%
12.37%
3
35.15%
19.37%
a. 1.58
b. 1.66
c. 1.75
d. 1.84
e. 1.93
(8A) Beta calculation
C N
Answer: b
MEDIUM
3
.
Stock X and the "market" have had the following rates of returns over
the past four years.
Year
Stock X
Market
2005
12.00%
14.00%
2006
5.00%
2.00%
2007
11.00%
14.00%
2008
7.00%
3.00%
60% of your portfolio is invested in Stock X and the remaining 40% is
invested in Stock Y.
The riskfree rate is 6% and the market risk
premium is also 6%.
You estimate that 14% is the required rate of
return on your portfolio.
What is the beta of Stock Y?
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 Spring '11
 JONES
 Finance, CN CN

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