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Commerce 374
Winter 2011
Home practice on CAPM Solution
Answer Key
Part I: Multiple Choice
1.
The variance of a portfolio of risky securities is .
..
A) the sum of the securities’ covariances
A) the sum of the securities’ variances
B) the weighted sum of the securities’ covariances
B) the weighted sum of the securities’ variances
3.
Asset A has an expected return of 15% and a rewardtovariability ratio of .4.
Asset B has an expected return of 20% and a rewardtovariability ratio of .3.
A
riskaverse investor would prefer a portfolio using the riskfree asset and
_______.
A) asset A
B) asset B
C) no risky asset
D) can't tell from the data given
5.
According to the capital asset pricing model, __________.
A) all securities must lie on the capital market line
B) all securities must lie on the security market line
C) underpriced securities lie below the security market line
D) overpriced securities lie above the security market line
8.
The riskfree rate is 4%.
The expected market rate of return is 11%.
If you
expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you
should __________.
A) buy stock X because it is overpriced
B) buy stock X because it is underpriced
C) sell short stock X because it is overpriced
D) sell short stock X because it is underpriced
9.
A security's beta coefficient will be negative if _____________.
A) its returns are negatively correlated with market index returns
B) its returns are positively correlated with market index returns
1
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View Full DocumentC) its stock price has historically been very stable
D) market demand for the firm's shares is very low
10.
An index fund that holds the market portfolio will need to rebalance its portfolio
_____________.
1.
Prices change
B) Expected returns change
C) A stock split occurs
D) None of the above
11.
The beta of a security is.
..
A) The covariance between the security and the market returns divided
by the variance of the market’s returns.
B) The covariance between the security and the market returns divided by the
variance of the securities’ returns.
C) The correlation coefficient between the security and the market returns.
D) The covariance between the security and the market returns.
12.
Stocks A, B, C, and D have betas of 1.5, 0.4, 0.9, and 1.7 respectively. What is the
beta of an equally weighted portfolio of A, B, and C …
A) 0.25
B) 0.93
C) 1.00
D) 1.13
13.
According to Tobin's separation property, portfolio choice can be separated into
two independent tasks consisting of __________ and ___________.
A) identifying all investor imposed constraints; identifying the set of securities
that conform to the investor's constraints and offer the best riskreturn
tradeoffs
B) identifying the investor's degree of risk aversion; choosing securities from
industry groups that are consistent with the investor's risk profile
C) identifying the optimal risky portfolio; constructing a complete portfolio
from Tbills and the optimal risky portfolio based on the investor's
degree of risk aversion
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 Spring '08
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