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Chapter 7 Questions. Please note that I have not verified all the answers yet. If you believe
any of them are wrong, please let me know.
1.
An index fund that holds the market portfolio will need to rebalance its portfolio when
_______.
A) prices change
B) expected returns change
C) a stock split occurs
D) none of the above
2.
Consider the CAPM.
The riskfree rate is 5% and the expected return on the market is
15%.
What is the beta on a stock with an expected return of 12%?
A) .5
B) .7
C) 1.2
D) 1.4
3.
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) .25
B) .93
C) 1.00
D) 1.13
4.
According to the capital asset pricing model, fairly priced securities have __________.
A) negative betas
B) positive alphas
C) positive betas
D) zero alphas
5. The portion of a security's expected return that is not explained by market risk is usually
called ____________.
A) alpha
B) beta
C) epsilon
D) None of the above
6.
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
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7.
Consider the single factor APT.
Portfolio A has a beta of 1.3 and an expected return of
21%. Portfolio B has a beta of 0.7 and an expected return of 17%.
The riskfree rate of
return is 8%.
If you wanted to take
advantage of an arbitrage opportunity, you should
take a short position in portfolio __________ and a long position in portfolio
__________.
A) A, A
B) A, B
C) B, A
D) B, B
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.
The riskfree rate and the expected market rate of return are 5% and 15% respectively.
According to the capital asset pricing model, the expected rate of return on security X
with a beta of 1.2 is equal to __________.
A) 12%
B) 17%
C) 18%
D) 23%
10.
Liquidity is a risk factor that ____.
A) has yet to be accurately measured and incorporated in portfolio management
B) is unaffected by trading mechanisms on various stock exchanges
C) has no effect on the market value of an asset
D) none of the above
11.
The most significant conceptual difference between the arbitrage pricing theory (APT)
and the capital asset pricing model (CAPM) is that the CAPM
______________.
A) places less emphasis on market risk
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 Spring '11
 Hearth
 Capital Asset Pricing Model, Financial Markets, capital asset pricing, Asset Pricing Model

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