EXAM 2_IPM_Solutions_2011(a)

EXAM 2_IPM_Solutions_2011(a) - BUS 415 Investment and...

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BUS 415 Investment and Portfolio Management MIDTERM EXAM 2 AUBG: Spring 2011 NAME____________________________________ Solution Guide (1) INSTRUCTIONS: 1. You have 75 minutes to complete the exam. 2. The exam is worth a total of 100 points . 3. You may use a calculator and scratch paper sheets. You must hand in the sheets with your exam (put your name on it). 4. Allocate your time wisely . Use the number of points assigned to each problem as your guide. 5. In order to get full credit on the problems, you must show ALL your work! 6. You can get partial credits if you show your calculations or provide arguments to support your answer. 7. No credits will be warded if you fail to state your assumptions or conclusions explicitly. 1
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A. Multiple choice questions (2 points each, total 22 points) 1. A “random walk” occurs when: A. Stock price changes are random but predictable B. Stock prices respond slowly to both new and old information C. Future price changes are uncorrelated with the past price changes D. Past information is useful in predicting future prices Answer: C. Random walk implies that current changes are independent of past price changes, as well as no predictability is observable. 2. The Arbitrage Pricing Theory (APT) differs from the single-factor Capital Asset Pricing Model (CAPM) because the APT: A. Place more emphasis on market risk B. Minimize the importance of diversification C. Recognize multiple unsystematic risk factors D. Recognize multiple systematic risk factors Answer: D. In contrast to CAPM, which impose only one systematic risk factor – the market risk, the APT recognizes multiple sources of systematic risk. 3. In contrast to Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory (APT): A. Requires that markets be in equilibrium B. Uses risk premiums based on micro-economic variables C. Specifies the exact number of and identifies specific factors that determine expected returns D. Does not require the restrictive assumption concerning the market portfolio. Answer: D. While CAPM is built on the first two assumptions APT says nothing about the exact number of the risk factors. It also doesn’t give any special role to the market portfolio as a benchmark portfolio. 4. According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false ? .A The expected rate of return on a security decreases in direct proportion to a decrease in the risk-free rate. .B The expected rate of return on a security increases as its beta increases. .C A fairly priced security has an alpha of zero. .D In equilibrium, all securities lie on the security market line. .E All of the above statements are true. Answer: A. Statements B, C, and D are true, but statement A is false. 5.
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EXAM 2_IPM_Solutions_2011(a) - BUS 415 Investment and...

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