EXAM 2_IPM_Solutions_2011(b)

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

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BUS 415 Investment and Portfolio Management MIDTERM EXAM 2 AUBG: Spring 2011 NAME____________________________________ Solution Guide (2) 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 sheet 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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1. The debate over whether markets are efficient will probably never be resolved because of ________. A. the lucky event issue. B. the magnitude issue. C. the selection bias issue. D. all of the above. E. none of the above. Answer: D. Factors A, B, and C all exist make rigid testing of market efficiency difficult or impossible. 2. The idea that there is a limit to the reduction of portfolio risk due to diversification is A. contradicted by both the CAPM and the single-index model. B. contradicted by the CAPM. C. contradicted by the single-index model. D. supported in theory, but not supported empirically. E. supported both in theory and by empirical evidence. Answer: E. The benefits of diversification are limited to the level of systematic risk. Figure 8.1 in the textbook shows this concept graphically. 3. Which of the following is true about the security market line (SML) derived from the Arbitrage Pricing Theory (APT)? A. The SML has a downward slope. B. The SML for the APT shows expected return in relation to portfolio standard deviation. C. The SML for the APT has an intercept equal to the expected return on the market portfolio. D. The benchmark portfolio for the SML may be any well-diversified portfolio. E. The SML is not relevant for the APT. Answer: D. The benchmark portfolio does not need to be the (unobservable) market portfolio under the APT, but can be any well-diversified portfolio. The intercept still equals the risk-free rate. 4. Empirical results regarding betas estimated from historical data indicate that A. betas are constant over time. B. betas of all securities are always greater than one. C. betas are always near zero. D. betas appear to regress toward one over time. E. betas are always positive. Answer: D. Betas vary over time, betas may be negative or less than one, betas are not always near zero; however, betas do appear to regress toward one over time. 2
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EXAM 2_IPM_Solutions_2011(b) - BUS 415 Investment and...

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