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Unformatted text preview: The Capital Allocation Line provided by a risk‐free security and N risky securities is A. the line that connects the risk‐free rate and the global minimum‐variance portfolio of the risky securities. B. the line that connects the risk‐free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. C. the line tangent to the efficient frontier of risky securities drawn from the risk‐free rate. D. the horizontal line drawn from the risk‐free rate. E. none of the above. 2 The Capital Allocation Line represents the most efficient combinations of the risk‐free asset and risky securities. Only C meets that definition. 4. Consider the single‐index model. The alpha of a stock is 0%. The return on the market index is 16%. The risk‐free rate of return is 5%. The stock earns a return that exceeds the risk‐free rate by 11% and there are no firm‐specific events affecting the stock performance. The β of the stock is _______. A. 0.67 B. 0.75 C. 1.0 D. 1.33 E. 1.50 11% = 0% + b(11%); b = 1.0. 5. According to the Capital Asset Pricing Model (CAPM), under priced securities A. have positive betas. B. have zero alphas. C. have negative betas. D. have positive alphas. E. none of the above. According to the Capital Asset Pricing Model (CAPM), under priced securities have positive alphas. 6. You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7. The beta of the resulting portfolio is A. 1.40 B. 1.15 C. 0.36 D. 1.08 E. 0.80 0.5(1.6) + 0.5(0.70) = 1.15. 7. Which of the following factors were used by Fama and French in their multi‐factor model? A. Return on the market index B. Excess return of small stocks over large stocks. C. Excess return of high book‐to‐market stocks over low book‐to‐market stocks. 3 D. All of the above factors were included in their model. E. None of the above factors were included in their model. Fama and French included all three of the factors listed. 8. Consider the regression equation: ri ‐ rf = g0 + g1bi + g2s2(ei) + eit where: ri ‐ rt = the average difference between the monthly return on stock i and the monthly risk‐free rate bi = the beta of stock i s2(ei) = a measure of the nons...
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- Spring '14