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FIN 7013
Activity
Northcentral University
FIN7013
FIN7013-chap9-13exam
There are 50 multiple choice questions on the exam. Each question is worth 2 points. For a total of 100 points.
Please highlight the correct answer for the multiple choice questions. GOOD LUCK!
Northcentral University
FIN7013
1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is
A. unique risk.
B. beta.
C. standard deviation of returns.
D. variance of returns.
E. none of the above.
2. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return
is a function of
A. systematic risk
B. unsystematic risk
C. unique risk.
D. reinvestment risk.
E. none of the above.
3. The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively.
According to the capital asset pricing model (CAPM), the expected rate of return on security X
with a beta of 1.2 is equal to
A. 0.06.
B. 0.144.
C. 0.12.
D. 0.132
E. 0.18
5. According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any
security is equal to
A. Rf + β [E(RM)].
B. Rf + β [E(RM) - Rf].
C. β [E(RM) - Rf].
D. E(RM) + Rf.
E. none of the above.
Northcentral University
FIN7013
6. The Security Market Line (SML) is
A. the line that describes the expected return-beta relationship for well-diversified portfolios only.
B. also called the Capital Allocation Line.
C. the line that is tangent to the efficient frontier of all risky assets.
D. the line that represents the expected return-beta relationship.
E. the line that represents the relationship between an individual security's return and the
market's return.
8. The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If you expect
a stock with a beta of 1.3 to offer a rate of return of 12 percent, you should
A. buy the stock because it is overpriced.
B. sell short the stock because it is overpriced.
C. sell the stock short because it is underpriced.
D. buy the stock because it is underpriced.
E. none of the above, as the stock is fairly priced.
9. The risk-free rate is 4 percent. The expected market rate of return is 11 percent. If you expect
CAT with a beta of 1.0 to offer a rate of return of 13 percent, you should
A. buy stock X because it is overpriced.
B. sell short stock X because it is overpriced.
C. sell stock short X because it is underpriced.
D. buy stock X because it is underpriced.
E. none of the above, as the stock is fairly priced.
10. 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
Northcentral University
FIN7013
11. ___________ a relationship between expected return and risk.
A. APT stipulates
B. CAPM stipulates
C. Both CAPM and APT stipulate
D. Neither CAPM nor APT stipulate
E. No pricing model has found
12 In a multi-factor APT model, the coefficients on the macro factors are often called ______.
A. systemic risk
B. firm-specific risk
C. idiosyncratic risk
D. factor betas
E. none of the above
13. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio
that will yield a sure profit.
A. positive
B. negative
C. zero
D. all of the above
E. none of the above
14. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%.
Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%. 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
E. A, the riskless asset
15. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The beta of
a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-diversified
portfolio is approximately __________.
A. 3.6%
B. 6.0%
C. 7.3%
D. 10.1%
E. none of the above
Northcentral University
FIN7013
16. Consider the single factor APT. Portfolios A and B have expected returns of 14% and 18%,
respectively. The risk-free rate of return is 7%. Portfolio A has a beta of 0.7. If arbitrage
opportunities are ruled out, portfolio B must have a beta of __________.
A. 0.45
B. 1.00
C. 1.10
D. 1.22
E. none of the above
There are three stocks, A, B, and C. You can either invest in these stocks or short sell them.
There are three possible states of nature for economic growth in the upcoming year; economic
growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and
C for each of these states of nature are given below:
Northcentral University
FIN7013
17. If you invested in an equally weighted portfolio of stocks A and B, your portfolio return would
be ___________ if economic growth were moderate.
A. 3.0%
B. 14.5%
C. 15.5%
D. 16.0%
E. none of the above
18. If you wanted to take advantage of a risk-free arbitrage opportunity, you should take a short
position in _________ and a long position in an equally weighted portfolio of _______.
A. A, B and C
B. B, A and C
C. C, A and B
D. A and B, C
E. none of the above
Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-
free rate of return is 6%. The following information is available about two well-diversified
portfolios:
Northcentral University
FIN7013
19. Assuming no arbitrage opportunities exist, the risk premium on the factor F1 portfolio should
be __________.
A. 3%
B. 4%
C. 5%
D. 6%
E. none of the above
20. The APT differs from the CAPM because the APT _________.
A. places more emphasis on market risk
B. minimizes the importance of diversification
C. recognizes multiple unsystematic risk factors
D. recognizes multiple systematic risk factors
E. none of the above
21. If you believe in the ________ form of the EMH, you believe that stock prices reflect all
relevant information including historical stock prices and current public information about the
firm, but not information that is available only to insiders.
A. semistrong
B. strong
C. weak
D. A, B, and C
E. none of the above
22. The difference between a random walk and a submartingale is the expected price change in
a random walk is ______ and the expected price change for a submartingale is ______.
A. negative; zero
B. negative; positive
C. zero; negative
D. zero; positive
E. zero; zero
Northcentral University
FIN7013
24. If you believe in the _______ form of the EMH, you believe that stock prices reflect all
information that can be derived by examining market trading data such as the history of past
stock prices, trading volume or short interest.
A. semistrong
B. strong
C. weak
D. all of the above
E. none of the above
26. Researchers have found that most of the small firm effect occurs
A. during the spring months.
B. during the summer months.
C. in December.
D. in January.
E. randomly.
27. Basu (1977, 1983) found that firms with low P/E ratios
A. earned higher average returns than firms with high P/E ratios.
B. earned the same average returns as firms with high P/E ratios.
C. earned lower average returns than firms with high P/E ratios.
D. had higher dividend yields than firms with high P/E ratios.
E. none of the above.
Northcentral University
FIN7013
29. The weather report says that a devastating and unexpected freeze is expected to hit Florida
tonight, during the peak of the citrus harvest. In an efficient market one would expect the price
of Florida Orange's stock to
A. drop immediately.
B. remain unchanged.
C. increase immediately.
D. gradually decline for the next several weeks.
E. gradually increase for the next several weeks.
30. Which of the following are used by fundamental analysts to determine proper stock prices?
I) trendlines
II) earnings
III) dividend prospects
IV) expectations of future interest rates
V) resistance levels
A. I, IV, and V
B. I, II, and III
C. II, III, and IV
D. II, IV, and V
E. All of the items are used by fundamental analysts.
31. Conventional theories presume that investors ____________ and behavioral finance presumes
that they ____________.
A. are irrational; are irrational
B. are rational; may not be rational
C. are rational; are rational
D. may not be rational; may not be rational
E. may not be rational; are rational
Northcentral University
FIN7013
33. Some economists believe that the anomalies literature is consistent with investors
____________ and ____________.
A. ability to always process information correctly and therefore they infer correct probability
distributions about future rates of return; given a probability distribution of returns, they always
make consistent and optimal decisions
B. inability to always process information correctly and therefore they infer incorrect probability
distributions about future rates of return; given a probability distribution of returns, they always
make consistent and optimal decisions
C. ability to always process information correctly and therefore they infer correct probability
distributions about future rates of return; given a probability distribution of returns, they often
make inconsistent or suboptimal decisions
D. inability to always process information correctly and therefore they infer incorrect probability
distributions about future rates of return; given a probability distribution of returns, they often
make inconsistent or suboptimal decisions
E. none of the above
35. Psychologists have found that people who make decisions that turn out badly blame
themselves more when that decision was unconventional. The name for this phenomenon is
A. regret avoidance
B. framing
C. mental accounting
D. overconfidence
E. obnoxicity
36. On October 29, 1991 there were 1,031 stocks that advanced on the NYSE and 610 that
declined. The volume in advancing issues was 112,866,000 and the volume in declining issues
was 58,188,000. The trin ratio for that day was ________ and technical analysts were likely to be
________.
A. 0.87, bullish
B. 0.87, bearish
C. 1.15, bullish
D. 1.15, bearish
E. none of the above
Northcentral University
FIN7013
37. In regard to moving averages, it is considered to be a ____________ signal when market price
breaks through the moving average from ____________.
A. bearish; below
B. bullish: below
C. bearish; above
D. bullish above
E. B and C
40. Single men trade far more often than women. This is due to greater ________ among men.
A. framing
B. regret avoidance
C. overconfidence
D. conservatism
E. none of the above
42. In the empirical study of a multi-factor model by Chen, Roll, and Ross, a factor that appeared
to have significant explanatory power in explaining security returns was ________.
A. the change in the expected rate of inflation
B. the risk premium on bonds
C. the unexpected change in the rate of inflation
D. industrial production
E. B, C and D
Northcentral University
FIN7013
43. In the results of the earliest estimations of the security market line by Lintner (1965) and by
Miller and Scholes (1972), it was found that the average difference between a stock's return and
the risk-free rate was ________ to its nonsystematic risk.
A. positively related
B. negatively related
C. unrelated
D. related in a nonlinear fashion
E. none of the above
Northcentral University
FIN7013
46. Consider the regression equation:
ri - rf = g0 + g1bi + eit
where:
ri - rf = the average difference between the monthly return on stock i and the monthly risk-free
rate
bi = the beta of stock i
This regression equation is used to estimate __________.
A. the security characteristic line
B. the security market line
C. the capital market line
D. A and B
E. A, B, and C
49. If you believe in the _________ form of the EMH, you believe that stock prices reflect all
available information, including information that is available only to insiders.
A. semistrong
B. strong
C. weak
D. all of the above
E. none of the above
50. Your opinion is that Boeing has an expected rate of return of 0.112. It has a beta of 0.92. The
risk-free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital
Asset Pricing Model, this security is
A. underpriced.
B. overpriced.
C. fairly priced.
D. cannot be determined from data provided.
E. none of the above.
Northcentral University
FIN7013
Northcentral University
FIN7013