FN6350 Quiz 3

Question 1

Which of the following statements is FALSE?

 

A) Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.

 

 

B) Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.

 

   

C) Because investors are risk averse, they will demand a risk premium to hold unsystematic risk.

 

 

D) The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.

 

Question 2

Which of the following statements is FALSE?

 

A) The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate.

 

 

B) Stocks in cyclical industries, in which revenues tend to vary greatly over the business cycle, are likely to be more sensitive to systematic risk and have higher betas than stocks in less sensitive industries.

 

   

C) If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent unsystematic shocks to the economy.

 

 

D) Beta differs from volatility.

 

Question 3

Which of the following investments offered the highest overall return over the past eighty years?

   

A) Small stocks

 

 

B) S&P 500

 

 

C) Corporate bonds

 

 

D) Treasury Bills

 

Question 4

Which of the following statements is TRUE?

 

A) Corporate bonds underperformed inflation during most years since 1925.

 

 

B) Treasury Bills outperformed inflation during every year since 1925.

 

 

C) The S&P 500 is more volatile than corporate bonds.

 

   

D) Small stocks have outperformed the S&P 500 in every year since 1925.

 

Question 5

Which of the following statements is FALSE?

 

A) With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be.

 

 

B) Stock returns will tend to move together if they are affected similarly by economic events.

 

   

C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together.

 

 

D) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries.

 

Question 6

Which of the following statements is FALSE?

   

A) When combining stocks into a portfolio that puts positive weight on each stock, unless all of the stocks are uncorrelated with the portfolio, the risk of the portfolio will be lower than the weighted average volatility of the individual stocks.

 

 

B) The volatility declines as the number of stocks in a portfolio grows.

 

 

C) An equally weighted portfolio is a portfolio in which the same amount is invested in each stock.

 

 

D) As the number of stocks in a portfolio grows large, the variance of the portfolio is determined primarily by the average covariance among the stocks.

 

Question 7

Consider the following linear regression model: (Ri - rf) = ai + bi(RMkt - rf) + ei

The bi in the regression:

 

A) measures the historical performance of the security relative to the expected return predicted by the SML.

 

   

B) measures the sensitivity of the security to market risk.

 

 

C) measures the deviation from the best fitting line and is zero on average.

 

 

D) measures the diversifiable risk in returns.

 

Question 8

Which of the following is NOT true regarding individual investor behavior?

 

A) A vast majority of individual investors hold fewer than 10 stocks in their portfolio.

 

   

B) Individual investors' portfolios consistently outperform the market averages.

 

 

C) Employees tend to over invest in their company's own stock.

 

 

D) Individual investors fail to diversify their portfolios adequately.

 

Question 9

Various trading strategies appear to offer non-zero alphas when we examine real world data. If indeed these alphas are positive, it could be explained by any of the following EXCEPT:

 

A) The positive alpha trading strategies contain risk that investors are unwilling to bear but the CAPM does not capture.

 

 

B) A stock's beta with the market portfolio does not adequately measure a stock's systematic risk.

 

   

C) The market portfolio is inefficient, but the market portfolio proxy used to calculate the alphas is efficient.

 

 

D) Investors are systematically ignoring positive-NPV investment opportunities.

 

Question 10

Which of the following statements is FALSE?

A) We can construct a self-financing portfolio by going long some stocks, and going short other stocks with equal market value.

 

B) The most obvious portfolio to use in a multifactor model is the market portfolio itself.

 

C) A portfolio costs nothing to construct is called a self-financing portfolio.

 

  D) In general, a self-financing portfolio is any portfolio with portfolio weights that sum to one rather than zero.

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Status NEW Posted 01 Aug 2017 04:08 PM My Price 10.00

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