Question 1

Suppose you have a portfolio consisting of Asset A, which has a beta of 1.4, and Asset B, which has a beta of 0.85. If you have 60 percent of the portfolio in Asset A and the rest in Asset B, the beta of your portfolio is closest to:
A) 1.000.
B) 1.070.
C) 1.125.
D) 1.180.

Accepted Answer

The portfolio beta is calculated as the weighted average of the betas of the assets in the portfolio. The calculation is: (0.60 * 1.4) + (0.40 * 0.85) = 0.84 + 0.34 = 1.18.

Question 2

Suppose you have a portfolio consisting of Asset C, which has a beta of 1.5, and Asset D, which has a beta of 0.8. If you have 80 percent of the portfolio in Asset C and the rest in Asset D, the beta of your portfolio is closest to:
A) 0.460.
B) 1.000.
C) 1.150.
D) 1.360.

Accepted Answer

The portfolio beta is calculated as the weighted average of the individual asset betas: (0.8 * 1.5) + (0.2 * 0.8) = 1.36.

Question 3

Suppose you have a portfolio consisting of Asset E, which has a beta of 1.5, and the risk-free asset. If you have 80 percent of the portfolio in Asset E and the rest in the risk-free asset, the beta of your portfolio is closest to:
A) 0.75.
B) 1.00.
C) 1.20.
D) 1.36.

Accepted Answer

The beta of the portfolio is calculated by taking the weighted average of the betas of the individual assets in the portfolio. Since the risk-free asset has a beta of 0 (it is uncorrelated with the market), the calculation is as follows: (0.8 * 1.5) + (0.2 * 0) = 1.2.

Question 4

You have invested all of your retirement funds in your company's stock, which has a beta of 1.0. When you hear on the radio that the stock market is down 150 points, what should you expect from your company stock in your retirement plan?
A) Should be a great day, your stock should be up significantly.
B) Rats! Your company stock is likely down more than the market today.
C) Your company stock is likely down with the market today in similar proportion.
D) It's anyone's guess as the market does not move at all in relation to your company stock.

Accepted Answer

Since the company's stock has a beta of 1.0, it tends to move with the market. Therefore, if the market is down, it's likely that the company's stock is also down in a similar proportion.

Question 5

You have invested all of your retirement funds in your company's stock, which has a beta of -1.0. When you hear on the radio that the stock market is down 150 points, what should you expect from your company stock in your retirement plan?
A) Should be a great day, your stock should be up significantly.
B) Rats! Your company stock is likely down more than the market today.
C) Your company stock is likely down with the market today in similar proportion.
D) It's anyone's guess as the market does not move at all in relation to your company stock.

Accepted Answer

A beta of -1.0 indicates that the stock moves in the opposite direction of the market. Therefore, if the market is down, a stock with a beta of -1.0 should be up.

Question 6

A beta of zero means:
A) no market risk (risk-free security).
B) less market risk than the average security.
C) more market risk than the average security.
D) negative correlation with the market return.
E) market risk the same as the average security.

Accepted Answer

A beta of zero indicates that the security's returns are not correlated with the market's returns, implying it has no market risk and is considered a risk-free security.

Question 7

The latest hot stock has a beta of 1.5. If the returns on the market decline by 2 percent, you should expect the price of the latest hot stock to go:
A) up 3%
B) up 3.5%
C) down 2%
D) down 3%
E) down 3.5%

Accepted Answer

The beta of a stock measures its volatility in comparison to the market. A beta of 1.5 means the stock is 50% more volatile than the market. Therefore, if the market declines by 2%, a stock with a beta of 1.5 would decline by 3% (1.5 times the market's movement).

Question 8

The latest hot stock has a beta of 1.5. If the returns on the market increase by 4 percent, you should expect the price of the latest hot stock to go:
A) up 6%
B) up 5.5%
C) down 4%
D) down 5.5%
E) down 6.0%

Accepted Answer

The answer of The latest hot stock has a beta...

Question 9

Sysco Corporation has a beta of 0.71. If the returns on the market increase by 1%, what should you expect from Sysco Corporation?
A) It will go up 1%
B) It will go up .71%
C) It will go down 1%
D) It will go down .71%

Accepted Answer

The beta of a stock measures its volatility in relation to the market. A beta of 0.71 means that if the market goes up by 1%, Sysco Corporation's stock is expected to go up by 0.71%.

Question 10

Which of the following statements is incorrect?
A) Betas are constant.
B) High growth companies tend to have betas much larger than one.
C) Portfolio betas are the weighted average of the betas of the stocks in the portfolio.
D) Betas for companies in the same industry are generally similar, but will exhibit differences based on financial risk, size, and other factors.

Accepted Answer

Betas are not constant; they can change over time due to various factors such as changes in a company's business model, industry dynamics, or overall market volatility.

Question 11

An investor has a three stock portfolio: $25,000 in McDonald's, which has a beta of 0.41; $25,000 in Home Depot, which has a beta of 0.81; and $50,000 in Cardinal Health, which has a beta of 0.76. The beta of this investor's portfolio is closest to:
A) 0.660
B) 0.685
C) 1.000
D) 1.980

Accepted Answer

The beta of the portfolio is calculated by taking the weighted average of the betas of the individual stocks, with the weights being the proportion of the investment in each stock. The total investment is $100,000 ($25,000 in McDonald's + $25,000 in Home Depot + $50,000 in Cardinal Health). The calculation is as follows:- McDonald's: (25,000 / 100,000) * 0.41 = 0.1025- Home Depot: (25,000 / 100,000) * 0.81 = 0.2025- Cardinal Health: (50,000 / 100,000) * 0.76 = 0.38Adding these together gives 0.1025 + 0.2025 + 0.38 = 0.685.

Question 12

An investor has a four stock portfolio: $25,000 in Comcast, which has a beta of 1.08; $25,000 in Coca Cola Bottling Company, which has a beta of .50; $50,000 in Microsoft, which has a beta of .98; and $100,000 in Apple, Inc., which has a beta of 1.21. The beta of this investor's portfolio is closest to:
A) 0.685
B) 1.0000
C) 1.0475
D) 3.7700

Accepted Answer

The beta of the portfolio is calculated by taking the weighted average of the betas of the individual stocks, with the weights being the proportion of the total investment in each stock. The total investment is $200,000 ($25,000 + $25,000 + $50,000 + $100,000). The calculation is as follows:- Comcast: ($25,000 / $200,000) * 1.08 = 0.135- Coca Cola: ($25,000 / $200,000) * 0.50 = 0.0625- Microsoft: ($50,000 / $200,000) * 0.98 = 0.245- Apple: ($100,000 / $200,000) * 1.21 = 0.605Adding these together gives a portfolio beta of 0.135 + 0.0625 + 0.245 + 0.605 = 1.0475.

Question 13

Which of the following statements is incorrect?
A) The SML is downward sloping.
B) SML can be used with individual assets or portfolios.
C) The SML depicts the relation between the required return and market risk, as measured by beta.
D) According to SML, assets with betas greater than the market beta of 1 will have larger risk premiums.
E) According to SML, assets with betas less than the market beta of 1 are less risky and will have lower required rates of return.

Accepted Answer

The Security Market Line (SML) is upward sloping, reflecting that higher risk (as measured by beta) is associated with higher expected returns.

Question 14

Which of the following best describes the diagonal line in the following diagram? 
A) The characteristic line
B) The capital market line
C) The security capital line
D) The security market line

Accepted Answer

The answer of Which of the following best describes the...

Question 15

Which of the following is a three-factor pricing model that uses a market factor, the market value of a firm's common equity, and the ratio of a firm's book equity value to its market value of equity to relate expected returns to risk?
A) Fama-French model
B) Arbitrage pricing theory
C) Capital asset pricing model
D) Capital planning asset model

Accepted Answer

The Fama-French model is a three-factor pricing model that expands on the Capital Asset Pricing Model (CAPM) by adding size risk (small minus big) and value risk (high book-to-market minus low) to the market risk factor. This model uses the market factor, the market value of a firm's common equity, and the ratio of a firm's book equity value to its market value of equity to relate expected returns to risk.

Question 16

Which of the following is not an example of arbitrage?
A) A retailer buying a product at a certain price from a wholesaler and selling for more to customers.
B) The new reader selling for the same price at retailers, online retailers, and directly from the company.
C) Buying a popular toy at a discount store and selling it on e-Bay for 10 times the price you bought it for.
D) Foreign visitors buying items on a visit to the U.S., which they can sell for more when they return home.

Accepted Answer

Arbitrage involves taking advantage of price differences in different markets for the same asset. Choice B describes a situation where the product is sold at the same price across different platforms, which does not involve exploiting price differences, hence it is not an example of arbitrage.

Question 17

A multifactor asset pricing model that does not depend on the existence of an underlying market portfolio and allows for the possibility that several types of risk may affect asset returns is best described as:
A) Fama-French model.
B) Economic value added.
C) Arbitrage pricing theory.
D) Capital asset pricing model.

Accepted Answer

The Arbitrage Pricing Theory (APT) is a multifactor asset pricing model that does not depend on the existence of an underlying market portfolio, unlike the Capital Asset Pricing Model (CAPM). APT allows for the possibility that several types of risk (factors) may affect asset returns, making it a more flexible approach compared to models that assume a single market factor.

Question 18

The theory that markets are efficient and that prices accurately reflect all information at any point in time is best described as:
A) Fama-French Model.
B) Arbitrage Pricing Theory.
C) Efficient market hypothesis.
D) Capital asset pricing model (CAPM).

Accepted Answer

The Efficient Market Hypothesis (EMH) posits that stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. Therefore, according to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.

Question 19

The study of historical trading information to identify patterns in trading data that can be used to invest successfully can best be described as:
A) event study.
B) pattern analysis.
C) technical analysis.
D) behavioral analysis.

Accepted Answer

Technical analysis involves the study of past market data, primarily price and volume, to forecast future price movements. It is commonly used by traders and investors to identify patterns and trends that may suggest future market behavior.

Question 20

Which of the following statements is incorrect?
A) A market that is semi-strong form efficient cannot be weak form efficient.
B) Semi-strong form efficient markets have asset prices that reflect all publicly known and available information.
C) The fact that professional fund managers do not outperform the market is strong evidence for the semi-strong form of market efficiency.
D) One way of testing for semi-strong form efficiency is to examine the speed of adjustment of stock prices to announcements of significant new information.

Accepted Answer

Semi-strong form efficiency includes weak form efficiency. In a semi-strong form efficient market, prices reflect all publicly available information, which includes past trading information covered under weak form efficiency. Thus, a market that is semi-strong form efficient is also weak form efficient, making statement A incorrect.

Quiz 9: Asset Pricing

Suppose you have a portfolio consisting of Asset A, which has a beta of 1.4, and Asset B, which has a beta of 0.85. If you have 60 percent of the portfolio in Asset A and the rest in Asset B, the beta of your portfolio is closest to:

Suppose you have a portfolio consisting of Asset C, which has a beta of 1.5, and Asset D, which has a beta of 0.8. If you have 80 percent of the portfolio in Asset C and the rest in Asset D, the beta of your portfolio is closest to:

Suppose you have a portfolio consisting of Asset E, which has a beta of 1.5, and the risk-free asset. If you have 80 percent of the portfolio in Asset E and the rest in the risk-free asset, the beta of your portfolio is closest to:

You have invested all of your retirement funds in your company's stock, which has a beta of 1.0. When you hear on the radio that the stock market is down 150 points, what should you expect from your company stock in your retirement plan?

You have invested all of your retirement funds in your company's stock, which has a beta of -1.0. When you hear on the radio that the stock market is down 150 points, what should you expect from your company stock in your retirement plan?

A beta of zero means:

The latest hot stock has a beta of 1.5. If the returns on the market decline by 2 percent, you should expect the price of the latest hot stock to go:

The latest hot stock has a beta of 1.5. If the returns on the market increase by 4 percent, you should expect the price of the latest hot stock to go:

Sysco Corporation has a beta of 0.71. If the returns on the market increase by 1%, what should you expect from Sysco Corporation?

Which of the following statements is incorrect?

An investor has a three stock portfolio: $25,000 in McDonald's, which has a beta of 0.41; $25,000 in Home Depot, which has a beta of 0.81; and $50,000 in Cardinal Health, which has a beta of 0.76. The beta of this investor's portfolio is closest to:

Which of the following statements is incorrect?

Which of the following best describes the diagonal line in the following diagram?

Which of the following is a three-factor pricing model that uses a market factor, the market value of a firm's common equity, and the ratio of a firm's book equity value to its market value of equity to relate expected returns to risk?

Which of the following is not an example of arbitrage?

A multifactor asset pricing model that does not depend on the existence of an underlying market portfolio and allows for the possibility that several types of risk may affect asset returns is best described as:

The theory that markets are efficient and that prices accurately reflect all information at any point in time is best described as:

The study of historical trading information to identify patterns in trading data that can be used to invest successfully can best be described as:

Which of the following statements is incorrect?