1. Jane is an individual investor. She has recently completed an investment strategy utilizing Markowitz portfolio strategy. From this information an observer would most likely conclude that Jane's portfolio is:
a. comprised mostly of high return stocks
b. well diversified
c. expected to outperform the market
d. spread across many industry groups
5. Unlike the Markowitz model, the single-index model includes a component that describes the part of a company's return that is:
a. impossible to estimate
b. closely aligned to the efficient frontier
c. independent of market performance
d. cyclical in nature
7. A primary rationale for using asset allocation to obtain superior diversification benefits is that _______ of different asset classes may be ________
a. betas; opposite
b. characteristics; complementary
c. correlation coefficients; low
d. cash flows; above average
8. Numerous studies have shown the diversification benefits of including international securities in a balanced portfolio. But recent studies suggest these diversification benefits are shrinking, indication investors should focus the international component of their portfolio more towards:
a. high risk, emerging markets
b. lower growth, stable economies
c. valuation opportunites
d. volatile currency situations
9. Recent research is indicating that more stocks are needed to achieve proper diversification than was previously believed. These studies are showing that individual stock volatility has risen:
a. due to international terrorism
b. for stocks that are sensitive to energy prices
c. for more than calculations of beta would suggest
d. while overall market volatility has not changed
11. Within the framework of Capital Market Theory, the investor is given a choice to_______ , moving the portfolio to a higher risk/return profile than contemplated by the efficient frontier.
a. include undervalued securites
b. leverage the portfolio
c. reinvest dividends
d. speculate in precious metals
12. The slope of the capital market line is important because it indicates the:
a. market price of risk
b. highest return potential of a portfolio
c. intercept position of the risk free asset
d. most efficient blend of asset classes
13. In the Capital Asset Pricing Model, it is assumed all investors hold the same risky portfolio. While this risky portfolio is comprised of all _________, it can use as a proxy the __________.
a. domestic and international stocks; Wilshire 500
b. stocks and bonds; DJIA
c. common stocks; S&P 500
d. possible investments; model efficient portfolio
15. On a chart of the risk/return relationship for two stocks, one with a beta of 0.5, and the second with a beta of 1.5, the two lines will invariably have a different:
a. intercept
b. axis
c. shape
d. slope
16. You are considering adding the stock of XYZ Company to your portfolio. If the risk free rate is 5%, the market rate of return is 12%, and XYZ stock has a beta of 1.3, your required rate of return on the stock will be:
a. 13.7%
b. 14.1%
c. 14.3%
d. 15%
17. It is a fundamental fact that betas of individual stocks are:
a. not stationary over time
b. calculated from future expected values
c. likely to be close to the market as a whole
d. not suitable for regression analysis
19. Although Arbitrage Pricing Theory (APT) is similar to the CAPM in that is assumes a relationship between security risk and return, APT differs from the CAPM because it:
a. assumes investors have homogenous beliefs
b. includes a marginal tax rate
c. assumes a single period investment horizon
d. recognizes several types of risks
a. comprised mostly of high return stocks
b. well diversified
c. expected to outperform the market
d. spread across many industry groups
5. Unlike the Markowitz model, the single-index model includes a component that describes the part of a company's return that is:
a. impossible to estimate
b. closely aligned to the efficient frontier
c. independent of market performance
d. cyclical in nature
7. A primary rationale for using asset allocation to obtain superior diversification benefits is that _______ of different asset classes may be ________
a. betas; opposite
b. characteristics; complementary
c. correlation coefficients; low
d. cash flows; above average
8. Numerous studies have shown the diversification benefits of including international securities in a balanced portfolio. But recent studies suggest these diversification benefits are shrinking, indication investors should focus the international component of their portfolio more towards:
a. high risk, emerging markets
b. lower growth, stable economies
c. valuation opportunites
d. volatile currency situations
9. Recent research is indicating that more stocks are needed to achieve proper diversification than was previously believed. These studies are showing that individual stock volatility has risen:
a. due to international terrorism
b. for stocks that are sensitive to energy prices
c. for more than calculations of beta would suggest
d. while overall market volatility has not changed
11. Within the framework of Capital Market Theory, the investor is given a choice to_______ , moving the portfolio to a higher risk/return profile than contemplated by the efficient frontier.
a. include undervalued securites
b. leverage the portfolio
c. reinvest dividends
d. speculate in precious metals
12. The slope of the capital market line is important because it indicates the:
a. market price of risk
b. highest return potential of a portfolio
c. intercept position of the risk free asset
d. most efficient blend of asset classes
13. In the Capital Asset Pricing Model, it is assumed all investors hold the same risky portfolio. While this risky portfolio is comprised of all _________, it can use as a proxy the __________.
a. domestic and international stocks; Wilshire 500
b. stocks and bonds; DJIA
c. common stocks; S&P 500
d. possible investments; model efficient portfolio
15. On a chart of the risk/return relationship for two stocks, one with a beta of 0.5, and the second with a beta of 1.5, the two lines will invariably have a different:
a. intercept
b. axis
c. shape
d. slope
16. You are considering adding the stock of XYZ Company to your portfolio. If the risk free rate is 5%, the market rate of return is 12%, and XYZ stock has a beta of 1.3, your required rate of return on the stock will be:
a. 13.7%
b. 14.1%
c. 14.3%
d. 15%
17. It is a fundamental fact that betas of individual stocks are:
a. not stationary over time
b. calculated from future expected values
c. likely to be close to the market as a whole
d. not suitable for regression analysis
19. Although Arbitrage Pricing Theory (APT) is similar to the CAPM in that is assumes a relationship between security risk and return, APT differs from the CAPM because it:
a. assumes investors have homogenous beliefs
b. includes a marginal tax rate
c. assumes a single period investment horizon
d. recognizes several types of risks
