Finance 4020 Howald exam review 2023 with complete solution

Finance 4020 Howald exam review 2023 with complete solution As diversification increases, the unsystematic risk of a portfolio approaches A) infinity B) 1 C) (n-1) x n D) 0 - D A single-index model uses ____________ as a proxy for the systematic risk factor. A) a market index, such as the S&P 500 B) the current account deficit C) the unemployment rate D) the growth rate in GNP - A In a factor model, the return on a stock in a particular period will be related to A) macroeconomic events B) the error term C) neither firm-specific events nor macroeconomic events D) firm-specific events E) both firm-specific events and macroeconomic events - E If the index model is valid, ___________ would be helpful in determining the covariance between assets HPQ and KMP A) Beta HPQ B) Mu M C) Beta KMP D) all of the options E) none of the options are correct - D Rosenberg and Guy found that __________ helped to predict firms' betas. A) debt/asset ratios B) variance of earnings C) market capitalization D) all of the options E) none of the options are correct - D The single-index model A) enhances the understanding of systematic versus nonsystematic risk B) greatly increases the number of required calculations relative to those required by the Markowitz model C) enhances the understanding of systematic verses nonsystematic risk and greatly increases the number of required calculations relative to those required by the Markowitz model D) greatly reduces the number of required calculations relative to those required by the Markowitz model E) greatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic verses nonsystematic risk - E Covariances between security returns tend to be A) positive because of economic forces that affect many firms B) positive because of Exchange regulations C) negative because of economic forces that affect many firms D) positive because of SEC regulations E) negative because of SEC regulations - A One "cost" of the single-index model is that it A) prohibits specialization of efforts within the security analysis industry B) is virtually impossible to apply C) is legally prohibited by the SEC D) allows for only two kinds of risk - macro risk and micro risk E) requires forecasts of the money supply - D The security characteristic line (SCL) associated with the single-index model is a plot of A) the security's returns on the vertical axis and Beta on the horizontal axis B) the security's returns on the vertical axis and the market index's returns on the horizontal axis C) the market index's excess returns on the vertical axis and the security's excess returns on the horizontal axis D) the market index's returns on the vertical axis and the security's returns on the horizontal axis E) the security's excess returns on the vertical axis and the market index's excess returns on the horizontal axis - E Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 40 stocks in order to construct a mean-variance efficient portfolio constrained by 40 investments. They will need to calculate ________ expected returns and ___________ variances of returns. A) 40; 40 B) 100; 100 C) 4950; 4950 D) 4950; 100 E) None of the options are correct - A Assume that stock market returns do follow a single-index structure. An investment fund analyzes 60 stocks in order to construct a mean-variance efficient portfolio constrained by 60 investments. They will need to calculate ___________ estimate of expected returns and ___________ estimate of sensitivity coefficients to the macroeconomic factor. A) 200; 19,900 B) 19,900; 19,900 C) 60; 60 D) 200; 200 E) None of the options are correct - C If a firm's beta was calculated as 1.35 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of A) between 1.0 and 1.35 B) zero or less C) between 0.0 and 1.0 D) equal to 1.35 E) greater than 1.35 - A In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is A) variance of returns B) beta C) standard deviation of returns D) unique risk - B In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is A) variance of returns B) market risk C) standard deviation of returns D) unique risk - B According the the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a function of A) unique risk B) systematic risk C) reinvestment risk D) unsystematic risk - B The market portfolio has a beta of A) 0.5 B) 0 C) -1 D) 1 - D Which statement is not true regarding the market portfolio? A) it includes all publicly-traded financial assets B) it lies on the efficient frontier C) it is the tangency point between the capital market line and the indifference curve D) all securities in the market portfolio are held in proportion to their market values E) all of the options are true - C The market risk, beta, of a security is equal to A) the variance of the security's returns divided by the variance of the market's returns B) the covariance between the security and market returns divided by the standard deviation of the market's returns C) the covariance between the security's return and the market return divided by the variance of the market's returns D) the variance of the security's returns divided by the covariance between the security and market returns - C According to the Capital Asset Pricing Model (CAPM), a security with a A) zero alpha is considered to be a good buy B) positive alpha is considered to be underpriced C) positive alpha is considered overpriced D) negative alpha is considered to be a good buy - B What is the expected return of a zero-beta security? A) the risk-free rate B) zero rate of return C) a negative rate of return D) the market rate of return - A Studies of liquidity spreads in security markets have shown that A) illiquid stocks are good investments for frequent, short-term traders B) liquid stocks earn higher returns than illiquid stocks C) illiquid stocks earn higher returns than liquid stocks D) both liquid and illiquid stocks earn the same returns - C An overpriced security will plot A) either above or below the security-market line depending on its standard deviation B) either above or below the security market line depending on its covariance with the market C) above the security market line D) below the security market line E) on the security market line - D The capital asset pricing model assumes A) all investors are price takers, have the same holding period, and have homogeneous expectations B) all investors are price takers C) all investors are price takers and have the same holding period D) investors have homogeneous expectations E) all investors have the same holding period - A If investors do not know their investment horizons for certain, A) the implications of the CAPM are no longer useful B) the implications of the CAPM are not violated as long as investors' liquidity needs are not priced C) the CAPM underlying assumptions are not violated D) the CAPM is no longer valid - B The amount that an investor allocates to the market portfolio is negatively related to I) the expected return on the market portfolio II) the investor's risk aversion coefficient III) the risk-free rate of return IV) the variance of the market portfolio A) I, III, and IV