Portfolio Exam 2 Summarized Question With Correct Answers

Portfolio Exam 2 Summarized Question With Correct Answers 13.0% - Answer-Calculate the expected return for D Industries, which has a beta of 1.0 when the risk-free rate is 0.03 and you expect the market return to be 0.13. 14.38% - Answer-The expected return for a stock, calculated using the CAPM, is 25 percent. The risk-free rate is 7.5 percent, and the beta of the stock is 0.80. Calculate the implied return on the market. A value of zero means that the returns are independent. - Answer-Which of the following statements about the correlation coefficient is FALSE? all assets and liabilities. - Answer-When individuals evaluate their portfolios, they should evaluate APT is invalid because a security's unsystematic component would be eliminated by diversification. - Answer-In one of their empirical tests of the APT, Roll and Ross examined the relationship between a security's returns and its own standard deviation. A finding of a statistically significant relationship would indicate that as the number of securities used to form portfolios increased, the number of factors that characterized the return generating process increased. - Answer-Dhrymes, Friend, and Gultekin, in their study of the APT, found that False - Answer-Arbitrage Pricing Theory (APT) specifies the exact number of risk factors and their identity. False - Answer-Because many of the assumptions made by the capital market theory are unrealistic, the theory is NOT applicable in the real world. False - Answer-Beta is a measure of unsystematic risk. False - Answer-Securities with returns that lie below the security market line are undervalued. False - Answer-The January Effect is an anomaly in that returns in January are significantly smaller than in any other month. False - Answer-Using the S&P index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance. highest possible utility curve. - Answer-The optimal portfolio is identified at the point of tangency between the efficient frontier and the perfectly positively correlated - Answer-All portfolios on the capital market line are return and risk - Answer-An individual investor's utility curves specify the tradeoffs he or she is willing to make between standard deviation - Answer-If an individual owns only one security the most appropriate measure of risk is True - Answer-A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty. True - Answer-As the number of risky assets in a portfolio increases, the total risk of the portfolio decreases. True - Answer-Empirical tests of the APT model have found that as the size of a portfolio increased, so did the number of factors. True - Answer-If the covariance of two stocks is positive, these stocks tend to move together over time. True - Answer-Prior to the work of Markowitz in the late 1950's and early 1960's, portfolio managers did NOT have a well-developed, quantitative means of measuring risk. True - Answer-The "true" market portfolio is unknown. True - Answer-The capital market line is the tangent line between the risk-free rate of return and the efficient frontier. True - Answer-The correlation coefficient and the covariance are measures of the extent to which two random variables move together. True - Answer-The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors. What is the beta of the market portfolio of risky assets? - Answer-All of the following questions remain to be answered in the real world EXCEPT