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Exam 24: Portfolio Theory, Asset Pricing Models, and Behavioral Finance

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Question 1

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Which of the following are the factors for the Fama-French model?

A) The excess market return, a size factor, and a book-to-market factor.
B) The excess market return, a debt factor, and a book-to-market factor.
C) The excess market return, a size factor, and a debt.
D) A debt factor, a size factor, and a book-to-market factor.
E) The excess market return, an industrial production factor, and a book-to-market factor.

F) A) and B)
G) C) and D)

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Question 2

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Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The market's required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund's assets are as follows:

A) 10.67%
B) 11.23%
C) 11.82%
D) 12.45%
E) 13.10%

F) A) and E)
G) A) and C)

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Question 3

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Data for Oakdale Furniture, Inc. is shown below. Now the expected inflation rate and thus the inflation premium increase by 2.0 percentage points, and Oakdale acquires risky assets that increase its beta by the indicated percentage. What is the firm's new required rate of return?

If the returns of two firms are negatively correlated, then one of them must have a negative beta.

Which of the following statements is CORRECT?

The returng on the market, the returns on United Fund (UF) , the riskfree rate, and the required return on the United Fund are shown below. Assuming the market is in equilibrium and that beta can be estimated with historical data, what is the required return on the market, ru? rRE: 7.00형 ronited: $15.00 \frac{8}{8}$

Which of the following is NOT a potential problem with beta and its estimation?

You are given the following returns on "the market" and Stock Q during the last three years. We could calculate beta using data for Years 1 and 2 and then, after Year 3, calculate a new beta for Years 2 and 3. How different are those two betas, i.e., what's the value of beta 2 - beta 1? (Hint: You can find betas using the Rise-Over-Run method, or using your calculator's regression function.)

Assume that you hold a well-diversified portfolio that has an expected return of 12.0% and a beta of 1.20. You are in the process of buying 100 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock?

You are holding a stock with a beta of 2.0 that is currently in equilibrium. The required rate of return on the stock is 15% versus a required return on an average stock of 10%. Now the required return on an average stock increases by 30.0% (not percentage points) . The risk- free rate is unchanged. By what percentage (not percentage points) would the required return on your stock increase as a result of this event?

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.

If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck's stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

Which of the following statements is CORRECT?

You have the following data on three stocks: As a risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well- diversified portfolio.

You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.00) . What is the new beta of the portfolio?

We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

A stock with a beta equal to -1.0 has zero systematic (or market) risk.

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation. 1.

If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock.