QUESTION 1

An implication of the efficient markets is that __________.

1. high book to market ratio stocks are consistently better performers
2. low beta stocks are consistently overpriced
3. stock prices will appear to follow a random walk
4. growth stocks are better buys than value stocks
1 points
QUESTION 2
Empirical tests of the strong-form version of the efficient market hypothesis indicate that
______________ are generally able to achieve superior returns.

1. hedge fund managers
2. professional money managers
3. stock exchange specialists
4. company insiders
1 points
QUESTION 3
Investors following what other investors are buying or selling is an example of _________.
1. Herding
2. mental accounting
3. overconfidence
4. loss aversion
1 points
QUESTION 4
Some researchers have found that portfolios of stocks with low P/E ratios ______________.

1. outperform stocks with high P/E ratios
2. underperform stocks with high P/E ratios
3. tend to have the same returns as stocks with high P/E ratios
4. are uncorrelated with returns for high P/E stocks
1 points
QUESTION 5
Some researchers have found that portfolios of stocks with small market values ______________.
1. outperform stocks with large market values
2. underperform stocks with large market values
3. tend to have the same returns as stocks with large market values
4. are uncorrelated with returns for large market value stocks
1 points
QUESTION 6
The finding that men trade far more actively than women is related to the behavioral finance study
of ______________.
1. market inefficiency
2. conservatism
3. mental accounting
4. overconfidence
1 points
QUESTION 7

The value or book-to-market effect refers to the finding that firms with high ratios of book value to
market value (B/M) (or similarly low ratios of market value to book value (M/B)) tend to have annual
returns ______________ returns for firms with lower ratios.
1. less than
2. greater than
3. equal to
4. unrelated to
1 points
QUESTION 8
A portfolio on the capital allocation or capital market line with returns greater than the returns on
the market or optimal risky portfolio represents a _____________.
1. borrowing portfolio (borrow at the risk-free rate and then buy the risky asset on margin)
2. lending porfolio (buy the risk-free asset, which is lending to the government, in
combination with the risky asset)
3. unacheivable portfolio

1 points
QUESTION 9

A risky portfolio has an expected rate of return of 15% and a standard deviation of 20%. The
Treasury bill rate is 4%. What is the Sharpe (reward-to-volatility) ratio for the portfolio?

1. 0.55
2. 0.75
3. 0.80
4. 0.95
S = [E(r) - r
f
]/
Your Risky Portfolio: S
P
= [0.15 0.04]/0.20 = 0.55

1 points
QUESTION 10

A stock has an estimated rate of return of 15.5% and a beta of 1.5. The market expected rate of
return is 10% and the risk-free rate is 3%. The alpha of the stock is ______________.

1. -2%
2. 0%
3. 2%
4. 3%
Alpha = 15.5 [3+1.5*(10-3)]= 2
1 points
QUESTION 11
According to the CAPM, overvalued securities will have ______________.

1. large betas
2. positive alphas
3. zero alphas
4. negative alphas
1 points
QUESTION 12
Investors should use a portfolio approach to investing to ____________.

1. reduce risk
2. monitor risk
3. eliminate risk
1 points
QUESTION 13

Portfolio managers who wish to maximize risk-adjusted returns will seek to invest more in stocks
with __________ .


1. low values of Jensen's alpha
2. zero values of Jensen's alpha
3. high values of Jensen's alpha

1 points
QUESTION 14

Security A has a standard deviation of .12 and a correlation coefficient with the market of .6, while
security B has a standard deviation of .14 and a correlation coefficient with the market of .5. Which
security has a higher beta if the market standard deviation is .13?

1. A=0.5538
2. B=0.538
= Correlation Coefficient Standard Deviation of Stock Returns between Market and Stock
/Standard Deviation of Market Returns
Not enough information

1 points
QUESTION 15

The beta of the market portfolio is _______.


1. -1.0
2. 0.0
3. 1.0
4. It has no beta.
1 points

QUESTION 16
The line depicting the risk and return of portfolio combinations of the risk-free asset and the market
portfolio is the ___________.


1. capital allocation line
2. capital market line
3. security market line
4. security characteristic line

1 points
QUESTION 17

Two assets are available for you to form an investment portfolio: the risk-free asset has a rate of
return of 5% and the market portfolio has an expected return of 15%. How much should you invest
in the risk-free asset to achieve a total portfolio expected return of 9%?

1. 40%
2. 50%
3. 60%
4. 70%
0.09=0.15w+(1-w)0.05=0.04
1 points
QUESTION 18
What is the CAPM estimated rate of return for a stock with a beta of 1.5 when the market expected
rate of return is 10% and the risk-free rate is 3%?

1. 10.5%
2. 12.0%
3. 13.5%
4. None of the above
0.03+(.10-.03)1.5=0.135
1 points

QUESTION 19
Which one of the following stocks is relatively more risky when held in a well-diversified portfolio?
Stock XYZ: standard deviation = .12 , beta = .5
Stock ABC: standard deviation = .13 , beta = .4


1. XYZ because its beta is higher.
2. XYZ because its standard deviation is higher.
3. ABC because its beta is lower.
4. ABC because its standard deviation is lower.
1 points

QUESTION 20

With respect to the CAPM based model used to predict returns for a stock (shown on the security
characteristic line), what is the estimated intercept term?

1. Alpha
2. Beta
3. Delta
4. gamma