Question: If the simple CAPM is valid, which

> Fill in the table below for the following zero-coupon bonds, all of which have par values of $1,000.

> The following table shows yields to maturity of zero-coupon Treasury securities. Term to Maturity (years) Yield to Maturity (%) 1……………………………………………3.50% 2………………………………………….4.50 3………………………………………….5.00 4………………………………………….5.50 5………………………………………….6.00 10………………

> Suppose that, in addition to the market factor that has been considered in Problems 1–7, a second factor is considered. The values of this factor for years 1 to 12 were as follows: / Perform the first-pass regressions as in the Chen, Roll, and Ross st

> Plot the capital market line (CML), the nine stocks, and the three portfolios on a graph of average returns versus standard deviation. Compare the mean-variance efficiency of the three portfolios and the market index. Does the comparison support the CAPM

> Perform the second-pass SML regression by regressing the average excess return of each portfolio on its beta.

> Specify the hypotheses for the second-pass regression used to test the SML of the CAPM.

> Perform the first-pass regressions for a single-index model and tabulate the summary statistics.

> Match each example to one of the following behavioral characteristics.

> After Polly Shrum sells a stock, she avoids following it in the media. She is afraid that it may subsequently increase in price. Which behavioral characteristic is the basis for Shrum’s decision making? a. Fear of regret. b. Representativeness. c. Mental

> Jill Davis tells her broker that she does not want to sell her stocks that are below the price she paid for them. She believes that if she just holds on to them a little longer they will recover, at which time she will sell them. Which behavioral charact

> One seeming violation of the Law of One Price is the pervasive discrepancy of closed-end fund prices from their net asset values. Would you expect to observe greater discrepancies on diversified or less-diversified funds? Why?

> Using the following data, calculate the change in the confidence index from last year to this year. What besides a change in confidence might explain the pattern of yield changes?

> Briefly explain why bonds of different maturities might have different yields according to the expectations and liquidity preference hypotheses. Briefly describe the implications of each hypothesis when the yield curve is (1) upward-sloping and (2) downw

> In Table 12B, if the trading volume in advancing shares on day 1 was 530 million shares, while the volume in declining issues was 440 million shares, what was the trin statistic for that day? Was the trin bullish or bearish?

> Table 12B contains data on market advances and declines. Calculate cumulative breadth and decide whether this technical signal is bullish or bearish.

> Yesterday, the S&P 500 rose by .48%. However, 1,704 issues on the NYSE declined in price while 1,367 advanced. Why might a technical analyst be concerned even though the market index rose on this day?

> Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 5%. Suppose that due to an increase in the expected inflation rate, the yields on both bonds increase by 1%. a. What would happen to the confidence index? b. Would this be interpreted as bull

> Collect data on the S&P 500 for a period covering a few months. Try to identify primary trends. Can you tell whether the market currently is in an upward or downward trend?

> Calculate breadth for the NASDAQ using the data in Figure 12.5. Is the signal bullish or bearish?

> Use the data from The Wall Street Journal in Figure 12.5 to calculate the trin ratio for the NASDAQ. Is the trin ratio bullish or bearish?

> Even if prices follow a random walk, they still may not be informationally efficient. Explain why this may be true and why it matters for the efficient allocation of capital.

> What do we mean by fundamental risk, and why may such risk allow behavioral biases to persist for long periods of time?

> Which of the following (hypothetical) observations would most contradict the proposition that the stock market is weakly efficient? Explain. a. Over 25% of mutual funds outperform the market on average. b. Insiders earn abnormal trading profits. c. Every

> a. An investment in a coupon bond will provide the investor with a return equal to the bond’s yield to maturity at the time of purchase if: i. The bond is not called for redemption at a price that exceeds its par value. ii. All sinking fund payments ar

> Steady Growth Industries has never missed a dividend payment in its 94-year history. Does this make it more attractive to you as a possible purchase for your stock portfolio?

> “If all securities are fairly priced, all must offer equal expected rates of return.” Comment.

> Good News, Inc., just announced an increase in its annual earnings, yet its stock price fell. Is there a rational explanation for this phenomenon?

> You know that firm XYZ is very poorly run. On a scale of 1 (worst) to 10 (best), you would give it a score of 3. The market consensus evaluation is that the management score is only 2. Should you buy or sell the stock?

> We know that the market should respond positively to good news and that good-news events such as the coming end of a recession can be predicted with at least some accuracy. Why, then, can we not predict that the market will go up as the economy recovers?

> In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rA = 3.1%. The rate of return on Bpex was only rB = 2.5%. The market today responded to very encoura

> An index model regression applied to past monthly returns in Ford’s stock price produces the following estimates, which are believed to be stable over time: rF = .10% + 1.1rM If the market index subsequently rises by 8% and Ford’s stock price rises by 7

> Suppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH?

> Which of the following statements are true if the efficient market hypothesis holds? a. It implies that future events can be forecast with perfect accuracy. b. It implies that prices reflect all available information. c. It implies that security prices c

> Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? Explain. a. The average rate of return is significantly great

> a. Explain the likely impact on the offering yield of adding a call feature to a proposed bond issue. b. Explain the likely impact on the bond’s expected life of adding a call feature to a proposed bond issue. c. Describe one advantage and one disadvanta

> Which of the following sources of market inefficiency would be most easily exploited? a. A stock price drops suddenly due to a large sale by an institution. b. A stock is overpriced because traders are restricted from short sales. c. Stocks are overvalue

> If markets are efficient, what should be the correlation coefficient between stock returns for two nonoverlapping time periods?

> Orb Trust (Orb) has historically leaned toward a passive management style of its portfolios. The only model that Orb’s senior management has promoted in the past is the capital asset pricing model (CAPM). Now Orb’s management has asked one of its analyst

> Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate? a. The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc. b. The stock of Kaski

> What is the expected rate of return for a stock that has a beta of 1.0 if the expected return on the market is 15%? a. 15%. b. More than 15%. c. Cannot be determined without the risk-free rate.

> Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. What would be the fair return for each company according to the capital asset pricing model (CAPM)?

> Suppose that borrowing is restricted so that the zero-beta version of the CAPM holds. The expected return on the market portfolio is 17%, and on the zero-beta portfolio it is 8%. What is the expected return on a portfolio with a beta of .6?

> Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. A stock has an expected rate of return of 4%. What is its beta?

> Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. What do investors expect the stoc

> If the simple CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently.

> On May 30, 2020, Janice Kerr is considering one of the newly issued 10-year AAA corporate bonds shown in the following exhibit. a. Suppose that market interest rates decline by 100 basis points (i.e., 1%). Contrast the effect of this decline on the price

> Hennessy & Associates manages a $30 million equity portfolio for the multimanager Wilstead Pension Fund. Jason Jones, financial vice president of Wilstead, noted that Hennessy had rather consistently achieved the best record among Wilstead’s six equity m

> If the simple CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently.

> If the simple CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently.

> What must be the beta of a portfolio with E(rP) = 18%, if rf = 6% and E(rM) = 14%?

> Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3% + .7RM + eA RB = −2% + 1.2RM + eB σM = 20%; R-squareA = .20; R-squareB = .12 What is the standard deviation of each stock?

> What is the basic trade-off when departing from pure indexing in favor of an actively managed portfolio?

> Based on current dividend yields and expected growth rates, the expected rates of return on stocks A and B are 11% and 14%, respectively. The beta of stock A is .8, while that of stock B is 1.5. The T-bill rate is currently 6%, while the expected rate of

> Suppose that the index model for stocks A and B is estimated from excess returns with the following results: Rework Problem 13 for portfolio Q with investment proportions of .50 in P, .30 in the market index, and .20 in T-bills.

> Suppose that the index model for stocks A and B is estimated from excess returns with the following results: What is the covariance between each stock and the market index?

> Suppose that the index model for stocks A and B is estimated from excess returns with the following results: What are the covariance and the correlation coefficient between the two stocks?

> Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in five years, and have a 7% annual coupon rate paid semiannually. a. Calculate the: i. Current yield. ii. Yield to maturity to the nearest whole percent (i.e., 3%, 4%, 5%, etc

> Suppose that the index model for stocks A and B is estimated from excess returns with the following results: Break down the variance of each stock into its systematic and firm-specific components.

> A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows: The c

> A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows: The c

> A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows: The

> Which of the following statements about the minimum-variance portfolio of all risky securities is valid? (Assume short sales are allowed.) Explain. a. Its variance must be lower than those of all other securities or portfolios. b. Its expected return can

> Determine the standard deviation of a random variable q with the following probability distribution: Value of q Probability 0………………………………………………. 0.25 1………………………………………………. 0.25 2………………………………………………. 0.50

> Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond with an 8% coupon if it is currently selling at par and the probability distribution of its yield to maturity a year from now is as follows: / For simplicity, assume

> The Narnian stock market had a rate of return of 45% last year, but the inflation rate was 30%. What was the real rate of return to Narnian investors?

> Suppose the risk-free interest rate is 6% per year. You are contemplating investing $107.55 in a 1-year CD and simultaneously buying a call option on the stock market index fund with an exercise price of $110 and expiration of 1 year. Using the scenario

> An economy is making a rapid recovery from steep recession, and businesses foresee a need for large amounts of capital investment. Why would this development affect real interest rates?

> Leaf Products may issue a 10-year maturity fixed-income security, which might include a sinking fund provision and either refunding or call protection. a. Describe a sinking fund provision. b. Explain the impact of a sinking fund provision on: i. The ex

> During a period of severe inflation, a bond offered a nominal HPR of 80% per year. The inflation rate was 70% per year. a. What was the real HPR on the bond over the year? b. Compare this real HPR to the approximation rreal ≈ rnom − i

> Using historical risk premiums from Table 5.5 over the 1927–2018 period as your guide, what would be your estimate of the expected annual HPR on the Big/Value portfolio if the current risk-free interest rate is 3%?

> The continuously compounded annual return on a stock is normally distributed with a mean of 20% and standard deviation of 30%. With 95.44% confidence, we should expect its actual return in any particular year to be between which pair of values? (Hint: Lo

> Which one of the following statements about the term structure of interest rates is true? a. The expectations hypothesis predicts a flat yield curve if anticipated future short-term rates exceed current short-term rates. b. The expectations hypothesis co

> The spot rates of interest for five U.S. Treasury securities are shown in the following exhibit. Assume all securities pay interest annually. Spot Rates of Interest Term to Maturity Spot Rate of Interest 1 year………………………………13.00% 2…………………………………….12.00 3

> A convertible bond has the following features. What is its conversion premium? Coupon………………………………………………………… 5.25% Maturity ……………………………………………June 15, 2030 Market price of bond ……………………………………$77.50 Market price of underlying common stock …….$28.00 Annual d

> Two basic assumptions of technical analysis are that security prices adjust: a. Gradually to new information, and study of the economic environment provides an indication of future market movements. b. Rapidly to new information, and study of the economi

> A “random walk” occurs when: a. Stock price changes are random but predictable. b. Stock prices respond slowly to both new and old information. c. Future price changes are uncorrelated with past price changes. d. Past information is useful in predicting

> Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect: a. An abnormal price change at the announcement. b. An abnormal price increase before the annou

> The semistrong form of the efficient market hypothesis asserts that stock prices: a. Fully reflect all historical price information. b. Fully reflect all publicly available information. c. Fully reflect all relevant information, including insider informa

> Bart Campbell, CFA, is a portfolio manager who has recently met with a prospective client, Jane Black. After conducting a survey market line (SML) performance analysis using the Dow Jones Industrial Average as her market proxy, Black claims that her port

> In contrast to the capital asset pricing model, arbitrage pricing theory: a. Requires that markets be in equilibrium. b. Uses risk premiums based on micro variables. c. Specifies the number and identifies specific factors that determine expected returns.

> The feature of the general version of the arbitrage pricing theory (APT) that offers the greatest potential advantage over the simple CAPM is the: a. Identification of anticipated changes in production, inflation, and term structure of interest rates as

> An investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of: a. A dominance argument. b. The mean-variance efficient frontier. c. Arbitrage activity. d. The capital asset pricing model.

> The general arbitrage pricing theory (APT) differs from the single-factor capital asset pricing model (CAPM) because the APT: a. Places more emphasis on market risk. b. Minimizes the importance of diversification. c. Recognizes multiple unsystematic risk

> According to the theory of arbitrage: a. High-beta stocks are consistently overpriced. b. Low-beta stocks are consistently overpriced. c. Positive alpha investment opportunities will quickly disappear. d. Rational investors will pursue arbitrage opportun

> A zero-investment portfolio with a positive alpha could arise if: a. The expected return of the portfolio equals zero. b. The capital market line is tangent to the opportunity set. c. The Law of One Price remains unviolated. d. A risk-free arbitrage oppo

> Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. / In this situation you would conclude that portfolios X and Y: a. Are in equilibrium. b. Offer an arbitrage opportunity. c. Are both underpriced. d. Are both fairly

> Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant makes the following arguments: a. B

> Refer to the following table, which shows risk and return measures for two portfolios. When plotting portfolio R relative to the capital market line, portfolio R lies: a. On the CML. b. Below the CML. c. Above the CML. d. Insufficient data given.

> Refer to the following table, which shows risk and return measures for two portfolios. When plotting portfolio R in the preceding table relative to the SML, portfolio R lies: a. On the SML. b. Below the SML. c. Above the SML. d. Insufficient data given.

> Richard Roll, in an article on using the capital asset pricing model (CAPM) to evaluate portfolio performance, indicated that it may not be possible to evaluate portfolio management ability if there is an error in the benchmark used. a. In evaluating por

> According to CAPM, the expected rate of return of a portfolio with a beta of 1.0 and an alpha of 0 is: a. Between rM and rf . b. The risk-free rate, rf . c. β(rM – rf ). d. The expected return on the market, rM.

> Capital asset pricing theory asserts that portfolio returns are best explained by: a. Economic factors. b. Specific risk. c. Systematic risk. d. Diversification.

> What is the expected return of a zero-beta security? a. Market rate of return. b. Zero rate of return. c. Negative rate of return. d. Risk-free rate of return.

> Within the context of the capital asset pricing model (CAPM), assume: Expected return on the market = 15% Risk-free rate = 8% Expected rate of return on XYZ security = 17% Beta of XYZ security = 1.25 Which one of the following is correct? a. XYZ is overp

> The security market line depicts: a. A security’s expected return as a function of its systematic risk. b. The market portfolio as the optimal portfolio of risky securities. c. The relationship between a security’s return and the return on an index. d. T

> Beta and standard deviation differ as risk measures in that beta measures: a. Only unsystematic risk, while standard deviation measures total risk. b. Only systematic risk, while standard deviation measures total risk. c. Both systematic and unsystematic

> The concept of beta is most closely associated with: a. Correlation coefficients. b. Mean-variance analysis. c. Nonsystematic risk. d. Systematic risk.

> The correlation between the Charlottesville International Fund and the EAFE Market Index of international stocks is 1.0. The expected return on the EAFE Index is 11%, the expected return on Charlottesville International Fund is 9%, and the risk-free retu

> Assume the correlation coefficient between Baker Fund and the market index is .70. What percentage of Baker Fund’s total risk is specific (i.e., nonsystematic)?

> Stocks A, B, and C have the same expected return and standard deviation. The following table shows the correlations between the returns on these stocks. Given these correlations, the portfolio constructed from these stocks having the lowest risk is a por