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Which of the following factors would not be expected to affect the nominal interest rate?The coupon rate on previously issued government bondsIn words, the real rate of interest is approximately equal tothe nominal rate minus the inflation rate.If the Federal Reserve lowers the Fed Funds rate, ceteris paribus, the equilibrium levels of funds lent will __________, and the equilibrium level of real interest rates will ___________.increase; decreaseBracket Creep" happens whentax liabilities are based on nominal income and there is a positive inflation rate.The holding-period return (HPR) for a stock is equal tothe dividend yield plus the capital gains yield.Which of the following measures of risk best highlights the potential loss from extreme negative returns?Value at risk (VaR)When comparing investments with different horizons, the ____________ provides the more accurate comparison.effective annual rateAnnual percentage rates (APRs) are computed usingsimple interest.Skewness is a measure ofthe symmetry of the distributionKurtosis is a measure ofhow fat the tails of a distribution are.When a distribution is positively skewed,standard deviation overestimates risk.When a distribution is negatively skewed,standard deviation underestimates risk.If a distribution has "fat tails," it exhibitskurtosis_______ is a risk measure that indicates vulnerability to extreme negative returns.Value at risk and lower partial standard deviation_______ is a risk measure that indicates vulnerability to extreme negative returns.All. Value at risk
Lower partial standard deviation
Expected shortfallThe most common measure of loss associated with extremely negative returns isvalue at risk.Practitioners often use a ________% VaR, meaning that ________% of returns will exceed the VaR, and ________% will be worse.1; 99; 1... Practitioners often use a 1% VaR, meaning that 99% of returns will exceed the VaR, and 1% will be worse.When assessing tail risk by looking at the 5% worst-case scenario, the VaR is themost optimistic, as it takes the highest return (smallest loss) of all the cases.When assessing tail risk by looking at the 5% worst-case scenario, the most realistic view of downside exposure would beexpected shortfall and conditional tail expectation.A portfolio generates a Sharpe ratio of 0.83. Which of the following benchmark Sharpe ration would be considered show the portfolio over performed?All. 0.81
0.79
0.65
0.62The best measure of a portfolio's risk adjusted performance is the _________.Sharpe measureA(n) ____________________ can be used to show the possible outcomes from a normal distribution function.event treeIn a two tailed normal distribution function, what is the confidence level created at 2 standard deviations?95.44% ... This is a general rule of statistics.The exact indifference curves of different investorsalthough not known with perfect certainty, do allow the advisor to create more suitable portfolios for the client.The utility score an investor assigns to a particular portfolio, other things equal,will increase as the rate of return increases.The presence of risk means thatmore than one outcome is possible.Based on their relative degrees of risk tolerance,investors will hold varying amounts of the risky asset and varying amounts of the risk-free asset in their portfolios.Asset allocation may involvethe decision as to the allocation between a risk-free asset and a risky asset and the decision as to the allocation among different risky assets.In the mean-standard deviation graph, an indifference curve has a ________ slope.positiveThe riskiness of individual assetsshould be considered in the context of the effect on overall portfolio volatility and should be combined with the riskiness of other individual assets in the proportions these assets constitute the entire portfolio.Treasury bills are commonly viewed as risk-free assets becausetheir short-term nature makes their values insensitive to interest rate fluctuations, and the inflation uncertainty over their time to maturity is negligible.A reward-to-volatility ratio is useful inunderstanding how returns increase relative to risk increases.When an investment advisor attempts to determine an investor's risk tolerance, which factor would they be least likely to assess?The level of return the investor prefersIn the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is calledthe capital allocation line.A fair gamewill not be undertaken by a risk-averse investor and is a risky investment with a zero risk premium.For capital investments where the forecasted return is above the investor's required return and below the capital market line, the investment is likely ________________.undervaluedSteve is more risk-averse than Edie. On a graph that shows Steve and Edie's indifference curves, which of the following is true? Assume that the graph shows expected return on the vertical axis and standard deviation on the horizontal axis.I) Steve and Edie's indifference curves might intersect.
III) Steve's indifference curves will have steeper slopes than Edie's.Which of the following statements is(are) true?I) Risk-averse investors reject investments that are fair games.
II) Risk-neutral investors judge risky investments only by the expected returns.Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,for the same return, David tolerates higher risk than Elias.The reduction in standard deviation from a well diversified portfolio of 100 stocks will ______________ than that of a 200 stock portfolio.not be statistically significantly differentThe expected return of a two asset portfolio with a correlation coefficient of .35 will be _______________ the weighted average expected return of the portfolio.equal to. According to portfolio theory, the existence of a correlation coefficient has no impact on the expected return of a portfolio.Given the capital allocation line, an investor's optimal portfolio is the portfolio thatmaximizes her expected utility.Which of the following statements regarding the capital allocation line (CAL) is false?The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset.The capital allocation line can be described as theinvestment opportunity set formed with a risky asset and a risk-free asset.Systematic risk is also referred to asmarket risk or nondiversifiable risk.The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called theportfolio opportunity set.The risk that can be diversified away isfirm-specific risk.Diversifiable risk is also referred to asunique risk or firm-specific risk.Which of the following is not a source of systematic risk?Personnel changesUnique risk is also referred to asdiversifiable risk or firm-specific risk.Market risk is also referred to assystematic risk or nondiversifiable riskNondiversifiable risk is also referred to assystematic risk or market riskThe expected return of a portfolio of risky securitiesis a weighted average of the securities' returns.Firm-specific risk is also referred to asdiversifiable risk or unique risk.Nonsystematic risk is also referred to asdiversifiable risk or unique risk.The risk that cannot be diversified away ismarket riskWhich of the following statement(s) is(are) true regarding the variance of a portfolio of two risky securities?III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,the portfolio standard deviation will be less than the weighted average of the individual security standard deviations.The standard deviation of a portfolio of risky securities isthe square root of the weighted sum of the securities' variances and covariances.The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is−1.0. ... The global minimum variance portfolio will have a standard deviation of zero whenever the two securities are perfectly negatively correlated.Other things equal, diversification is most effective whensecurities' returns are negatively correlated.Which of the following statement(s) is(are) true regarding the selection of a portfolio from those that lie on the capital allocation line?II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.
III) Investors choose the portfolio that maximizes their expected utility.The variance of a portfolio of risky securitiesis the weighted sum of the securities' variances and covariances.The risk that can be diversified away in a portfolio is referred to as ___________.I) diversifiable risk
II) unique risk
III) firm-specific riskThe measure of risk in a Markowitz efficient frontier isstandard deviation of returns.Which of the following statement(s) is(are) false regarding the selection of a portfolio from those that lie on the capital allocation line?I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.The unsystematic risk of a specific securityresults from factors unique to the firm.As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation?It decreases at a decreasing rate.An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line mustborrow some money at the risk-free rate, invest in the optimal risky portfolio, and invest only in risky securitiesA single-index model uses __________ as a proxy for the systematic risk factor.a market index, such as the S&P 500The index model was first suggested bySharpe.The security characteristic line (SCL)all. plots the excess return on a security as a function of the excess return on the market.
allows one to estimate the beta of the security.
allows one to estimate the alpha of the security.The single-index modelgreatly reduces the number of required calculations relative to those required by the Markowitz model and enhances the understanding of systematic versus nonsystematic risk.As diversification increases, the standard deviation of a portfolio approachesthe standard deviation of the market portfolio.As diversification increases, the firm-specific risk of a portfolio approaches0.As diversification increases, the unsystematic risk of a portfolio approaches0.Security returnsare based on both macro events and firm-specific events and are usually positively correlated with each other.Beta books typically rely on the __________ most recent monthly observations to calculate regression parameters.60. Most published betas and other regression parameters are based on five years of monthly return data.As diversification increases, the total variance of a portfolio approachesthe variance of the market portfolio.According to the index model, covariances among security pairs aredue to the influence of a single common factor represented by the market index return and usually positive.As diversification increases, the unique risk of a portfolio approaches0.Suppose you are doing a portfolio analysis that includes all of the stocks on the NYSE. Using a single-index model rather than the Markowitz modelreduces the number of inputs needed from more than 5 million to about 10,000.Rosenberg and Guy found that ___________ helped to predict firms' betas.ALL.Rosenberg and Guy found that debt/asset ratios, market capitalization, and variance of earnings were determinants of firms' betas.Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.100; 100 The expected returns of each of the 100 securities must be calculated. In addition, the 100 variances around these returns must be calculated.The expected impact of unanticipated macroeconomic events on a security's return during the period iszero. The expected value of unanticipated macroeconomic events is zero, because by definition it must average to zero or it would be incorporated into the expected return.If the index model is valid, _________ would be helpful in determining the covariance between assets GM and GE.all. βGM
βGE
σMRosenberg and Guy found that __________ helped to predict a firm's beta.All. the firm's financial characteristics
the firm's industry group
firm size
the firm's financial characteristics and the firm's industry groupIf a firm's beta was calculated as 1.35 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta ofbetween 1.0 and 1.35.. Betas, on average, equal one; thus, betas over time regress toward the mean, or 1. Therefore, if historic betas are more than 1, adjusted betas are between 1 and the calculated beta.Assume that stock market returns do follow a single-index structure. An investment fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.125;125 For a single-index model, n(125), expected returns and n(125) sensitivity coefficients to the macroeconomic factor must be estimated.Assume that stock market returns do follow a single-index structure. An investment fund analyzes 200 stocks in order to construct a mean-variance efficient portfolio constrained by 200 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.200;200 For a single-index model, n(200), expected returns and n(200) sensitivity coefficients to the macroeconomic factor must be estimated.If a firm's beta was calculated as 1.3 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta ofbetween 1.0 and 1.3 Betas, on average, equal one; thus, betas over time regress toward the mean, or 1. Therefore, if historic betas are greater than 1, adjusted betas are between 1 and the calculated beta.Assume that stock market returns do not resemble a single-index structure. An investment fund analyzes 125 stocks in order to construct a mean-variance efficient portfolio constrained by 125 investments. They will need to calculate _____________ expected returns and ___________ variances of returns.125;125 The expected returns of each of the 125 securities must be calculated. In addition, the 125 variances around these returns must be calculated.If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP.all. βHPQ
βKMP
σMAssume 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.40;40 ... the expected returns of each of the 40 securities must be calculated. In addition, the 40 variances around these returns must be calculated.The intercept in the regression equations calculated by beta books is equal toα + rf(1 − β).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 ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.60;60... For a single-index model, n(60), expected returns and n(60) sensitivity coefficients to the macroeconomic factor must be estimated.If a firm's beta was calculated as 0.8 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta ofbetween 0.8 and 1.0.... Betas, on average, equal one; thus, betas over time regress toward the mean, or 1. Therefore, if historic betas are less than 1, adjusted betas are between 1 and the calculated beta.In their study about predicting beta coefficients, which of the following did Rosenberg and Guy find to be factors that influence beta?ALL. All of the factors mentioned, as well as variance of earnings, firm size, and debt-to-asset ratio, were found to help predict betas.The capital asset pricing model assumesall investors are fully informed, are rational, and are mean-variance optimizers.

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