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Exam 8: Index Models

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Question 31

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The single-index model

A) greatly reduces the number of required calculations,relative to those required by the Markowitz model.
B) enhances the understanding of systematic versus nonsystematic risk.
C) greatly increases the number of required calculations,relative to those required by the Markowitz model.
D) A and B.
E) B and C.

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Question 32

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An analyst estimates the index model for a stock using regression analysis involving total returns.The estimated the intercept in the regression equation is 6% and the β is 0.5.The risk-free rate of return is 12%.The true β of the stock is ________.

A) 0%
B) 3%
C) 6%
D) 9%
E) none of the above

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Question 33

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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.

Consider the single-index model.The alpha of a stock is 0%.The return on the market index is 10%.The risk-free rate of return is 3%.The stock earns a return that exceeds the risk-free rate by 11% and there are no firm-specific events affecting the stock performance.The β of the stock is _______.

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 ____________ covariances.

In a factor model,the return on a stock in a particular period will be related to _________.

In their study about predicting beta coefficients,which of the following did Rosenberg and Guy find to be factors that influence beta? I.Industry group II.Variance of cash flow III.Dividend yield IV.Growth in earnings per share

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the β of your portfolio was 0.18 and β_Mwas 0.22,the β of the portfolio would be approximately ________.

As diversification increases,the unique risk of a portfolio approaches ____________.

The Security Characteristic Line (SCL)

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 132 stocks in order to construct a mean-variance efficient portfolio constrained by 132 investments.They will need to calculate ____________ covariances.

Suppose the following equation best describes the evolution of β over time: Β_t= 0.25 + 0.75β_t-1 If a stock had a β of 0.6 last year,you would forecast the β to be _______ in the coming year.

One "cost" of the single-index model is that it

If a firm's beta was calculated as 0.8 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of

Suppose you held a well-diversified portfolio with a very large number of securities,and that the single index model holds.If the β of your portfolio was 0.20 and β_Mwas 0.16,the β of the portfolio would be approximately ________.

The intercept in the regression equations calculated by beta books is equal to

If the index model is valid,_________ would be helpful in determining the covariance between assets K and L.

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.

If a firm's beta was calculated as 0.6 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of

As diversification increases,the total variance of a portfolio approaches ____________.