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Exam 8: Index Models

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Question 31

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Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of

A) the α of the asset.
B) the β of the asset.
C) the σ of the asset.
D) the δ of the asset.

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Question 32

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Suppose you held a well-diversified portfolio with a very large number of securities, and that the single index model holds. If the σ of your portfolio was 0.25 and σ_M was 0.21, the β of the portfolio would be approximately ________.

A) 0.64
B) 1.19
C) 1.25
D) 1.56

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Question 33

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Security returns

As diversification increases, the total variance of a portfolio approaches

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

The beta of a stock has been estimated as 0.85 using regression analysis on a sample of historical returns. A commonly-used adjustment technique would provide an adjusted beta of

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 175 stocks in order to construct a mean-variance efficient portfolio constrained by 175 investments. They will need to calculate ________ estimates of expected returns and ________ estimates of sensitivity coefficients to the macroeconomic factor.

Suppose the following equation best describes the evolution of β over time: β_t = 0.31 + 0.82β_{t - 1}. If a stock had a β of 0.88 last year, you would forecast the β to be _______ in the coming year.

Suppose you forecast that the market index will earn a return of 12% in the coming year. Treasury bills are yielding 4%. The unadjusted β of Mobil stock is 1.50. A reasonable forecast of the return on Mobil stock for the coming year is _________ if you use a common method to derive adjusted betas.

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

Assume that stock market returns do follow a single-index structure. An investment fund analyzes 500 stocks in order to construct a mean-variance efficient portfolio constrained by 500 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimates for the variance of the macroeconomic factor.

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 you are doing a portfolio analysis that includes all of the stocks on the NYSE. Using a single-index model rather than the Markowitz model

If a firm's beta was calculated as 1.6 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

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 ____________ covariances.

The index model has been estimated for stocks A and B with the following results: R_A = 0.01 + 0.5R_M + e_A. R_B = 0.02 + 1.3R_M + e_B. Σ_M = 0.25; σ(e_A) = 0.20; σ(e_B) = 0.10. The covariance between the returns on stocks A and B is

If a firm's beta was calculated as 1.3 in a regression equation, a commonly-used adjustment technique would provide an adjusted beta of

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

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 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.