Question: A zero-investment portfolio with a positive

> 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.

> 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

> 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

> Identify and briefly discuss three criticisms of beta as used in the capital asset pricing model.

> Assume that a risk-averse investor owning stock in Miller Corporation decides to add the stock of either Mac or Green Corporation to her portfolio. All three stocks offer the same expected return and total variability. The correlation of return between M

> Portfolio theory as described by Markowitz is most concerned with: a. The elimination of systematic risk. b. The effect of diversification on portfolio risk. c. The identification of unsystematic risk. d. Active portfolio management to enhance return.

> The measure of risk for a security held in a diversified portfolio is: a. Specific risk. b. Standard deviation of returns. c. Reinvestment risk. d. Covariance.

> Which statement about portfolio diversification is correct? a. Efficient diversification can reduce or eliminate systematic risk. b. Diversification reduces the portfolio’s expected return because it reduces a portfolio’s total risk. c. As more securitie

> Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

> What is the reward-to-volatility (Sharpe) ratio for the equity fund in CFA Problem 8?

> The change from a straight to a kinked capital allocation line is a result of the: a. Reward-to-volatility (Sharpe) ratio increasing. b. Borrowing rate exceeding the lending rate. c. Investor’s risk tolerance decreasing. d. Increase in the portfolio prop

> Given $100,000 to invest, what is the expected risk premium in dollars of investing in equities versus risk-free T-bills on the basis of the following table?

> Which point designates the optimal portfolio of risky assets?

> Which indifference curve represents the greatest level of utility that can be achieved by the investor?

> Claire Pierce comments on her life circumstances and investment outlook: I must support my parents who live overseas on Pogo Island. The Pogo Island economy has grown rapidly over the past 2 years with minimal inflation, and consensus forecasts call for

> The variable (A) in the utility formula represents the: a. Investor’s return requirement. b. Investor’s aversion to risk. c. Certainty equivalent rate of the portfolio. d. Preference for one unit of return per four uni

> On the basis of the utility formula above, which investment would you select if you were risk neutral?

> On the basis of the utility formula above, which investment would you select if you were risk averse with A = 4?

> Assume that of your $10,000 portfolio, you invest $9,000 in Stock X and $1,000 in Stock Y. What is the expected return on your portfolio?

> What are the standard deviations of returns on Stocks X and Y?

> What are the expected rates of return for Stocks X and Y?

> Based on the scenarios below, what is the expected return for a portfolio with the following return profile? Use the following scenario analysis for Stocks X and Y to answer CFA Problems 3 through 5 (round to the nearest percent).

> Given $100,000 to invest, what is the expected risk premium in dollars of investing in equities versus risk-free T-bills (U.S. Treasury bills) based on the following table?

> An analyst estimates that a stock has the following probabilities of return depending on the state of the economy: What is the expected return of the stock?

> Although we stated that real assets constitute the true productive capacity of an economy, it is hard to conceive of a modern economy without well-developed financial markets and security types. How would the productive capacity of the U.S. economy be af

> During an interview with her investment adviser, a retired investor made the following two statements: a. “I have been very pleased with the returns I’ve earned on Petrie stock over the past two years and I am certain that it will be a superior performer

> What is the relationship between securitization and the role of financial intermediaries in the economy? What happens to financial intermediaries as securitization progresses?

> Why would you expect securitization to take place only in highly developed capital markets?

> Financial engineering has been disparaged as nothing more than paper shuffling. Critics argue that resources used for rearranging wealth (i.e., bundling and unbundling financial assets) might be better spent on creating wealth (i.e., creating real assets

> Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 90 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20% per year. Assume

> What are the advantages and disadvantages of exchange-traded funds versus mutual funds?

> Balanced funds, life-cycle funds, and asset allocation funds all invest in both the stock and bond markets. What are the differences among these types of funds?

> Open-end equity mutual funds find it necessary to keep a small fraction of total investments, in very liquid money market assets. Closed-end funds do not have to maintain such a position in “cash-equivalent” securities. What difference between open-end a

> Suppose you observe the investment performance of 350 portfolio managers for 5 years and rank them by investment returns during each year. After 5 years, you find that 11 of the funds have investment returns that place the fund in the top half of the sam

> You expect a tax-free municipal bond portfolio to provide a rate of return of 4%. Management fees of the fund are .6%. What fraction of portfolio income is given up to fees? If the management fees for an equity fund also are .6%, but you expect a portfol

> Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to .4% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced by tra

> Louise and Christopher Maclin live in the U.K. and currently rent an apartment in London’s metropolitan area. During an initial discussion of the Maclins’ financial plans, Christopher Maclin makes the following statements to the Maclins’ financial advise

> You are considering an investment in a mutual fund with a 4% load and an expense ratio of .5%. You can invest instead in a bank CD paying 6% interest. a. If you plan to invest for 2 years, what annual rate of return must the fund portfolio earn for you t

> The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth ye