1．Which of the following statements about using the capital asset pricing model (CAPM) to value stocks is least accurate? A) If the CAPM expected return is too low, then the asset’s price is too high. B) The model reflects how market forces restore investment prices to equilibrium levels. C) The CAPM reflects unsystematic risk using standard deviation. D) The model measures how much extra compensation investors require to hold highly volatile stocks. The correct answer was C) The capital asset pricing model assumes all investors hold the market portfolio, and as such unsystematic risk, or risk not related to the market, does not matter. Thus, the CAPM does not reflect unsystematic risk and does not rely on standard deviation as the measure of risk but instead uses beta as the measure of risk. The remaining statements are accurate. 2．Glimmer Glass has a correlation of 0.67 with the market portfolio, a variance of 23 percent, and an expected return of 14 percent. The market portfolio has an expected return of 11 percent and a variance of 13 percent. Glimmer stock is approximately: A) 19% more volatile than the average stock. B) 4% more volatile than the average stock. C) 50% less volatile than the average stock. D) 11% less volatile than the average stock. The correct answer was D) Beta is equal to the covariance divided by the market portfolio variance, or the product of the correlation and the ratio of the stock standard deviation to the market standard deviation. To derive the standard deviation, we take the square root of the variance. So beta = 0.67 x 0.479583 / 0.360555 = 0.891183. Glimmer shares are about 11% less volatile than the average stock. 3．Rachel Stephens, CFA, examines data for two computer stocks, AAA and BBB, and derives the following results: §
Standard deviation for AAA is 0.50 §
Standard deviation for BBB is 0.50 §
Standard deviation for the S& 500 is 0.20 §
Correlation between AAA and the S&500 is 0.60 §
Beta for BBB is 1.00 Stephens is asked to identify the stock that has the highest systematic risk and the stock that has the highest unsystematic risk. Stephens should draw the following conclusions:
| Highest Systematic Risk | Highest Unsystematic Risk |
A) Stock AAA Stock AAA B) Stock AAA Stock BBB C) Stock BBB Stock BBB D) Stock BBB Stock AAA The correct answer was B) First, compare the betas for the two stocks. The beta for AAA can be derived with the formula:
Therefore, AAA has larger beta and greater systematic risk than stock BBB which has a beta equal to 1. To assess the unsystematic risk, note that total risk is measured by the standard deviation. Note that the standard deviations for AAA and BBB are identical. Therefore, AAA and BBB have identical total risk. Moreover, note that: total risk = systematic risk + unsystematic risk. We have already concluded that both stocks have identical total risk and that AAA has greater systematic risk. Therefore, BBB must have higher unsystematic risk. 4．The security market line (SML) is a graphical representation of the relationship between return and: A) systematic risk. B) unsystematic risk. C) total risk. D) variance. The correct answer was A) The SML graphically represents the relationship between return and systematic risk as measured by beta. 5．How are the capital market line (CML) and the security market line (SML) similar? A) The CML and SML use the standard deviation as a risk measure. B) Individual securities that are priced in equilibrium will plot on the SML and CML. C) The CML and SML can be used to find the expected return of a portfolio. D) The market portfolio will plot directly on the CML and the SML. The correct answer was D) All portfolios will plot on the SML. The only portfolio that will plot on the CML is the market portfolio, because it is perfectly diversified. 6．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 percent? A) More than 15%. B) Less than 15%. C) Cannot be determined without the risk-free rate. D) 15%. The correct answer was D) The expected return of a stock with a beta of 1.0 must, on average, be the same as the expected return of the market which also has a beta of 1.0. | 
发表于 2008-4-14 17:34
|