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Q11. Michael Carr and Karen Bocock are analysts for the Portfolio Optimization Group. Carr and Bocock are discussing the firm’s mean variance optimization model for equity holdings and the pros and cons of using market model estimates or historical estimates as inputs to the model.
- Carr states, “One of the main concerns I have about the model is that whether we are using market model estimates or historical estimates, we are implicitly assuming that the historical relationship between the stock and the market is indicative of the future.”
- Bocock replies, “One of the main advantages to using the market model estimates is the fact that there are fewer parameters to estimate.”
With regard to their statements about methods for computing the inputs for a mean-optimization model:
A) both are incorrect.
B) both are correct.
C) only one is correct.
Q12. The single-factor market model assumes there are how many sources of risk in asset returns?
A) One.
B) Three.
C) Two.
Q13. Bill Tanner is a new associate at Global Western Investments. Tanner approaches his supervisor, Eric Simms, with some questions about risk. Specifically, Tanner lacks a complete understanding of many portfolio concepts, including the following:
- How the presence of a risk-free asset will affect the efficient frontier.
- The difference between total risk, systematic risk, and unsystematic risk.
- Market and Macroeconomic models.
Tanner is concerned with providing the best investment advice possible for his clients. He seeks advice from some of his former Midwestern college friends who now happen to be CFA charterholders. One of his old roommates suggests that he look into using the market model or a multifactor model based on the arbitrage pricing theory (APT).
Tanner researches alternative pricing models and starts to become confused as all the equations look similar. He writes down the following notes from memory:
- The intercept for the market model is derived from the APT.
- The intercept for the APT is the risk free rate.
- The intercept for a macroeconomic factor model is the expected return on the stock when there are no surprises to the factors.
Simms makes the predictions for Tanner shown in Exhibit 1.
Exhibit 1: Simm’s Predictions for Tanner
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Beta for Stock B |
1.10 |
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Beta for Stock C |
1.50 |
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Correlation between Stock A and the S& 500 |
0.50 |
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Standard deviation for Stock A |
28% |
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Standard deviation for the S& 500 |
20% |
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1-year Treasure bill rate |
5% |
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Expected return on the S& 500 |
12% |
Tanner uses the market model predictions (and the S& 500 as a proxy for the market portfolio) to calculate the covariance of Stock B and C at 0.33. Using the market model, he also determines that the systematic component of the variance for Stock B is equal to 0.048.
Next, he heads out to meet a friend, Del Torres, for lunch. Torres excitedly tells Tanner about his latest work with tracking and factor portfolios. Torres says he has developed a tracking portfolio to aid in speculating on oil prices and is working on a factor portfolio with a specific set of factor sensitivities to the Russell 2000.
Which of the following is the most appropriate response to Tanner’s question about the presence of a risk-free asset and the Markowitz efficient frontier? The presence of a risk-free asset changes the characteristics of the Markowitz efficient frontier by:
A) reducing the total risk and the systematic risk of the market portfolio.
B) allowing risk averse investors to include in their portfolios an asset that is negatively correlated with stocks, thereby reducing the risk related to investing in equities.
C) converting the Markowitz efficient frontier from a curve into a linear risk/return relationship.
Q14. Which of the following statements best describes the concept of systematic risk? Systematic risk:
A) is approximately equal to total risk divided by unsystematic risk.
B) remains even for a well-diversified portfolio.
C) as measured by the standard deviation is the only risk rewarded by the market.
Q15. Are Tanner’s notes on the intercepts for the pricing models correct?
A) No, because the intercept for the APT is the stock’s alpha.
B) No, because the intercept for the market model is the risk-free rate.
C) No, because the intercept for the market model is the return on the stock when the return on the market is zero.
Q16. The beta of Stock A is closest to:
A) 0.36.
B) 0.50.
C) 0.70.
Q17. According to the predictions of the market model, did Tanner correctly calculate the covariance of Stock B and C and Stock B’s systematic component of variance?
Covariance Systematic component
A) Yes Yes
B) Yes No
C) No Yes
Q18. Did Torres correctly describe tracking and factor portfolios?
Tracking Factor
A) No No
B) Yes No
C) No Yes | 
发表于 2009-4-2 12:57
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