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36 Cards in this Set
- Front
- Back
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The average standard deviation of a portfolio or randomly selected stocks becomes nearly horizontal when approximately how many stocks are included in the portfolio?
-9 -30 -80 -500 -none of the above |
30
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In a CAPM based world, we diversify away systematic risk.
T/F |
false
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How many stocks should be included in your portfolio if you wish to eliminate 99% of average diversifiable risk?
-10 -99 -100 -1000 |
100
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If we combine a risky asset with a risk-less asset, all of the possible combinations of these two assets would show a straight line on a graph of risk versus return.
T/F? |
true
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Which of the following is not an assumption of the CAPM equation?
-all investors hold efficient portfolios -all investors have the same holding period -have homogeneous expectations -no transaction costs -all are assumptions of the CAPM |
all are assumptions of the CAPM
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One important result of the CAPM is that the results suggest a passive investment strategy should work fine.
T/F? |
true
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If we plot a stock in a return/beta space and it falls on the SML, we do not expect abnormal profits to be made.
T/F? |
true
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A passive investment strategy means we can select any stocks we want and put them in a portfolio and have an optimal portfolio.
T/F? |
false
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The T-bill is commonly considered the risk-free asset to use in the CAPM.
T/F? |
true
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Portfolios that contain a large number of stocks generally have more systematic risk than portfolios with fewer stocks.
T/F? |
false
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The covariance of real assets with short-term T-bills is small.
T/F? |
false
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If the borrowing rate is greater than the lending rate, the CML will change slope at portfolio M or possible farther to the right of M on the efficient frontier.
T/F? |
true
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A beta of 1.70 is considered very risky.
T/F? |
true
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Buying an index fund and not selling it unless you simply need the money is an active investing strategy.
T/F? |
false
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Using the CAPM, the expected return on stock XYZ when the risk-free rate is 6%, the expected return on the market is 12%, and Beta of 1.5 is:
-23% -10.5% -15.5% -18% -none of the above |
none of the above
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A key to good portfolio management, beyond basic diversification, would be to find positive alpha stocks.
T/F? |
true
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Under CAPM, what is the expected return of a security with a zero beta?
-market rate of return -zero -a negative rate of return -the risk-free rate of return |
the risk-free rate of return
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Using the CAPM, if the risk-free rate increases, so does the expected returns on everything else.
T/F? |
true
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When we combine the risk-free asset with the efficient frontier, we get a new set of portfolios to invest in that are superior to all other portfolios on the efficient frontier except for portfolio M.
T/F? |
true
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When an asset is not in portfolio M, what should happen?
-it's price should rise until it is in M -It's price should fall until it is in M -It's beta should increase -It's unsystematic risk should increase -None of the above |
It's price should fall until it is in M
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The capital market line CML is plotted on a graph of return and beta.
T/F? |
false
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This question needs you to think before you answer. If you are truly a superior stock picker, you would want the correlations of your assets to be:
-highly negatively correlated -have no correlation at all -highly positively correlated -it would be irrelevant -none of the above |
highly positively correlated
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A major problem with the CAPM is that beta is stationary.
T/F? |
false
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A major problem with the CAPM is that betas vary depending on the time periods used to calculate them.
T/F? |
true
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When we calculate betas, we get nearly the same beta no matter which index we use.
T/F? |
false
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The Fama-French three-factor model uses a variable related to the difference in returns of small cap and large cap stocks.
T/F? |
true
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The four-factor model uses a variable related to the difference in returns of small cap and large cap stocks.
T/F? |
true
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Both the Fama-French three-factor model and the four-factor model use a momentum variable, which is a variable related to past price behavior of the best and worst performing stocks.
T/F? |
false
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To compare portfolio managers, you could use:
-Sharpe index -Treynor index -alpha -all of the above -none of the above |
all of the above
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The US government passed the original legislation brought to them by the Treasury Secretary Paulson.
T/F? |
false
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Which of the following is not likely a cause of the current financial crisis?
-lax lending standards on housing -holding rates too low for too long by Fed -mark-to-market accounting rules at banks -defaults on loans -restriction of short sales in the stock market |
restriction of short sales in the stock market
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Which of the following has the government not "bailed out":
-Wells Fargo -Lehman Brothers -Freddie Mac/Fannie Mae -AIG -Morgan Stanley |
Lehman Brothers
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Where did they get the figure of $700 billion for the bailout plan?
-Unknown -It was the amount of mortgages held at the Fed -It was the amount of mortgages held at Freddie Mac/Fannie Mae -It was the amount of commercial paper held at the Fed -It was the amount of commercial paper held in money market mutual funds |
Unknown
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Why are money market funds involved in this mess?
-Unknown -commercial lending practices at banks have ceased -mortgages held as collateral for short term loans at Freddie Mac/Fannie Mae were frozen -commercial paper market froze due to Lehman going bankrupt -money market mutual funds have been unaffected |
commercial paper market froze due to Lehman going bankrupt
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Mark-to-market accounting rules has forced what to happen?
-foreclosures on homeowners -commercial lending at most banks to stop -banks to get more capital to meet bank capital requirements -commercial paper market to freeze due to Lehman going bankrupt -money market mutual funds to issue commerical paper |
banks to get more capital to meet bank capital requirements
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Based upon all of the reactions by the stock market to the legislative process of the bailout, is it credible to believe that the market truly, ultimately felt we needed the bailout plan that was passed?
Yes or No? |
no
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