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Multiple Choice Quiz
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1
The Security Risk Evaluation book published by Merrill Lynch relies on the __________ most recent monthly observations to calculate regression parameters.
A)12
B)36
C)60
D)120
E)none of the above
2
Suppose the following equation best describes the evolution of β over time:
βt = 0.25 + 0.75βt-1
If a stock had a β of 0.6 last year, you would forecast the β to be _______ in the coming year.
A)0.45
B)0.60
C)0.70
D)0.75
E)none of the above
3
According to the index model, covariances among security pairs are
A)due to the influence of a single common factor represented by the market index return.
B)related to industry-specific events.
C)usually positive.
D)extremely difficult to calculate.
E)A and C
4
In a factor model, the return on a stock in a particular period will be related to
A)macroeconomic events.
B)firm-specific events.
C)the error term.
D)both a and b.
E)both a and c.
5
Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 16%. The risk-free rate of return is 5%. 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
A)1.0.
B)0.75.
C)2.0 .
D)1.5 .
E)1.50 .
6
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 0.20 and σ M was 0.16, the β of the portfolio would be approximately
A)0.9.
B)1.25.
C)1.85.
D)0.56.
E)none of the above
7
Security returns
A)are usually positively correlated with each other.
B)are based on both macro events and firm-specific events.
C)are based on firm-specific events only.
D)A and B.
E)A and C.
8
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.
A)45
B)100
C)4,950
D)10,000
E)none of the above
9
The beta of GM stock has been estimated as 1.2 by Merrill Lynch using regression analysis on a sample of historical returns. The Merrill Lynch adjusted beta of GM stock would be
A)1.20.
B)1.32.
C)1.13.
D)1.0.
E)none of the above
10
The index model for stock A has been estimated with the following result:
RA = 0.01 + 0.9RM + eA
If σM = 0.25 and R2A = 0.25, the standard deviation of return of stock A is _________.
A)0.2025
B)0.2500
C)0.4500
D)0.8100
E)none of the above





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