Chapter 13 Test Bank.docx
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Chapter 13 Test Bank.docx
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Chapter13TestBank
Chapter13TestBank-Static
Student:
___________________________________________________________________________
MultipleChoiceQuestions
1.Theexpectedreturn/betarelationshipisused
A.byregulatorycommissionsindeterminingthecostsofcapitalforregulatedfirms.
B.incourtrulingstodeterminediscountratestoevaluateclaimsoflostfutureincomes.
C.toadviseclientsastothecompositionoftheirportfolios.
D.Alloftheoptionsarecorrect.
E.Noneoftheoptionsarecorrect.
2.Theexpectedreturn/betarelationshipisnotused
A.byregulatorycommissionsindeterminingthecostsofcapitalforregulatedfirms.
B.incourtrulingstodeterminediscountratestoevaluateclaimsoflostfutureincomes.
C.toadviseclientsastothecompositionoftheirportfolios.
D.byregulatorycommissionsindeterminingthecostsofcapitalforregulatedfirmsandtoadviseclientsastothecompositionoftheirportfolios.
E.Noneoftheoptionsarecorrect.
3.__________arguedinhisfamouscritiquethattestsoftheexpectedreturn/betarelationshipareinvalidandthatitisdoubtfulthattheCAPMcaneverbetested.
A.Kim
B.Markowitz
C.Modigliani
D.Roll
E.Noneoftheoptionsarecorrect.
4.FamaandMacBeth(1973)foundthattherelationshipbetweenaverageexcessreturnsandbetaswas
A.linear.
B.nonexistent.
C.asexpected,basedonearlierstudies.
D.linearandasexpected,basedonearlierstudies.
E.FamaandMacBethdidnotexaminetherelationshipbetweenexcessreturnsandbeta.
5.IntheempiricalstudyofamultifactormodelbyChen,Roll,andRoss,afactor(thefactors)thatappearedtohavesignificantexplanatorypowerinexplainingsecurityreturnswas(were)
A.thechangeintheexpectedrateofinflation.
B.theriskpremiumoncorporatebonds.
C.theunexpectedchangeintherateofinflation.
D.industrialproduction.
E.theriskpremiumoncorporatebonds,theunexpectedchangeintherateofinflation,andindustrialproduction.
6.IntheempiricalstudyofamultifactormodelbyChen,Roll,andRoss,afactorthatdidnotappeartohavesignificantexplanatorypowerinexplainingsecurityreturnswas
A.thechangeintheexpectedrateofinflation.
B.theriskpremiumoncorporatebonds.
C.theunexpectedchangeintherateofinflation.
D.industrialproduction.
7.IntheresultsoftheearliestestimationsofthesecuritymarketlinebyLintner(1965)andbyMillerandScholes(1972),itwasfoundthattheaveragedifferencebetweenastock'sreturnandtheriskfreeratewas________toitsnonsystematicrisk.
A.positivelyrelated
B.negativelyrelated
C.unrelated
D.relatedinanonlinearfashion
E.Noneoftheoptionsarecorrect.
8.IntheresultsoftheearliestestimationsofthesecuritymarketlinebyMillerandScholes(1972),itwasfoundthattheaveragedifferencebetweenastock'sreturnandtheriskfreeratewas________toitsbeta.
A.positivelyrelated
B.negativelyrelated
C.unrelated
D.inverselyrelated
E.notproportional
9.IntheresultsoftheearliestestimationsofthesecuritymarketlinebyMillerandScholes(1972),itwasfoundthattheaveragedifferencebetweenastock'sreturnandtheriskfreeratewas________toitsnonsystematicriskand________toitsbeta.
A.positivelyrelated;negativelyrelated
B.negativelyrelated;positivelyrelated
C.positivelyrelated;positivelyrelated
D.negativelyrelated;negativelyrelated
E.notrelated;notrelated
10.Inthe1972empiricalstudybyBlack,Jensen,andScholes,theyfoundthattheestimatedslopeofthesecuritymarketlinewas_______whattheCAPMwouldpredict.
A.higherthan
B.equalto
C.lessthan
D.twiceasmuchas
E.Moreinformationisrequiredtoanswerthisquestion.
11.Inthe1972empiricalstudybyBlack,Jensen,andScholes,theyfoundthattheestimatedslopeofthesecuritymarketlinewas_______whattheCAPMwouldpredict.
A.flatterthan
B.equalto
C.steeperthan
D.onehalfasmuchas
E.Noneoftheoptionsarecorrect.
12.Ifaprofessionallymanagedportfolioconsistentlyoutperformsthemarketproxyonariskadjustedbasisandthemarketisefficient,itshouldbeconcludedthat
A.theCAPMisinvalid.
B.theproxyisinadequate.
C.eithertheCAPMisinvalidortheproxyisinadequate.
D.theCAPMisvalidandtheproxyisadequate.
E.Noneoftheoptionsarecorrect.
13.GiventheresultsoftheearlystudiesbyLintner(1965)andMillerandScholes(1972),onewouldconcludethat
A.highbetastockstendtooutperformthepredictionsoftheCAPM.
B.lowbetastockstendtooutperformthepredictionsoftheCAPM.
C.thereisnorelationshipbetweenbetaandthepredictionsoftheCAPM.
D.highbetastocksandlowbetastockstendtooutperformthepredictionsoftheCAPM.
E.Noneoftheoptionsarecorrect.
14.Ifamarketproxyportfolioconsistentlybeatsallprofessionallymanagedportfoliosonariskadjustedbasis,itmaybeconcludedthat
A.theCAPMisvalid.
B.themarketproxyismean/varianceefficient.
C.theCAPMisinvalid.
D.theCAPMisvalidandthemarketproxyismean/varianceefficient.
E.themarketproxyismean/varianceefficientandtheCAPMisinvalid.
15.Indevelopingtheirtestofamultifactormodel,Chen,Roll,andRosshypothesizedthat__________mightbeaproxyforsystematicfactors.
A.themonthlygrowthrateinindustrialproduction
B.unexpectedinflation
C.expectedinflation
D.themonthlygrowthrateinindustrialproductionandunexpectedinflation
E.themonthlygrowthrateinindustrialproduction,unexpectedinflation,andexpectedinflation
16.KandelandStambaugh(1995)expandedRoll'scritiqueoftheCAPMbyarguingthattestsrejectingapositiverelationshipbetweenaveragereturnandbetaaredemonstrating
A.theinefficiencyofthemarketproxyusedinthetests.
B.thattherelationshipbetweenaveragereturnandbetaisnotlinear.
C.thattherelationshipbetweenaveragereturnandbetaisnegative.
D.theneedforabetterwayofexplainingsecurityreturns.
E.Noneoftheoptionsarecorrect.
17.Inthe1972empiricalstudybyBlack,Jensen,andScholes,theyfoundthattheriskadjustedreturnsofhighbetaportfolioswere_____________theriskadjustedreturnsoflowbetaportfolios.
A.greaterthan
B.equalto
C.lessthan
D.unrelatedto
E.Moreinformationisnecessarytoanswerthisquestion.
18.TheresearchbyFamaandFrenchsuggestingthatCAPMisinvalidhasgeneratedwhichofthefollowingresponses?
A.Bettereconometricsshouldbeusedinthetestprocedure.
B.Estimatesofassetbetasneedtobeimproved.
C.TheoreticalsourcesandimplicationsofresearchthatcontradictsCAPMneedstobereconsidered.
D.Thesingleindexmodelneedstoaccountfornontradedassetsandthecyclicalbehaviorofassetbetas.
E.Alloftheoptionsarecorrect.
19.Considertheregressionequation:
ritrft=ai+bi(rmtrft)+eit
where:
rit=returnonstockiinmontht
rft=themonthlyriskfreerateofreturninmontht
rmt=thereturnonthemarketportfolioproxyinmontht
Thisregressionequationisusedtoestimate
A.thesecuritycharacteristicline.
B.benchmarkerror.
C.thecapitalmarketline.
D.Alloftheoptionsarecorrect.
E.Noneoftheoptionsarecorrect.
20.Considertheregressionequation:
rirf=g0+g1b1+g2s2(ei)+eit
where:
rirf=theaveragedifferencebetweenthemonthlyreturnonstockiandthemonthlyriskfreerate
bi=thebetaofstocki
s2(ei)=ameasureofthenonsystematicvarianceofthestocki
IfyouestimatedthisregressionequationandtheCAPMwasvalid,youwouldexpecttheestimatedcoefficient,g0,hastobe
A.0.
B.1.
C.equaltotheriskfreerateofreturn.
D.equaltotheaveragedifferencebetweenthemonthlyreturnonthemarketportfolioandthemonthlyriskfreerate.
E.Noneoftheoptionsarecorrect.
21.Considertheregressionequation:
rirf=g0+g1bi+g2s2(ei)+eit
where:
rirt=theaveragedifferencebetweenthemonthlyreturnonstockiandthemonthlyriskfreerate
bi=thebetaofstocki
s2(ei)=ameasureofthenonsystematicvarianceofthestocki
IfyouestimatedthisregressionequationandtheCAPMwasvalid,youwouldexpecttheestimatedcoefficient,g1,tobe
A.0.
B.1.
C.equaltotheriskfreerateofreturn.
D.equaltotheaveragedifferencebetweenthemonthlyreturnonthemarketportfolioandthemonthlyriskfreerate.
E.equaltotheaveragemonthlyreturnonthemarketportfolio.
22.Considertheregressionequation:
rirf=g0+g1bi+g2s2(ei)+eit
where:
rirt=theaveragedifferencebetweenthemonthlyreturnonstockiandthemonthlyriskfreerate
bi=thebetaofstocki
s2(ei)=ameasureofthenonsystematicvarianceofthestocki
IfyouestimatedthisregressionequationandtheCAPMwasvalid,youwouldexpecttheestimatedcoefficient,g2,tobe
A.0.
B.1.
C.equaltotheriskfreerateofreturn.
D.equaltotheaveragedifferencebetweenthemonthlyreturnonthemarketportfolioandthemonthlyriskfreerate.
E.Noneoftheoptionsarecorrect.
23.Considertheregressionequation:
rirf=g0+g1bi+eit
where:
rirf=theaveragedifferencebetweenthemonthlyreturnonstockiandthemonthlyriskfreerate
bi=thebetaofstocki
Thisregressionequationisusedtoestimate
A.thebenchmarkerror.
B.thesecuritymarketline.
C.thecapitalmarketline.
D.thebenchmarkerrorandthesecuritymarketline.
E.thebenchmarkerror,thesecuritymarketline,andthecapitalmarketline.
24.Benchmarkerror
A.referstotheuseofanincorrectmarketproxyintestsoftheCAPM.
B.canresultininconclusivetestsoftheCAPM.
C.canresultinincorrectevaluationmeasur
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