Multiple Choice Sample Quiz A (Topics 1 to 4) Flashcards
The expected return on Roosters Ltd is 5%, Roosters beta is 0.75, the expected return on the market portfolio is 8%, and the risk free interest rate is 2%. According to the capital asset pricing model which of the following responses is true?
A. The total risk of Roosters Ltd is 4.5%
B. Roosters Ltd’s risk premium will be 2%.
C. Roosters Ltd’s market risk will be low.
D. The shares in Roosters Ltd are mispriced.
D. The shares in Roosters Ltd are mispriced.
What occurs in an efficient market?
A. Risky asset portfolios will lie above the capital market line.
B. Risky asset portfolios will lie below the security market line.
C. The slope of an asset’s security market line will be steeper than the slope of the capital market line.
D. The slope of an asset’s capital allocation line will be flatter than the slope of the capital market line.
D. The slope of an asset’s capital allocation line will be flatter than the slope of the capital market line.
A risky asset portfolio:
A. Are superior to any other type of portfolio.
B. cannot lie above the efficient frontier.
C. are preferred by risk neutral investors.
D. cannot contain more than two risky assets.
B. cannot lie above the efficient frontier.
When will investors prefer Portfolio A over Portfolio B?
A. If Portfolio B has a lower return and a lower risk.
B. If they can only invest in one portfolio.
C. If they are risk averse.
D. If Portfolio A lies on a higher utility curve.
D. If Portfolio A lies on a higher utility curve.
There is no correlation between the return on shares in Roosters Ltd and returns on the market portfolio. According to the capital asset pricing model:
A. Roosters Ltd’s expected return will be the risk-free interest rate.
B. Rooster Ltd cannot be priced.
C. Roosters Ltd’s actual return will increase.
D. Roosters Ltd will be a risky investment.
A. Roosters Ltd’s expected return will be the risk-free interest rate.
What could increase Rooster Ltd’s beta?
A. The market demand for shares in Roosters Ltd decreases.
B. The standard deviation of the returns on the market portfolio decreases.
C. The expected return on Roosters Ltd increases.
D. The risk free rate increases.
B. The standard deviation of the returns on the market portfolio decreases.
An investor is very risk averse and can only invest in a portfolio that contains risky assets. How do they decide on the best portfolio to invest in?
A. It will be the risky asset portfolio on the inefficient frontier that is close to the risk free interest rate.
B. It will be the risky asset portfolio on the efficient frontier where it is tangent to a utility curve.
C. It will be the risky asset portfolio on the efficient frontier that is close to the minimum variance portfolio.
D. It will be the risky asset portfolio on the capital market line close to the risky free asset.
B. It will be the risky asset portfolio on the efficient frontier where it is tangent to a utility curve.
What will occur when the market risk premium is 6%, the risk free interest rate is 3%, the expected return on shares in Roosters Ltd is 11.2% and Roosters Ltd’s beta is 1.2?
- The returns on Roosters Ltd are not very sensitive to changes in the returns on the market portfolio.
- The expected return on Roosters Ltd is 3.2% higher than the return on the market portfolio.
- This situation is not possible according to the capital asset pricing model.
- Shares in Roosters Ltd will be correctly priced.
This situation is not possible according to the capital asset pricing model.
What can limit the ability to fully exploit diversification benefits for portfolios?
A. Not being able to short sell assets.
B. Including assets that are negatively correlated with other assets in the portfolio.
C. Being able to use margin trading.
D. Investing in risky assets.
A. Not being able to short sell assets.
The expected return on a risky asset is 15% and the return on a risk free asset is 4.5%. Roosters Managed Fund invests 60% of their funds in the risky asset. This means that:
A. Roosters Managed Fund will short-sell the risky asset.
B. The expected return on the portfolio will be less than 12%.
C. Roosters Managed Fund will borrow at 4.5%.
D. The portfolio will be less risky than the risk free asset.
B. The expected return on the portfolio will be less than 12%.
According to the single factor model:
A. The excess return on the market is the market risk premium.
B. A positive alpha implies an asset’s return will be lower than predicted by the capital asset pricing model.
C. The residual error will be positive.
D. Asset returns depend on the total risk of the common factor.
A. The excess return on the market is the market risk premium.
What occurs when shares are short sold on the Australian Securities Exchange (ASX)?
A. Brokers will sell shares to the short seller.
B. Margin calls will always be made when the share price increases.
C. Naked short selling will be profitable when share prices fall.
D. A daily report on short sales is released.
D. A daily report on short sales is released.
The brokerage fee paid when you trade shares on the Australian Securities Exchange is:
A. A reward.
B. An explicit cost.
C. A fine.
D. An implicit cost.
B. An explicit cost.
What is possible in an efficient market?
A. There will be no opportunity for arbitrage.
B. A multi-factor model will have one source of systematic risk.
C. Anomalies will exist.
D. Assets will be mispriced when there is a zero alpha.
A. There will be no opportunity for arbitrage.
You will need $20,000 to buy 250 shares in Roosters Ltd. As you only have $17,000, you borrow the rest from your broker. Your broker requires a maintenance margin of 40% on this agreement. How much does the price of Roosters Ltd have to change by before the broker will make a margin call?
A. Increase by $60
B. Decrease by $20
C. Decrease by $60
D. Increase by $20
C. Decrease by $60
