Multiple Choice Sample Quiz B (Topics 1 to 4) Flashcards
The return on Roosters Ltd’s shares is greater than the return on Storm Ltd’s shares. However, Rooster Ltd’s total risk is less than Storm Ltd’s total risk. If the capital asset pricing model is valid than:
A. Shares in Roosters Ltd and Storm Ltd will lie on or below the efficient frontier.
B. This situation is not possible.
C. Shares in Roosters Ltd and Storm Ltd cannot lie on the security market line.
D. Investors will always prefer to invest in Storm Ltd rather than Roosters Ltd.
A. Shares in Roosters Ltd and Storm Ltd will lie on or below the efficient frontier.
What is one of the assumptions that the capital asset pricing model is based on?
A. A multi-period economy exists.
B. Investor’s preferences can be described by a logarithmic utility function.
C. Financial markets are not perfectly frictionless.
D. There are no informational asymmetries.
D. There are no informational asymmetries.
What is a problem that occurs when trying to test if the capital asset pricing model is valid?
Group of answer choices
A. Realised returns instead of expected returns are used in the test.
B. The market risk premium may be negative.
C. Total risk should be used in the model.
D. Investor’s preferences are not taken into account.
A. Realised returns instead of expected returns are used in the test.
The expected return on shares in Roosters Ltd is 6.75%, the market risk premium is 5% and the interest rate on Treasury notes is 3%. What is the beta for Roosters Ltd?
A. -1.5
B. -0.8
C. 0.75
D. 1.875
C. 0.75
Which of the following companies would have the lowest beta?
A. A company that manufactures luxury furniture.
B. A company that produces essential medical supplies.
C. A company that operates a holiday resort.
D. A company that is involved in events management.
B. A company that produces essential medical supplies.
The optimal total portfolio for an investor who invests 105% of their wealth in the optimum risky asset portfolio will:
A. Lie on the inefficient frontier where margin trading is allowed.
B. Lie on the security market line where it is tangent to a utility curve.
C. Lie on the capital market line to the right of the optimum risky asset portfolio.
D. Lie on the capital market line where investing in the risk free asset occurs.
C. Lie on the capital market line to the right of the optimum risky asset portfolio.
What would occur in a world where only five risky assets exist?
A. The risk of a portfolio containing all five risky assets will need to include five measures of correlation.
B. The risk of the portfolios will mainly be influenced by the variances of the assets.
C. All possible portfolios will lie on the efficient frontier.
D. Five of the possible portfolios will contain only one of the risky assets.
D. Five of the possible portfolios will contain only one of the risky assets.
Roosters Managed Fund invests 30% of their funds in the risky asset. This means that Roosters Managed Fund will:
A. Be very risk averse.
B. Invest in a portfolio that is riskier than the risk free asset.
C. Be short selling.
D. Invest 130% of their funds in the risk free asset.
B. Invest in a portfolio that is riskier than the risk free asset.
When will the return and risk of a portfolio containing two risky assets change?
A. When the risk aversion of an investor changes
B. When their weights are changed.
C. When the return and risk on the market portfolio changes.
D. When they are traded in an efficient market.
B. When their weights are changed.
What portfolio would an investor prefer if they have a risk aversion of 3.5 (A = 3.5)?
A. Portfolio Delta with an expected return of 20% and a standard deviation of 3%.
B. Portfolio Alpha with an expected return of 3% and a standard deviation of 0%.
C. Portfolio Gamma with an expected return of -16% and a standard deviation of 2%.
D. Portfolio Beta with an expected return of 10% and a standard deviation of 4%.
Portfolio Delta with an expected return of 20% and a standard deviation of 3%.
(Highest Utility)
What is true about the single index model (SIM)?
A. Average future returns are predicted by the SIM.
B. Alpha measures the asset specific risk of an asset.
C. Its beta reveals the sensitivity of an asset’s returns to changes in the market portfolio’s return.
D. The common risk factor in the SIM is total risk.
C. Its beta reveals the sensitivity of an asset’s returns to changes in the market portfolio’s return.
What does the arbitrage pricing theory do?
A. Assume you buy the asset with the lower alpha and sell the asset with the higher alpha.
B. Sum the weighted asset’s betas in a portfolio to equal one.
C. Sum the alphas of the assets in a portfolio to equal one.
D. Assume asset prices can be determined under a no-arbitrage condition.
D. Assume asset prices can be determined under a no-arbitrage condition.
Currently the highest bid price for Roosters Ltd is $50 and the lowest ask price is $55. What will happen if you submit a limit order to sell Roosters Ltd shares at $54?
A. The trade will be executed at $50.
B. It will become a limit sell order within the spread.
C. It will become a limit sell order outside the spread.
D. The trade will be executed at $54.
B. It will become a limit sell order within the spread.
When will the maintenance margin on a margin trade be smaller?
A. When price movements of a share are not very volatile.
B. When the daily report of the Australian Securities Exchange is favourable.
C. When the price of the share increases.
D. When the trader is a client of the broker.
A. When price movements of a share are not very volatile.
Roosters Managed Fund short sells 500 shares in Broncos Ltd through their broker. The shares were trading at $45 per share when the short sale was made. The broker sets an initial margin of 40% and a maintenance margin of 30%. When will a margin call be made?
A. When the price of shares in Broncos Ltd increases above $45.
B. When the price of shares in Broncos Ltd increase above $49.
C. When the price of shares in Broncos Ltd decreases below $45.
D. When the price of shares in Broncos Ltd decrease below $49.
B. When the price of shares in Broncos Ltd increase above $49.
