Multiple Choice Sample Quiz C (Topics 1 to 4) Flashcards
If the capital asset pricing model is valid, which of the following situations are possible?
A. Portfolio A will have an expected return of 16% when it has a beta of -0.75, the market return is 18% and the risk free rate is 10%.
B. Trading in financial markets will be frictionless.
C. Portfolio A can have an expected return of 20% and a beta of 1.4, while Portfolio B can have an expected return of 25% and a beta of 1.2
D. All investors will have the same level of risk aversion.
B. Trading in financial markets will be frictionless.
What is a beta?
A. A measure of the change in an asset’s returns due to asset-specific fluctuations.
B. A measure of the sensitivity of an asset’s returns to market-wide movements.
C. A measure of the slope of the security market line.
D. A measure of the contribution of total risk to the expected return on an asset.
B. A measure of the sensitivity of an asset’s returns to market-wide movements.
Roosters Managed Fund invests 25% of their funds in a risk free asset and the rest in a risky asset with an expected return of 7% and a standard deviation of 5%. The risk free interest rate is 2%. What is the expected return and the risk of this portfolio?
A. 9% and 5%
B. 3.25% and 3.75%
C. 7% and 5%
D. 5.75% and 3.75%
D. 5.75% and 3.75%
In an efficient market, the slope of the capital market line is:
A. Equal to the slope of the efficient frontier where the optimal risky asset portfolio lies.
B. Smaller than the slope of the efficient frontier where the optimal risky asset portfolio lies.
C. Measured by run over rise.
D. The risk premium of the market portfolio multiplied by the standard deviation of the market portfolio.
A. Equal to the slope of the efficient frontier where the optimal risky asset portfolio lies.
Adding shares in Roosters Ltd to a portfolio will reduce the portfolio’s risk the most if its correlation with other assets in the portfolio is:
A. 1
B. 0.6
C. -0.7
D. -0.4
C. -0.7
An investor’s indifference (utility) curves will be steeper when they are which of the following?
A. Less risk averse
B. Highly risk averse
C. A risk seeker
D. Risk neutral
B. Highly risk averse
A single factor model:
A. Assumes all asset returns depend on the total risk of one common factor.
B. Is a theoretical model.
C. Uses realised excess returns.
D. Is more complex than the capital asset pricing model.
C. Uses realised excess returns.
Which of the following models or theories assumes there is more than one systematic risk factor?
A. The capital asset pricing model
B. The single index model
C. Arbitrage pricing theory
D. The mean-variance optimisation model
D. The mean-variance optimisation model
Roosters Managed Fund purchases 100 shares in Broncos Ltd. To pay for the shares they borrow $3000 from their broker and use $5000 of their won money. What will be the percentage margin on this trade?
A. 62.5%
B. 80%
C. 60%
D. 37.5%
A. 62.5%
When are investors not required to search for the best price to trade at?
A. When they buy shares through a share purchase plan.
B. When they buy shares through a placement.
C. When they trade over-the-counter.
D. When they trade in an auction market.
D. When they trade in an auction market.
Which if the following statements is not correct?
A. The rate of return on an investment is based on its value at the start of the period, the end of the period and any cash payments received during the period.
B. Covariance is a measure of how two random variables move together.
C. The real return on an investment will not change when the inflation rate increases.
D. In a margin trade the broker requires a payment of interest.
D. In a margin trade the broker requires a payment of interest.
The capital asset pricing model assumes which of the following?
A. Assets can be priced using market risk.
B. Investors should invest in the market portfolio.
C. The market portfolio is the safest investment.
D. Total risk should always be used.
A. Assets can be priced using market risk.
How is the capital market line (CML) different from the security market line (SML)?
A. All portfolios containing risky assets will lie on the CML.
B. The CML depicts the expected return and total risk on all risky assets.
C. Portfolios made up the efficient portfolio and risk-free asset lie on the CML.
D. The CML depicts the expected return and market risk on all risky assets.
C. Portfolios made up the efficient portfolio and risk-free asset lie on the CML.
Financial analysts report that Roosters Ltd should have a lower beta. How will investors react to this news?
A. They will pay a lower price for shares in Roosters Ltd.
B. They will short sell shares in Roosters Ltd.
C. They will pay a higher price for shares in Roosters Ltd.
D. It will have no impact on trading in Roosters Ltd shares.
A. They will pay a lower price for shares in Roosters Ltd. (MY UNDERSTANDING)
C. They will pay a higher price for shares in Roosters Ltd. (CORRECT ANSWER)
When investors can only invest in risky assets, their optimal portfolio will:
A. Be the risky asset portfolio where the capital market line is tangent to a utility curve.
B. Be the risky asset portfolio where the capital market line is tangent to the security market line.
C. Be the risky asset portfolio where the efficient frontier is tangent to a utility curve.
D. Be the risky asset portfolio where the efficient frontier is tangent to the capital market line.
C. Be the risky asset portfolio where the efficient frontier is tangent to a utility curve.
