Q&A Hero

Q: One way to express the trade-off between risk and return for an individual security is through:A.the security market line.B.the beta coefficient.C.the correlation coefficient.D.arbitrage pricing theory.

Q: Systematic risk is rewarded with a premium in the marketplace because:A.risk is particular to the stock or industry.B.it represents a random occurrence which could not have been foreseen.C.it is associated with market movements which cannot be eliminated through diversification.D.None of the above

Q: The capital asset pricing model (CAPM) takes off where the _________ concluded.A.Security market lineB.Capital market lineC.Efficient frontier and Markowitz portfolio theoryD.Arbitrage pricing theory

Q: The beta coefficient is a measure of:A.the relationship between the return of an individual stock and the return on the market.B.the relationship between the return on a stock and the return on the portfolio.C.the relationship between the portfolio risk and the market risk.D.None of the above

Q: A good way to minimize risk and receive an optimum return on your portfolio is:A.through diversification.B.to buy only risk-free securities.C.through blue-chip stock purchases only.D.through junk-bonds.

Q: The capital market line can be used to determine the expected return on any portfolio based on:A.unsystematic risk.B.the degree of risk on that portfolio.C.the market rate of return.D.None of the above

Q: The standard deviation of a risk-free asset is:A.1.B.0.C.-1.D.any number between -1 and 1.

Q: The point of tangency between the efficient frontier and the capital market line:A.is the ideal portfolio of available investments.B.can be calculated by using the Markowitz portfolio theory and CAPM.C.represents the point at which the market is in equilibrium.D.All of the above

Q: The capital market line (CML) as defined by the capital asset pricing model is characterized by all of the following except:A.a straight line tangent to the efficient frontier.B.a straight line which includes the rate of return on a risk-free asset.C.a point on the efficient frontier above which higher returns can be generated by borrowing funds without assuming more risk.D.All of the above are characteristics of the capital market line

Q: The correlation coefficient:A.measures the amount of risk associated with a given security at a given moment in time.B.measures the joint movement between two variables.C.measures the expected value of a security at a specified moment in time.D.All of the above

Q: Under Markowitz's theory, the ideal portfolio for an investor is represented by:A.the point of tangency between the efficient frontier and the investor's indifference curve.B.the highest possible indifference curve.C.the highest possible point on the efficient frontier.D.None of the above

Q: The investor wants to achieve the __________ risk-return indifference curve.A.lowestB.highestC.medianD.mean

Q: The efficient frontier:A.represents all possible portfolios for a given level of risk.B.separates unattainable portfolios from less than optimal portfolios.C.is different for every investor.D.More than one of the above

Q: For two investments with a correlation coefficient (rij) less than +1, the portfolio standard deviation will be __________ the weighted average of the individual investments' standard deviation.A.more thanB.less thanC.equal toD.zero compared to

Q: Countercyclical investments are more likely to have:A.high positive correlation with a normal portfolio.B.slight positive correlation with a normal portfolio.C.no correlation with a normal portfolio.D.high negative correlation with a normal portfolio.

Q: An assumption of the capital asset pricing model is that investors can borrow or lend an unlimited amount of funds at a given risk-free rate.

Q: Because of portfolio effect, the most significant factor related to the risk of any investment is:A.its standard deviation, or degree of uncertainty.B.its effect on the risk of the portfolio.C.systematic risk associated with the investment.D.None of the above

Q: Which of the following is NOT a problem associated with proving the validity of the security market line?A.The appropriate risk-free and market ratesB.The additional return required for each additional increment of risk in the market placeC.The stability of beta on an individual security over timeD.All of the above are associated problems

Q: Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with a likelihood of 20%, 30%, 25%, and 25%, respectively. Considering the portfolio's standard deviation and expected value, would you say that this portfolio is of:A.average yield, low-risk.B.lower-than-average yield, low-risk.C.average yield, average risk.D.Not enough information to tell

Q: The investor is only assumed to receive additional returns for unsystematic risk.

Q: The security market line shows the risk-return trade-off for an individual security.

Q: By picking stocks that are not perfectly correlated, unsystematic risk may be eliminated.

Q: Systematic risk measures risk that is related to the market.

Q: According to the text, a risk-averse investor:A.demands a premium for assuming risk.B.will only participate in low-risk or risk-free investments.C.is one of a small minority in the United States.D.More than one of the above

Q: The beta coefficient indicates how volatile a stock is, relative to the market.

Q: In an efficient market context, the ability to achieve high returns may be more directly related to absorption of additional risk than superior ability in selecting stocks.

Q: In using the capital market line, the higher the portfolio standard deviation, the lower the anticipated return (Kp).

Q: An underlying assumption to the CAPM model is that an individual can choose an investment combining the return on the risk-free asset with the market rate of return, and this will provide superior returns to the efficient frontier at all points except M, where they are equal.

Q: Points along the capital market line represent a combination of a risk-free asset and M (the market portfolio) with the possibility of borrowing beyond point M.

Q: The capital asset pricing model (CAPM) takes off where the efficient frontier concludes, with the introduction of a new investment outlet, the risk-free asset (RF).

Q: It can be assumed that the lower the expected value of an investment, the higher the standard deviation will be.

Q: Unsystematic risk cannot be diversified away.

Q: The point of tangency between the efficient frontier and the Security Market Line is considered to represent an optimum portfolio.

Q: In general, the greater the dispersion of outcomes, the lower the risk.

Q: An investor is indifferent between points on a risk-return indifference curve, though not indifferent to achieving the highest curve possible.

Q: Unsystematic risk earns a risk premium, because it cannot be offset through efficient portfolio management.

Q: There is debate in regard to the capital asset pricing model about the appropriate RF, KM, and stability of beta.

Q: The steeper the slope on a risk-return indifference curve, the more anxious an investor is to take risks.

Q: If a particular stock is less risky than the market, its beta coefficient will fall somewhere between -1 and 0.

Q: Points below the efficient frontier have less desirable risk-return characteristics than those along the efficient frontier.

Q: The essence of the capital market line is that the only way to earn greater returns is to take increasingly greater risks.

Q: Points above the efficient frontier have superior risk-return characteristics to those along the efficient frontier, but are not part of the feasible set.

Q: The capital market line enables investors to achieve a higher level of utility than they could on the efficient frontier.

Q: According to the capital asset pricing model, it is possible to compose a portfolio with a return greater than any one on the efficient frontier, given equal risk, without borrowing funds for investment.

Q: The greater the negative correlation between two (or more) securities, the lower the portfolio standard deviation (all else being equal).

Q: Markowitz's theory asserts that the slope of indifference curves is determined by the investor's indifference to various portfolios.

Q: The standard deviation for a portfolio is a weighted average of the individual securities' standard deviations.

Q: Harry Markowitz developed the theory that an efficient set of portfolios exists which represent the maximum return possible for any given level of risk.

Q: The expected value for a portfolio is a weighted average of the individual securities' expected values.

Q: The expected value is a commonly used measure of dispersion.

Q: The idea behind the portfolio effect is that risk can be reduced by combining securities, but there will be a corresponding reduction in return.

Q: Value Line futures contracts trade on the Kansas City Board of Trade.

Q: Risk measurement usually considers only losses rather than the dispersion of all outcomes.

Q: The profit on a stock index option is determined by the change in the underlying value of the futures contract.

Q: Risk is generally associated only with loss from possible investments.

Q: An investor bought a March S&P 500 Index futures contract in December for $1,490.05. After six months the contract value went down to $1,466.00. The contract has a multiplier of 250. With an initial margin of $20,000, and a $16,000 maintenance margin requirement, would there be a call for more margin? A.No, the account would have an excess of $2,012.50 B.Yes, an additional $3,677.19 would be required C.No, the account would have exactly enough cash for margin D.Yes, an additional $2,012.50 would be required E.No, the account would have an excess of $3,677.19

Q: The S&P 100 Index is composed of 100 blue chip stocks on which the CME currently has individual option contracts.

Q: Unlike the capital market line, the security market line is unique for each investor.

Q: Futures provide a more efficient hedge than options, in that gains and losses can be more fully offset by futures contracts.

Q: Each of the major stock index futures markets has a corresponding stock index options market.

Q: A tax hedge is used to reduce or eliminate tax on the capital gains on a portfolio.

Q: The multiplier for the S&P 500 futures contract is: A.5. B.10. C.100. D.250. E.500.

Q: A perfect hedge using stock index futures eliminates both losses and gains on a stock portfolio.

Q: The overuse of portfolio insurance in the market may be dangerous because: A.a large amount of selling may take place simultaneously. B.a small amount of arbitraging may take place simultaneously. C.in a down market, the insurance companies may not be able to pay for the losses. D.All of the above

Q: Stock index futures provide the portfolio manager a realistic alternative to selling either a part or the entirety of a portfolio in a declining market.

Q: Futures contracts exist for the: A.Dow Jones Industrial Average. B.NASDAQ 100 Stock Index. C.S&P 500. D.All of the above

Q: Stock index futures and options are sometimes referred to as derivatives.

Q: An arbitrage is trading in: A.options and futures at the same time. B.two different markets when the price of the same item is different. C.two different markets when the price of two different items is the same. D.two different markets when there is no correlation between the markets.

Q: Since there is never physical delivery of goods in the stock index futures market, all open transactions are automatically closed out on the settlement date.

Q: With a given size portfolio, the higher the portfolio beta, A.the more likely the portfolio is to go up, rather than down. B.the more likely the portfolio is to go down, rather than up. C.the fewer contracts necessary to hedge the portfolio. D.the more contracts necessary to hedge the portfolio.

Q: Stock index futures contracts are limited to the Dow Jones Industrial Average.

Q: Program trading calls for: A.computer-based trigger points for large trades. B.the use of computer programs to measure performance. C.the use of only call options. D.All of the above

Q: The market for stock index futures began in February of 1982, when the NYSE began trading futures on the Dow Jones Industrial Average.

Q: Stock specialists and OTC dealers hedge their positions with stock index futures: A.to profit from major market movements. B.to reduce market risk on his or her inventory. C.to reduce the unsystematic risk on the stocks in his or her inventory. D.More than one of the above

Q: If you have a put option on a stock index, you hope the market will: A.go up. B.go down. C.remain unchanged. D.None of the above

Q: You buy an S&P 500 Index Call Option for $15. The strike price is $1,250. If the index closes at $1,290, what is your total profit?

Q: One of the major uses of a stock index future is the ability: A.to use it to hedge. B.to make an unlimited amount of money. C.to increase risk. D.All of the above

Q: When an investment banker hedges a stock for initial distribution with stock index futures, A.the underwriter intends to reduce the risk of loss during the distribution period. B.there is potential of gain or loss on both the stock and the stock index futures. C.he or she sells futures contracts. D.All of the above

Q: In order to effectively hedge a stock portfolio, the portfolio manager must know the total dollar value of the portfolio, the current index futures price, and: A.the number of contracts available in the market. B.the portfolio P/E ratio. C.the relative volatility of the portfolio to the market. D.More than one of the above

Q: Stock index futures represent an efficient approach to: A.only taking on unsystematic risk. B.only taking on systematic risk. C.taking on zero risk, because the index is fully diversified. D.taking on lots of risk, due to the fact that the indexes are usually composed of lots of stocks, not just a few.