MCQ Quiz

Question 1 of 35

On the capital market line, the y-intercept is most likely equal to:

The market return
The risk-free rate
The market risk premium

Question 2 of 35

The market model is most accurately written as:

$R_i = \alpha_i + \beta_i R_m + e_i$
$R_i = R_f + \sigma_i R_m$
$R_i = \beta_i + \alpha_i R_f + e_i$

Question 3 of 35

If an investor borrows 50% of initial wealth and the market standard deviation is 20%, the leveraged portfolio standard deviation is closest to:

20%
30%
40%

Question 4 of 35

Nonsystematic risk is most likely best reduced by:

Diversifying across assets that are not highly correlated
Borrowing at the risk-free rate
Buying only the highest-beta stock

Question 5 of 35

Adding a risk-free asset to a risky portfolio can most likely improve the risk-return trade-off because the risk-free asset has what correlation with the risky portfolio?

Perfect positive correlation
Perfect negative correlation
Zero correlation

Question 6 of 35

If the market standard deviation is 20% and 25% of wealth is invested in the market, the portfolio standard deviation on the CML is closest to:

10%
15%
5%

Question 7 of 35

Unlike the capital market line, the security market line applies most likely to:

Any security, whether efficient or not
Only efficient portfolios
Only the market portfolio

Question 8 of 35

The Treynor ratio most accurately measures excess return per unit of:

Total risk
Beta risk
Alpha

Question 9 of 35

The CFA Curriculum states that total variance is most accurately equal to:

Systematic variance plus nonsystematic variance
Systematic risk plus beta
Nonsystematic risk minus covariance

Question 10 of 35

The security market line most accurately plots expected return against:

Total risk measured by standard deviation
Systematic risk measured by beta
Nonsystematic risk measured by alpha

Question 11 of 35

A portfolio invests 20% in the risk-free asset, 30% in the market portfolio, and 50% in a stock with beta 2.0. The portfolio beta is closest to:

1.00
1.30
1.50

Question 12 of 35

The Sharpe ratio most accurately measures excess return per unit of:

Total risk
Systematic risk
Nonsystematic variance

Question 13 of 35

Beta is most accurately calculated as:

Asset variance divided by market variance
Market variance divided by asset covariance
Covariance of the asset with the market divided by market variance

Question 14 of 35

A capital allocation line most accurately plots the expected return and total risk of combinations of:

Two risky securities only
A risk-free asset and a risky asset or risky portfolio
Any assets with the same beta

Question 15 of 35

Which of the following is most likely an example of systematic risk?

A failed drug trial at one company
An airliner crash affecting one airline
An unexpected increase in economy-wide inflation

Question 16 of 35

If an investor borrows 25% of initial wealth at the risk-free rate and invests the full amount plus borrowed funds in the market, the expected return is closest to 17.5% when the risk-free rate is 5% and market return is:

10%
15%
20%

Question 17 of 35

In the market model, the slope coefficient $\beta_i$ is best interpreted as an estimate of an asset's:

Systematic risk
Nonsystematic risk
Risk-free rate

Question 18 of 35

If a portfolio has beta 1.30, the risk-free rate is 4%, and the market return is 16%, the CAPM expected return for the portfolio is closest to:

15.6%
18.4%
19.6%

Question 19 of 35

If a portfolio has return 14.0%, risk-free rate 4.0%, portfolio standard deviation 25.0%, and market standard deviation 20.0%, the portfolio's M2 is closest to:

8.0%
10.0%
12.0%

Question 20 of 35

Using the CAPM, if the risk-free rate is 3%, the market return is 10%, and an asset's beta is 1.1, the asset's expected return is closest to:

10.7%
11.1%
13.3%

Question 21 of 35

If the risk-free rate is 5%, the market return is 15%, and 25% of wealth is invested in the market, the expected portfolio return is closest to:

7.5%
10.0%
12.5%

Question 22 of 35

When borrowing and lending rates differ, the slope of the capital market line to the right of the market portfolio most likely uses:

$[E(R_m)-R_f]/\sigma_m$
$[E(R_m)-R_b]/\sigma_m$
$[R_b-R_f]/\sigma_m$

Question 23 of 35

The beta of a short-term US Treasury bill is most likely:

0.0
0.5
1.0

Question 24 of 35

If an asset's correlation with the market is 0.70, the asset standard deviation is 25%, and the market standard deviation is 15%, the asset's beta is closest to:

0.70
1.17
1.67

Question 25 of 35

If an asset has the same standard deviation as the market but zero correlation with the market, its beta is most likely:

0.0
1.0
-1.0

Question 26 of 35

Relative to portfolios on the capital market line, a portfolio plotted above the line is most likely:

Inferior to any point on the line
A borrowing portfolio
Not achievable

Question 27 of 35

If a security plots above the security market line, the security is most likely:

Overvalued and should have a lower weight
Fairly priced with zero alpha
Undervalued with positive alpha

Question 28 of 35

According to capital market theory, investors should expect additional return for bearing which type of risk?

Systematic risk only
Nonsystematic risk only
Both systematic and nonsystematic risk equally

Question 29 of 35

A market portfolio such as the S&P 500 most likely contains:

Only nonsystematic risk
No systematic risk
No nonsystematic risk

Question 30 of 35

Using the market model, if $\alpha_i = 0.0001$, $\beta_i = 0.9$, the market return is 1.0%, and the stock return is 2.0%, the stock's abnormal return is closest to:

0.09%
1.09%
2.90%

Question 31 of 35

A risk-free asset such as a three-month Treasury bill has most likely:

Positive systematic risk and zero nonsystematic risk
Zero systematic risk and positive nonsystematic risk
Zero systematic risk and zero nonsystematic risk

Question 32 of 35

If the risk-free rate is 5%, the market return is 15%, and 75% of wealth is invested in the market, the expected portfolio return is closest to:

7.5%
12.5%
15.0%

Question 33 of 35

If an asset has a negative beta, its expected return under the CAPM is most likely:

Equal to the market return
Greater than any positive-beta asset
Less than the risk-free rate

Question 34 of 35

If an asset's correlation with the market is -0.10, its standard deviation is 60%, and the market standard deviation is 25%, the asset's beta is closest to:

-0.24
0.24
2.40

Question 35 of 35

Using the CAPM, if the risk-free rate is 3%, the market return is 10%, and an asset's beta is 1.5, the asset's expected return is closest to:

10.5%
13.5%
15.0%

Portfolio Risk and Return Part II (Katas)

First Principles Thinking: intercept of the CML

First Principles Thinking: structure of the market model

First Principles Thinking: leverage magnifies market risk

First Principles Thinking: why diversification works

First Principles Thinking: diversification with a risk-free asset

First Principles Thinking: risk of a lending portfolio

First Principles Thinking: domain of the SML versus the CML

First Principles Thinking: systematic-risk performance measure

First Principles Thinking: decomposition of total variance

First Principles Thinking: what the SML graphs

First Principles Thinking: portfolio beta is a weighted average

First Principles Thinking: what the Sharpe ratio uses in the denominator

First Principles Thinking: beta measures market sensitivity

First Principles Thinking: definition of the CAL

First Principles Thinking: market-wide versus local risk

First Principles Thinking: return of a leveraged portfolio

First Principles Thinking: meaning of beta in the market model

First Principles Thinking: CAPM for a portfolio

First Principles Thinking: rescaling excess return to market risk

First Principles Thinking: apply the CAPM directly

First Principles Thinking: return of a lending portfolio

First Principles Thinking: kinked CML with a higher borrowing rate

First Principles Thinking: beta of a risk-free asset

First Principles Thinking: beta from correlation and volatility

First Principles Thinking: zero correlation means zero market sensitivity

First Principles Thinking: meaning of positions around the CML

First Principles Thinking: actual return above required return

First Principles Thinking: which risk is priced

First Principles Thinking: diversified portfolios and remaining risk

First Principles Thinking: actual return minus model-implied return

First Principles Thinking: risk-free means no risk components

First Principles Thinking: weighted-average return on the CML

First Principles Thinking: negative beta lowers required return

First Principles Thinking: negative correlation produces negative beta

First Principles Thinking: expected return from beta risk