One main difference between the CAPM and the APT is:

A)the CAPM depends on the market while the APT depends on

interrelationships between securities.
B)the APT depends on the market while the CAPM depends on the
interrelationships between securities.
C)the CAPM does not specify the cause of the correlations between
securities while the APT specifies the impact of the same factors that
cause correlation.
D) only one implies a positive risk return relationship.
E)

none of the above.

Feedback: See p. 319-321

INCORREC
T

The impact of an information announcement may have limited effect due to:

A)part of the effect has already been incorporated into prices because it
was expected.
B) the market is slow to react to new information.
C) only wholly new information or surprises will effect prices.
D)
E)

a and c.
b and c.

Feedback: See p. 307-308

INCORREC
T

Which of the following statements is not true?

A)Systematic risk is any risk that affects a large number of securities.

B) Unsystematic risk is a risk that specifically affects a single asset.
C)Examples of systematic risk include the uncertainty about GNP, interest
rates, and inflation.
D)An example of unsystematic risk includes the announcement of an oil
strike by a petroleum company.
E)Beta measures the response of a stock's return to unsystematic risk.

Feedback: See p. 310

INCORREC
T

If the expected rate of productivity was 3% and the actual rate was 1.75%; the
systematic response coefficient for productivity, P, would produce a change in
any security return of:
A)
B)

4.75%
4.75(P)%

C)

-1.25(P)%
D)

-1.25%

E)

3(P)%

Feedback: Rationale:Ri = PFP = P(1.75 - 3) = -1.25 P

INCORREC
T

If the expected rate of inflation was 4% and the actual rate was 5.5%; the
systematic response coefficient from inflation, I , would result in a change in
any security return of:
A)
B)
C)
D)
E)

9.5%
1.5 I.
-1.5 I
4.0%
5.5 I

Feedback: Rationale: Ri = IFI = I(5.5 - 4) = 1.5 I

INCORREC
T

The major difference between a factor model and the market model is:

A)the factor model incorporates systematic risk while the market model
does not.
B)the factor model incorporates unsystematic risk while the market model
does not.
C)the factor model may include a number of systematic risks while the
market model includes only one.

D)
E)

both a and b.
all of the above.

Feedback: See p. 312-313

INCORREC
T

Suppose the Technee Corporation's common stock has a beta of 1.2. If the riskfree rate is 5% and the expected market return is 8%, the expected return for
Technee's common stock is:
A)

3.0%.

B)

5.0%.

C)

6.0%.

D)
E)

9.0%.
8.6%.

Feedback: Rationale:5 + 1.2(8 - 5) = 8.6%

INCORREC
T

Suppose the DiscMarc Corporation's common stock has a return of 10%. Assume
the risk-free rate is 5%, the expected market return is 8%, and no unsystematic
influence affected DiscMarc's return. The beta for DiscMarc is:
A)

1.00.

B)

1.67.

C)

2.00.

D)

3.33.

E) impossible to calculate beta without the inflation rate.

Feedback: Rationale: 10 = 5 + (8 - 5) ; 5 = 3 ; = 5/3 = 1.67

INCORREC
T

Stock attributes can be used to characterize portfolio management styles as well

as estimating returns. Portfolios with:
A)low P/Es are aggressive while high P/E portfolios are growth oriented.
B)high P/Es are aggressive while low P/E portfolios are growth oriented.

C)low P/Es are value funds while high P/E portfolios are growth funds.
D)high P/Es are value funds while low P/E portfolios are growth funds.
E) low P/Es can not be distinguished from high P/E portfolios.
Feedback: See p. 322

1
0

INCORREC
T

A security will have the risk-free return if that security has:

A)

a zero beta.

B) neither systematic risk nor unsystematic risk.

C)

no systematic risk.

D)

no unsystematic risk.

E)

both a & c are correct.

Cost of capital
The discount rate on a project is equal to
A)

the risk-free rate.

B) the rate of return on the market portfolio.

C) the rate of return on the zero-beta asset.
D) the expected return on a stock of comparable risk.
E) the risk-free rate plus the return on the market portfolio.
Feedback: See p. 328-329

CORRECT

One of the key assumptions in applying the CAPM to calculate the cost of
equity capital for a new project is:
A)the standard deviation of the project must be lower than the
standard deviation of the firm's other projects.
B)the beta risk of the new project is the same as the risk of the
firm.

C)the standard deviation of the project must be greater than the

standard deviation of the firm's other projects.
D)the beta risk of the new project is less than the risk of the firm.
E)

none of the above.

Feedback: See p. 339

INCORRECT

In the standard capital budgeting situation, projects in an all equity firm are
accepted if:
A) the project's IRR is equal to the cost of equity capital.
B) the project's IRR is less than the cost of equity capital.
C) the project's IRR is greater than the cost of equity capital.
D) the project's IRR is twice that of the cost of equity capital.
E) the project's IRR is half that of the cost of equity capital.

INCORRECT

The betas of many firms, such as Bank of Nova Scotia, are reasonably
stable over time but betas may change when:
A)the competitive nature of the industry changes cutting
profitability.
B) firms change their leverage substantially.
C) the relative relationship to the market changes.
D)
E)

all of the above.

none of the above.

Feedback: See p. 334-335

CORRECT

The greater the variability of the revenues of a company,

A)

the greater will the beta.

B) the more market dependent is the beta.

C) the less reliable is the market index.

D) the greater the beta for a fixed or given correlation.
E) the smaller the beta for a fixed or given correlation.
Feedback: See p. 335-336

INCORRECT

When comparing two different production technologies, the firm with low
operating leverage will have:
A) a total cost line with a greater slope.
B) a total cost line with a smaller slope.
C) a greater change in EBIT for a given change in volume.
D) a smaller change in EBIT for a given change in volume.
E)

both b and d.

Feedback: See p. 336-337

INCORRECT

The Tenplen Corporation has an asset beta of 1.05 and an equity beta of
1.2. The equity portion of the capital structure in market value terms .625.
Tenplen has a zero tax rate. What is the debt beta?
A)

.75

B)

.80

C)

1.05

D)

-.24

E)

-.40

Feedback: Rationale:(1.05 - 1.2(.625))/.375 = .80

CORRECT

You already hold Top Black Asphalt Company as the only asset in your
portfolio. If you want to realign your investments by putting 40% of your
wealth in a market index fund what would the systematic risk of the
portfolio be if the beta of Top Black is .74?
A)

.8

B)

.84
C)

.9

D)

.6

E)

.45

Feedback: Rationale: .4(1) + .6(.74) = .844

INCORRECT

If the expected market return is 14% and the risk free rate is 6%, what is
the expected return of the newly created portfolio of Top Black and the
market index fund?
A)

20.00%.

B)

11.92%.

C)

17.76%.

D)

11.76%.

E)

12.72%.

Feedback: Rationale: Rp = 6 + .84(14 - 6) = 6 + 6.72 = 12.72

10

INCORRECT

Which of the following industries is likely to have a low beta?

A)
B)
C)
D)

The auto industry.

The construction industry.
The steel industry.
The utilities industry.

Feedback: See p. 335-337

Leverage
The correct answer for each question is indicated by a

INCORREC
T

Which of the following statements is true concerning the efficient market

hypothesis?

A)

Equilibrium rates of return prevail.

B) Firms securities sell at their "fair" value.

C) Financial investors cannot earn a positive return.
D)

Both a & b.

E)

Both a & c.

Feedback: See p. 363-364

INCORREC
T

The weak form of the efficient market hypothesis states that:

A) only major market events can be predicted.

B)past price changes cannot be used to predict future price changes.
C)

technical analysis is useless.

D)

E)

both b & c.
none of the above.

Feedback: See p. 365-366

CORRECT

Strong form efficiency states that the market incorporates any and all pertinent
information in the stock price. Strong form efficiency implies that:
A) an investor can not expect to earn any return.
B) an investor can always really on technical analysis.
C)an insider or corporate officer can not outperform any other investor
by trading on the inside information.
D)any investor can outperform the market by trading on publicly
available information.
E)

none of the above.

Feedback: See p. 367-369

INCORREC
T

Serial correlation measures the relationship between the return on a security in the
current period with the same security's return in a prior period. Which of the

following patterns would indicate market inefficiency:

A)a negative correlation which means that the directional price pattern
will tend to continue.
B)a zero correlation which means that the directional price pattern will
tend to continue.
C)a positive correlation which means that the directional price pattern
will tend to continue.
D)a positive correlation which means that the directional price pattern
will tend to reverse.
E)a zero correlation which means that the directional price pattern will
tend to reverse.
Feedback: See p. 371

INCORREC
T

The strong-form of the efficient market hypothesis states that:

A) security prices reflect all publicly available information.

B) insider information contains no special advantage.
C) major market events can be predicted.
D)

all of the above.

E)

both a & b.

Feedback: See p. 379-380

CORRECT

In studying the impact of dividend omissions announcements on daily stock prices

Szewczyk, Tstetsekos and Zantout found that the significant change in price
occurred on the same day.
A) These results are consistent with strong form efficiency.
B) These results are consistent with semi-strong form efficiency.
C) These results are inconsistent with weak form efficiency
D) These results are inconsistent with all forms of market efficiency
E) These results are consistent with all forms of market efficiency.
Feedback: See p. 372

INCORREC
T

The acronym CAR stands for:

A)

cumulative abnormal return.

B)

cumulative average risk.

C)

current abnormal risk.

D)

current average return.

E)

none of the above.

Feedback: See p. 372

INCORREC
T

Studies or data on mutual performance versus a market index find:

A)Most mutual funds outperform the index. These findings refute the
semi-strong efficient markets.
B)Most mutual funds outperform the index. These findings refute the
strong form of efficient markets.
C)

Mutual funds are bad investments.

D) Mutual funds are riskless compared to the index.

E)Most mutual funds under perform the index. These findings support
the semi-strong form of the efficient market.
Feedback: See p. 374-375

INCORREC
T

You are investigating the effect of hurricanes on sugar cane producers' stock
performance and have gathered the following data for three months. The monthly
returns for the portfolio of producers was .0092, .0043 and .0065 while the market
average 1%, 1.2% and .9% for the three months centered on the hurricane
period. What are the three abnormal returns assuming a portfolio beta
approximating 1?
A)

.0008, .0077, .0025

B)

.0008, -.0077, -.0025

C)

-.0077, .0008, -.0025

D)
E)

-.0008, -.0077, -.0025

None of the above.

Feedback: Rationale:.0092 - .01 = -.0008, .0043 - .012 = -.0077, .0065 - .

009 = -.0025