Chapter 10 Practice Questions
1. A portfolio has a beta of 1.0. The S&P 500 experiences 8% growth, and the portfolio produces an actual return of 6%, with a risk-free rate of 2%. What is the alpha of the portfolio?
A. 2%
B. -2%
C. 1%
D. -1%
2. Given the following assumptions for Stock ABC, what is its expected return using the capital asset pricing model? Risk-free rate: 3%; return of broader stock market: 11%; beta: 1.2, standard deviation: 2.
A. 6.3%
B. 8.1%
C. 12.6%
D. 16.2%
3. All of the following would be an example of a passive investment strategy except:
A. Investing in a broad-based ETF
B. Dollar cost averaging
C. A risk arbitrage activity
D. Laddering
4. Which of the following is not true of passive and active investment strategies?
A. Passive investment strategies are usually lower cost than active investment strategies.
B. Passive investment strategies are usually more tax-efficient than active investment strategies.
C. Technical analysis would be considered passive investing strategy, while fundamental analysis would be considered an active investing strategy.
D. Strategic asset allocation would be considered a passive investment strategy, while tactical asset analysis would be considered an active investment strategy.
5. All of the following are true of diversification except:
A. It involves investing in uncorrelated assets.
B. It can lower systematic risk.
C. It is a major tenet of modern portfolio theory.
D. It supports the old adage, “Don’t put all your eggs in one basket.”
6. If a security has a beta of 1.5, what does this mean?
A. The security is subject to more systematic risk than a security with a beta of 1.0.
B. The security is subject to less nonsystematic risk than the security with a beta of 1.0.
C. If the security had a market price of $10 at the beginning of the year, and the market returned 10% over the year, we ca