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.