5) Which of the following statements is false?

a) Rather than relying on the efficiency of a single portfolio (such as the market), multifactor models rely on the weaker condition that an efficient portfolio can be constructed from a collection of well-diversified portfolios or factors.

b) A positive alpha in a single factor model means that the portfolios that implement the trading strategy capture risk that is not captured by the market portfolio.

c) Multifactor models have a distinct advantage over single-factor models in that it is much easier to identify a collection of portfolios that captures systematic risk than just a single portfolio.

d) Trading strategies based on market capitalization, book-to-market ratios, and momentum have been developed that appear to have zero alphas.

e) None of the above

6) Which of the following statements is false?

a) It is not actually necessary to identify the efficient portfolio itself. All that is required is to identify a collection of portfolios from which the efficient portfolio can be constructed. b) Although we might not be able to identify the efficient portfolio itself, we know some characteristics of the efficient portfolio.

c) An efficient portfolio can be constructed from other diversified portfolios.

d) An efficient portfolio need not be well diversified.

e) None of the above

7) Rose Industries is currently trading for $47 per share. The stock pays no dividends. A one-year European call option on Rose Industries with a strike price of $45 is currently trading for $7.45. If the risk-free interest rate is 6% per year, then calculate the price of a one-year European put option on Rose Industries with a strike price of $45.

a) $7.30

b) $7.10

c) $2.90

d) $7.45

e) None of the above

8) Which of the following will NOT increase the value of a put option?

a) An increase in the time to maturity

b) A decrease in the stock price

c) A decrease in the stock's volatility

d) An increase in the exercise price

e) None of the above 4

9) All else being equal a ________ alpha implies that the stock also has a relative ________ expected return.

a) positive; high

b) negative; high

c) positive; low

d) None of the above

10) Which of the following statements is false?

a) Beta measures the sensitivity of a security to market-wide risk factors.

b) Volatility measures total risk, while beta measures only systematic risk.

c) The beta is the expected percentage change in the excess return of the market portfolio for a 1% change in the excess return of a security.

d) Utilities tend to be stable and highly regulated, and thus are insensitive to fluctuations in the overall market.

e) None of the above

11) Which of the following statements is false?

a) The intrinsic value of an option is the value it would have if it expired immediately.

b) A European option cannot be worth less than its American counterpart.

c) Put options increase in value as the stock price falls.

d) A put option cannot be worth more than its strike price.

e) None of the above

12) Which of the following statements is false?

a) Portfolios with high market capitalizations will have positive alphas if the market portfolio is not efficient.

b) The size effect is the observation that firms with high book-to-market ratios have positive alphas.

c) If the market portfolio is not efficient, then a portfolio of high book-to-market stocks will likely have positive alphas.

d) Portfolios with low book-to-market ratios will have negative alphas if the market portfolio is not efficient.

e) None of the above

13) KD Industries' stock is currently trading at $32 per share. Consider a put option on KD stock with a strike price of $30. The maximum value of this put option is:

a) $0 b) $32 c) $30 d) $2 e) None of the above