When the correlation coefficient between two securities is +1, the portfolio opportunity set is linear, and the risk-free asset can be created as a combination of these two securities.

True

False

1 points

QUESTION 2

The slope of the capital market line is the equilibrium price of risk in terms of expected return.

True

False

1 points

QUESTION 3

A stock's total risk consists of company-specific risk, which can be eliminated by diversification, plus market risk, which cannot be eliminated by diversification.

True

False

1 points

QUESTION 4

The two-fund separation in the CAPM equilibrium means that every investor holds a combination of the well-diversified market portfolio and the risk-free asset.

True

False

1 points

QUESTION 5

As more securities are added to a portfolio, total risk typically would be expected to fall at an decreasing rate.

True

False

1 points

QUESTION 6

The SML is a graphical presentation of the relationship between expected return and beta.

True

False

1 points

QUESTION 7

Stocks with a beta of zero offer an expected rate of return of zero.

True

False

1 points

QUESTION 8

Risk aversion implies that the SML is upward sloping.

True

False

1 points

QUESTION 9

If other things remain the same, the higher the standard deviation, the lower the beta of a security.

True

False

1 points

QUESTION 10

The beta of a security is estimated as the slope of the regression equation, where the dependent variable (vertical axis) is the (excess) return on the security and the independent variable (horizontal axis) is the (excess) return on the market portfolio.

True

False

1 points

QUESTION 11

If a security is below the SML, a mean-variance investor would buy the security because it is undervalued.

True

False

1 points

QUESTION 12

In efficient capital markets, security prices change in a random fashion.

True

False

1 points

QUESTION 13

The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information.

True

False

1 points

QUESTION 14

A serial correlation test is a means of investigating the semi-strong form of market efficiency.

True

False

1 points

QUESTION 15

Researchers have found negative short-term serial correlation and positive long-term serial correlation in stock returns.

True

False

1 points

QUESTION 16

In an event study, the behavior of the cumulative average residual return (CAR) is studied to assess the impact of a particular event on a firm's stock price.

True

False

1 points

QUESTION 17

In an efficient market, negative alphas on stocks will quickly disappear.

True

False

1 points

QUESTION 18

Liew and Vassalou (2000) show that returns on style portfolios (SMB and HML) seem to predict GDP growth and may be proxies for business cycle risk.

True

False

1 points

QUESTION 19

It has been known that a high P/E ratio portfolio on average outperforms a low P/E ratio portfolio.

True

False

1 points

QUESTION 20

The size effect is an anomaly in which the small firms consistently experienced significantly larger risk-adjusted returns than the large firms.

True

False