Chapter 08 Index Models

Chapter 08

Index Models

Multiple Choice Questions

1. As diversification increases, the total variance of a portfolio approaches ____________.

A. 0

B. 1

C. the variance of the market portfolio

D. infinity

E. none of the above

As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the variance of the market portfolio.

Difficulty: Easy

3. As diversification increases, the firm-specific risk of a portfolio approaches ____________.

A. 0

B. 1

C. infinity

D. n-1 * n

E. none of the above

As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the variance (or standard deviation) of the market portfolio.

Difficulty: Easy

7. A single-index model uses __________ as a proxy for the systematic risk factor.

A. a market index, such as the S&P 500

B. the current account deficit

C. the growth rate in GNP

D. the unemployment rate

E. none of the above

The single-index model uses a market index, such as the S&P 500, as a proxy for the market, and thus for systematic risk.

Difficulty: Easy

10. According to the index model, covariances among security pairs are

A. due to the influence of a single common factor represented by the market index return

B. extremely difficult to calculate

C. related to industry-specific events

D. usually positive

E. A and D

Most securities move together most of the time, and move with a market index, or market proxy.

Difficulty: Easy

12. Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of ______________.

A. the of the asset

B. the of the asset

C. the of the asset

D. the of the asset

E. none of the above

The slope of the regression line, b, measures the volatility of the stock versus the volatility...