Online Quiz for SIM

Question: As diversification increases, the total variance of a portfolio

approaches ____________.
Correct Answer:

the variance of the market portfolio

Question: Which of the following is true regarding R2?

Question: Which of the following is correct about the stocks alpha?

Selected
Answer:

Under CAPM, alpha is zero at all times

Correct
Answer:

Under CAPM, the value of alpha is zero when the

market is at equilibrium

Response
Feedback:

Under CAPM, the expected (equilibrium) value of alpha is

zero, although alpha could be positive, negative or zero

Question: The index model has been estimated for stocks A and B with
the following results:
RA = 0.01 + 0.8RM + eA
RB = 0.02 + 1.2RM + eB
sM = 0.20 s(eA) = 0.17 s (eB) = 0.10
The standard deviation of returns of stock A is __________.
Correct Answer:

0.2335

Question: The Security Characteristic Line (SCL)

Selected
Answer:
Correct
Answer:

plots the excess return on a security as a function of the

excess return on the market.
all of the above.

Response The security characteristic line, which plots the excess return
Feedback: of the security as a function of the excess return of the
market allows one to estimate both the alpha and the beta
of the security.

Question: Analysts may use regression analysis to estimate the market

model for a stock. When doing so, the intercept of the regression line is
an estimate of ______________.
Selected Answer:

the a of the asset

Correct Answer:

none of the above

Response The market model is a regression of total stock returns on

Feedback: total market returns. The intercept is neither b, s nor d, and
is not the a of the asset, which is the intercept of the single
index model which uses excess returns.
Question: The Security Characteristic Line (SCL) associated with the
single-index model is a plot of
Correct
Answer:

the security's excess returns on the vertical axis and the

market index's excess returns on the horizontal axis.

Question: The index model for stock B has been estimated with the
following result:
RB = 0.01 + 1.1RM + eB
If sM = 0.20 and R2B = 0.50, the standard deviation of returns of stock B is
_________.
Correct Answer:

0.3111

Question: Which of the following statements are true?

Selected
Answer:

the characteristic line is a regression output of the

security market line.

Correct
Answer:

it is common to ignore the risk free rate and estimate

the market model instead.

Response A is incorrect because SML shows you the relationship

Feedback between the return of a security in relation to its systematic
:
risk (as measured by b) whereas the characteristics line
shows the relationship between a stocks excess return to the
markets excess return. B is also incorrect because a large
alpha could be accompanied by a t-stat of less than 1.96 (or 2

as per the rule of thumb), hence making the output

insignificantly differnet from 0. R2 measures the proportion of
variation of the stocks excess return that is explained by the
markets excess return, not the other way around. Hence C is
incorrect. D is correct as practitioners typically use the
market model instead of following the single index model
strictly.
Question: A single-index model uses __________ as a proxy for the
systematic risk factor.
Correct Answer:

a market index, such as the S&P/ASX 300 index

Question: As diversification increases, the total variance of a portfolio

approaches ____________.
Selected Answer:

none of the above

Correct Answer:

the variance of the market portfolio

Response
Feedback:

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.

Question: Analysts may use regression analysis to estimate the market

model for a stock. When doing so, the intercept of the regression line is
an estimate of ______________.
Selected Answer:

the a of the asset

Correct Answer:

none of the above

Response The market model is a regression of total stock returns on

Feedback: total market returns. The intercept is neither b, s nor d, and
is not the a of the asset, which is the intercept of the single
index model which uses excess returns.
Question: Analysts may use regression analysis to estimate the market
model for a stock. When doing so, the slope of the regression line is an
estimate of ______________.

Correct Answer:

the b of the asset

Question: Suppose you held a well-diversified portfolio with a very large

number of securities, and that the single index model holds. If the s of
your portfolio was 0.20 and sM was 0.16, the b of the portfolio would be
approximately ________.
Correct Answer:

1.25

Question: Which of the following is correct about the stocks alpha?

Correct
Answer:

Under CAPM, the value of alpha is zero when the market

is at equilibrium

Question: As diversification increases, the firm-specific risk of a portfolio

approaches ____________.
Correct Answer:

Question: Analysts may use regression analysis to estimate the market

model for a stock. When doing so, the intercept of the regression line is
an estimate of ______________.
Selected Answer:

the a of the asset

Correct Answer:

none of the above

Response The market model is a regression of total stock returns on

Feedback: total market returns. The intercept is neither b, s nor d, and
is not the a of the asset, which is the intercept of the single
index model which uses excess returns.