Portfolio Management Chapter 8 Index Model

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

• a market index, such as the S&P 500

• the current account deficit

  
  

• the growth rate in GNP

• the unemployment rate

  
  

Which is the following variables to help predict betas by Rosenberg and Guy:

• 1. Dividend yield, debt-to-asset ratio, interest coverage ratio

• Variance of cash flow, structure capital, market capitalization

• Variance of earnings, growth in earnings per share, firm size

• 1. Asset coverage ratio, stock turnover ratio, inventory turnover

The beta in the formula refers to:

• 1. Sensitivity coefficient.

• 1. Market factor.

• 1. Firm-specific random factor

• 1. Expected return

In this regression equation, what does “e” mean?

• Standard error

• 1. Standard deviation

• 1. Variance

• 1. Residual

A well-constructed portfolio that includes … positions in future …  alpha stocks and … positions in future … alpha stocks will outperform the market index

• short/positive and long/positive

• 1. long/positive and short/negative

• long/negative and short/negative

• 1. short/negative and long/positive

The concept of beta is most closely associated with:

• Correlation coefficients.

•  Mean-variance analysis.

• Nonsystematic risk. 

  
  

• Systematic risk. 

  
  

1. As diversification increases, the standard deviation of a portfolio approaches ____________.

• 0

• 1

• infinity

• the standard deviation of the market portfolio

Beta and standard deviation differ as risk measures in that beta measures: 

• Only unsystematic risk, while standard deviation measures total risk.

• Only systematic risk, while standard deviation measures total risk.

• Both systematic and unsystematic risk, while standard deviation measures only unsystematic risk.

• Both systematic and unsystematic risk, while standard deviation measures only systematic risk

The index model allows us to more easily implement the Markowitz model for efficient diversification.

• True

• False