IAM quiz test PGDM Batch 2023-25 T3

One approach for using multifactor models is to use factors that capture systematic risk. Which of the following is NOT a common factor used in this approach?

• Consumer Confidence

• unexpected changes in inflation

• yield curve shifts

• unexpected changes in real GDP

• All of these are correct

Recently, you have received a tip that the stock of Buttercup Industries is going to rise from $76.00 to $85.00 per share over the next year. You know that the annual return on the S&P 500 has been 13% and the 90-day T-bill rate has been yielding 3% per year over the past 10 years. If beta for Buttercup is 1.0, will you purchase the stock?

• Yes, because it is overvalued.

• Yes, because it is undervalued.

• No, because it is undervalued.

• No, because it is overvalued.

• Yes, because the expected return equals the estimated return.

The betas for the market portfolio and risk-free security are:

• Market: 0 Risk-free: 1

• Market: 1 Risk-free: 0

• Market: −1 Risk-free: 1

• Market: 1 Risk-free: −1

• Market: 2 Risk-free: 1

Which of the following are you more you more likely to use in order to calculate the risk-free rate for use in equity valuation?

• 3-month T-bill rate

• Yield on Long-term Corporate Bonds

• Yield on a small-cap equity index

• Return on the Nifty 50 Index

Which of the following is NOT true of the CAPM Model?

• It assumes all investors are risk-averse and rational

• It assumes all investors hold a market portfolio that is fully diversified

• The CAPM assumes there is a non-linear retaionship between risk and return

• The CAPM assumes markets are efficient.

One of the variables that has been known to have predictive power for stock returns beyond the CAPM market beta is:

• Debt

• Past stock returns

• Standard deviation of stock returns

• Firm Size

The empirical evidence on CAPM indicates that

• Returns on high beta stocks are a little too high and returns on low beta stocks are a little too low

• Other variables such as Size appear to have predictive power beyond CAPM

• The Market Risk premium has been relatively stable across decades

• High book to market firms outperform low book to market firms

The Market Model is often used

• To estimate the market risk premium in CAPM

• To estimate the Beta in CAPM

• To estimate the firm-specific return in CAPM

• To predict future stock returns

The expression for stock return variance in terms of the market model can be written in the following equation. If we assume that a stock's diversifiable risk has been diversified away , then the stock return variance is simply:

• The variance of the market return

• The variance of the idiosyncratic risk

• The square of the product of Beta and the market return

• The variance of beta

The standard error of the Beta estimate allows us: 

• To calculate the t-statistic of beta

• To calculate the average beta of the portfolio

• To assess the prescision of the beta

• To calculate the t-statistic of beta and To assess the prescision of the beta

• To calculate the average beta of the portfolio and To assess the prescision of the beta