10 Questions
In the regression equation ri,t rf = g0 + g1 (rM,t rf ) + g2 SM Bt + ei,t, if the CAPM is true, what would you expect the estimated coefficient g1 to represent?
The market risk premium
If a single index model has been estimated for stocks A and B with the following results: $rA,t rf = 0.01 + 0.6(rM,t rf) + eA,t$, $rB,t rf = 0.02 + 0.9(rM,t rf) + eB,t$. Also, SD measures of $rM$, $eA$, and $eB$ are 0.25, 0.1, and 0.2, respectively. What is the covariance between the returns on stocks A and B?
0.0338
In the context of the single index model, if the coefficient of the market return for stock A is 0.6 and the standard deviation of the market return is 0.25, what does the coefficient value imply?
Stock A is less sensitive to market movements
If the CAPM is true, what would you expect the estimated coefficient g2 in the regression equation $ri,t rf = g0 + g1 (rM,t rf) + g2 SM Bt + ei,t$ to represent?
The size factor
If the single index model has been estimated for stocks A and B with the following results: $rA,t rf = 0.01 + 0.6(rM,t rf) + eA,t$, $rB,t rf = 0.02 + 0.9(rM,t rf) + eB,t$. Also, SD measures of $rM$, $eA$, and $eB$ are 0.25, 0.1, and 0.2, respectively. What is the correlation coefficient between the returns on stocks A and B?
0.3
In the single index model, if the coefficient of the market return for stock A is 0.6 and the standard deviation of the market return is 0.25, what does the coefficient value imply?
Stock A is 0.6 times as volatile as the market
If the CAPM is true, what would you expect the estimated coefficient g2 in the regression equation $ri,t rf = g0 + g1 (rM,t rf) + g2 SM Bt + ei,t$ to represent?
The relative risk exposure of small firms to the market risk compared to that of big firms
What is the correlation coefficient between the returns on stocks A and B, given the single index model results: $rA,t rf = 0.01 + 0.6(rM,t rf) + eA,t$, $rB,t rf = 0.02 + 0.9(rM,t rf) + eB,t$ and SD measures of $rM$, $eA$, and $eB$ are 0.25, 0.1, and 0.2, respectively?
0.0525
If the single index model has been estimated for stocks A and B, what is the covariance between the returns on stocks A and B, given the regression results and SD measures?
0.0338
If the single index model has been estimated for stocks A and B, and the standard deviation measures of $rM$, $eA$, and $eB$ are 0.25, 0.1, and 0.2, respectively, what does the covariance between the returns on stocks A and B indicate?
The extent to which the returns of stocks A and B move together
Test your knowledge of intermediate investment concepts with practice questions from FINA 3103. Explore regression equations and understand the relationship between risk and return in financial markets.
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