Fund of Val Practice Problems

Which of the following are true regarding the Fama and French 3-factor model?

The value factor is the excess return of a portfolio that is long stocks with relatively high book-to-market ratios and short stocks with relatively low book-to-market ratios.

The three factors in the Fama and French 3-factor model are the market portfolio excess return, the return of a size factor, and the return of a value factor.

The three factors in the Fama and French 3-factor model are the risk-free asset excess return, the return of a size factor, and the return of a value factor

Which of the following are true according to the capital asset pricing model? When answering this question, assume that the market, risk premium is positive. sys

If 2 stocks have the same amount of systematic risk, then the 2 stocks will have the same expected return.

Which of the following are true according to the capital asset pricing model? When answering this question, assume that the risk-free rate and market risk premium are both positive. Beta

A stock with a beta of 0 has a required rate of return equal to the risk-free rate.

Which of the following present an arbitrage opportunity?

A well-diversified portfolio that has no risk earns a higher rate of return as the risk-free asset.
A well-diversified portfolio that has no risk earns a lower rate of return as the risk-free asset.
2 well-diversified portfolios with the same betas on each factor have different expected rates of return.

Which of the following are true according to a multifactor model? When answering this question, assume that the risk-free rate is positive and that the risk premium with respect to each factor in the model is positive. beta

i. A stock with a positive beta on all factors has an expected return that is greater than the risk-free rate.
ii. A stock with a negative beta on all factors has an expected return that is less than the risk-free rate.

Which of the following are true? risk

Unsystematic risk can be diversified away by including a sufficiently large number of stocks in a portfolio. Systematic can’t.

Which of the following are true according to the capital asset pricing model? When answering this question, assume that the risk-free rate and market risk premium are both positive. alpha

i. The alpha of a stock is the difference between the expected return of the stock and the required rate of return on the stock.
ii. If a stock has a positive alpha, it indicates that the stock is underpriced.

Which of the following are true according to the capital asset pricing model? When answering this question, assume that the risk-free rate and market risk premium are both positive. y int = Rf and slope = MRP

ii. The slope of the security market line is equal to the market risk premium.
iv. The y-intercept of the security market line is equal to the risk-free rate.

Which of the following are assumptions made in the development of the capital asset pricing model?

ii. All investors have the same assessment of the standard deviation of the return of each security.
iii. All investors have the same assessment of the expected return of each security.

Which of the following are true according to arbitrage pricing theory? When answering this question, assume that the risk-free rate is positive and that the risk premium with respect to each factor in the model is positive.

iii. If well-diversified portfolio A has a higher beta on each factor than well-diversified portfolio B, portfolio A has a higher expected rate of return than portfolio B.
iv. If a large number of stocks have non-zero alpha, then it is possible to form an arbitrage portfolio.

Which of the following are true? When answering this question, assume that for each stock, the market price of the stock is equal to the intrinsic value of the stock.

i. All else equal, a stock with a higher required rate of return will have a lower price to earnings ratio than a stock with a lower required rate of return.
iii. All else equal, a stock with more valuable growth opportunities will have a higher price to earnings ratio than a stock whose dividends grow at a lower rate.

Which of the following are true? For firm Ch 13

i. For a firm with a return on equity that is greater than the required rate of return on its equity, the present value of growth opportunities is positive.
iv. For a firm with a return on equity that is less than the required rate of return on its equity, the present value of growth opportunities is negative.

Which of the following are true? For stock ch 13

i. For a stock that can be valued using the constant growth model, in each period, the expected percentage change in the value of the stock from one period to the next is equal to the growth rate of the stock’s dividends.
iii. If 2 stocks have the same expected future dividends in each period, the stock with a higher required rate of return has a lower intrinsic value.
iv. If 2 stocks have the same expected dividend over the next year and the same required rate of return, the stock with a faster dividend growth rate has a higher intrinsic value

Which of the following are true? model ch 13

i. It is appropriate to value a stock using the constant growth model when the amount of the stock’s dividend is expected to grow at a constant annual rate forever.
ii. If a stock can be valued using the constant growth model and the market price of the stock is equal to the intrinsic value of the stock, then the expected return of the stock is equal to the stock’s dividend yield plus the growth rate of the stock’s dividends.
iii. If a stock is expected to pay the same dividend each year forever and the market price of the stock is equal to the intrinsic value of the stock, then the expected return of the stock is equal to the stock’s dividend yield.

Which of the following are true? instrincs

ii. If the intrinsic value of a stock is less than the market price of the stock, then the expected return of the stock is less than the required rate of return of the stock.
iv. If the expected return of a stock is less than the required rate of return of the stock, then the intrinsic value of the stock is less than the market price of the stock.

Which of the following are true? PV

i. The present value of growth opportunities is the difference between the value of a firm’s stock and the value of the firm’s stock if it were to keep its assets unchanged.
ii. For 2 stocks with the same value of assets in place, the stock with the higher present value of growth opportunities will have a higher price than the stock with the lower present value of growth opportunities