question

Measures time-weighted returns & allows for compounding

answer

geometric avg return

question

Complete portfolio refers to the investment in:

answer

the risk-free asset and the risky portfolio combined

question

Timing good last year. Invested more in your portfolio right before prices went up and sold before prices went down. In calculating historical performance measures, which one will be the largest:

answer

dollar-weighted return

question

market risk premium defined as

answer

the difference between return on an index fund & return on treasury bills

question

rate of return on ___ is known at the beginning of the holding period, while rate of return on __ is not known until end of holding period

answer

treasury bills, risky assets

question

In the mean standard deviation graph, the line that connects the risk-free rate and optimal risky portfolio P is called:

answer

capital allocation line

question

You invest all your money in 1 year T bills. Following statements are correct

answer

your nominal return on the T-bills is riskless, your nominal sharpe ratio is zero

question

The CAL provided by combinations of 1 month Tbills and a broad index of common stocks is called the

answer

CML

question

Arguments supporting passive investment strategies

answer

active trading strategies may not guarantee higher returns but guarantee higher costs, passive investors can free-ride on the activity of knowledge investors whose trade force prices to reflect currently available info

question

risk that can be eliminated through diversification is called:

answer

unique risk, firm-specific risk ,diversifiable risk

question

adding additional risky assets to the investment opportunity set will generally move the efficient frontier

answer

UP & LEFT

question

investors degree of risk aversion will determine

answer

optimal mix of risk-free asset and risky asset

question

correlation coefficient between two assets equals

answer

their covariance divided by the product of their st devs

question

expected rate of return of a portfolio of risky securities is

answer

the weighted sum of the securities' expected returns

question

beta is a measure of security responsiveness to

answer

market risk

question

firm specific risk is also called:

answer

unique risk, diversifiable risk

question

Harry Markowitz is best known for work on

answer

techniques used to identify efficient portfolios of risky assets

question

Suppose that a stock portfolio and a bond portfolio have a zero correlation. this means that

answer

the returns on the stock and bond portfolios tend to vary independently of each other

question

on a standard expected return vs standard deviation graph, investors will prefer portfolios that lie to the ___ of the current investment opportunity set

answer

LEFT & ABOVE

question

complete portfolio refers to a portfolio consisting of

answer

the risk-free asset combined w at least one risky asset

question

rational risk-averse investors will always prefer portfolios

answer

located on the CML to those located on the efficient frontier

question

The optimal risky portfolio can be identified by finding:

answer

the tangency point of the CML and the efficient frontier, the line w the steepest slope that connects the riskfree rate to efficient frontier

question

the part of a stock's return that is systematic is a function of which of the following variables:

answer

volatility in excess returns of the stock market, the sensitivity of the stock's returns to changes in the stock market

question

According to Tobin's separation property, portfolio choice can be separated into 2 independent tasks consisting of

answer

identifying the optimal risky portfolio & constructiong a complete portfolio from T-bills and the optimal risky portfolio based on the investors degree of risk aversion

question

You are recalculating the risk of ACE stock in relaation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. you must also find that the

answer

correlation coefficient between ACE and the market has risen

question

the values of beta coefficients of securities are

answer

usually positive but not restricted

question

a security's beta coefficient will be negative if

answer

its returns are negatively correlated w market-index returns

question

the market value weighted avg beta of firms included in the market index will always be

answer

1

question

some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is

answer

less than 1

question

if an investor does not diversify his portfolio and puts all his money in one stock, the appropriate measure of security risk for that investor is the:

answer

stocks st dev

question

which of the following provides the best example of a systematic-risk event

answer

federal reserve increases interest rates 50 basis points

question

Decreasing the # of stocks in a portfolio from 50 to 10 would likely

answer

increase the unsystematic risk of the portfolio`

question

If you want to know the portfolio st dev for a 3 stock portfolio you will have to

answer

calculate 3 covariances

question

What correlation coefficient will produce the least diversification benefit

answer

the highest #

question

which correlation coefficient will produce the most diversification benefits

answer

the lowest number

question

What is the most likely correlation coefficient between a stockindex mutual fund and the SP500

answer

1

question

as you lengthen the time horizon of you investment period and decide to invest for multiple years, you will find that:

answer

the average risk per year may be smaller over longer investment horizons, the overall risk of your investment will compound over time

question

you are considering adding a new security to your portfolio. to decide whether you should add the security, you need to know the securities:

answer

expected return, st dev, correlation w portfolio

question

an adjusted beta will be __ than the unadjusted beta

answer

closer to 1

question

assumptions of the simple CAPM model:

answer

All the options

question

in CAPM, the systematic measure of risk is captured by:

answer

beta

question

if enough investors decide to purchase stocks, they are likely to drive up stock prices thereby causing:

answer

expected returns to fall; risk premiums to fall

question

the market portfolio has a beta of

answer

1

question

in a well-diversified portfolio, __ risk is negligible

answer

unsystematic

question

if all investors become more risk averse, the SML will ___ and stock prices will ___

answer

have the same intercept with a steeper slope; fall

question

arbitrage is based on the idea that:

answer

assets w identical risks must have the same expected rate of return

question

investors require a risk premium as compensation for bearing:

answer

systematic risk

question

according to the CAPM, a fairly priced security will plot:

answer

along the SML

question

according to the CAPM, fairly priced securities have:

answer

zero alphas

question

the graph of the relationship between expected return and beta in the CAPM is called

answer

SML

question

the beta of a security is equal to

answer

the covariance between the security and market returns divded by the variance of the markets returns

question

according to the CAPM, in equilibrium....

answer

all securities returns must lie on the SML

question

according to CAPM, which of the following is not a true statement regarding the market portfolio

answer

it is always the minimum-variance portfolio on the efficient frontier

question

in a world where the CAPM holds, which one of the following is not a true statement regarding the CML

answer

the capital market line is also called the security market line

question

an important characteristic of market equilibrium is

answer

the absence of arbitrage opportunities

question

according to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is

answer

directly related to the beta of the stock

question

in his famous critique of the CAPM, Roll argued that the CAPM

answer

is not testable because the true market portfolio can never be observed

question

which of the following variables do Fama and French claim do a better job explaining stock returns than beta:

answer

book to market ratio, firm size

question

the SML is valid for ___ and the CML is valid for ___

answer

both well-diversified portfolios and individual assets; well difersified portoflios only

question

according to capital asset pricing theory, the key determinant of portfolio returns is

answer

the systematic risk of the portfolio

question

the expected return of the risky-asset portfolio w minimum variance is

answer

tcant be determined

question

the most significant conceptual difference between the arbitrage pricing theory and the CAPM is that

answer

the CAPM recognizes only one systematic risk factor

question

the measure of unsystematic risk can be found from an index model as

answer

residual standard devaiton

question

standard deviation of portfolio returns is a measure of

answer

total risk

question

the measure of risk used in the CAPM model is

answer

beta

question

which of the following beliefs would not preclude charting as a method of portfolio mgmt

answer

stock prices follow recurring patterns

question

the weak form of the EMH states that __ must be reflected in the current stock price

answer

all past info

question

the semistrong form of the EMH states that __ must be reflected in the current stock price

answer

all publicly available info

question

the strong form of the EMH states that __ must be reflected

answer

all information, including inside info

question

evidence suggests that there may be __ momentum and __ reversal patterns in stock price behavior

answer

short run; long run

question

proponents of the EMH typically advocate

answer

a passive investment strategy

question

the tendency when the __ performing stocks in one period are the best performers in the next and the current __ performers are lagging is called the reversal effect

answer

worst; best

question

which of the following is not amethod employed by followers of technical analysis

answer

earnigns forecasting

question

which of the following is not a method employed by fundamental analysis

answer

relative strength analysis

question

the primary objective of fundamental analysis is to identify

answer

mispriced stocks

question

if you believe in the __ form of the EMH, you believe that stock prices reflect all publicly available info but not inside info

answer

semistrong

question

you believe that stock prices reflect all info that can be derived by examining market trading data but you do not believe stock prices reflect all publicly available info and inside info. this is __ form of EMH

answer

weak

question

mutual fund that attempts to hold quantities of shares in proportion to their representation in the stock market is called a __ fund

answer

index

question

choosing stocks by searching for predictable patterns in stock prices is called

answer

technical analysis

question

which is not an issue that is central to debate regarding market efficiency

answer

the tax-loss selling issue

question

small firms have tended to earn abnormal returns in

answer

january

question

fama and French suggested that many market anomalies can be explained as manifestations of

answer

varying risk premiums

question

proponents of the EMH think technical analysts

answer

are wasting time

question

evidence supporting semistromg form market efficiency suggest investors should

answer

use a passive trading strategy

question

"buy a stock if its price moves up by 2% more than Dow average" example of

answer

trading rule

question

according to research by Ball and Brown, securities markets fully adjust to earnings annoucncements

answer

gradually over time

question

when stock returns exhibit positive serial correlation, this means that __ returns tend to follow __ returns

answer

positive; positive

question

Basu found that firms with high P/E ratios:

answer

earned lower avg returns than firms w low P/E ratios

question

fundamental analysis is likely to yield best results for

answer

neglected stocks

question

According to Laporta's study, which stock is likely to generate greatest alpha

answer

the stock expected to generate poor earnings growth

question

even if the markets are efficient, professional portfolio mgmt. is still important because it provides investors w

answer

low cost diversification, portfolio w a specified risk level

question

Banz found that on avg, the risk adjusted returns of small firms:

answer

were higher than the risk-adjusted returns of large firms

question

DeBondt and Thaler found

answer

good; poor

question

JM keyes : example of __ problem

answer

lucky event

question

most tests of semistrong efficiency are

answer

joint tests of market efficiency and the risk-adjustment measure

question

the broadest info set is included in the

answer

strong form

question

Fama French evidence that high book to market firms outperform low book to market firms even after adjusting for beta means that

answer

either book to market firms are underpriced or book to market ratio is a proxy

question

the term random walk is used in investments to refer to

answer

stock price changes that are random and unpredictable

question

Market efficiency characteristics

answer

all 3

question

stock market analyssts have tended to be __

answer

overwhelmingly optimistic

question

assume that a company announces unexpectedly high earnings. one might expect

answer

an abnormal price change immediately after the announcement

question

market anomaly refers to

answer

price behavior tha differs from the behavior predicted by the efficne tmarket hypotesis

question

which contradicts the proposition tha the stock market is weakly efficient

answer

every January, stock market earns above normal returns

question

which observation would appear to contradict weak form of EMH

answer

you could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall

question

the semistrong form of the EMH implies that __ generate abnormal returns and __ generate abnormal returns

answer

tenchincal analysis cannot; fundamental analysis cannot

question

implication of the EMH is that

answer

nonzero alphas will quickly disappear

question

one type of passive portfolio mgmt. is

answer

investing in a well diversified portfolio w out attempting to search out mispriced securities

question

value stocks usually exhibit __ price to book ratios and __ price to earnings ratios

answer

low low

question

growth stocks usually exhibit __ price to book ratios and __ price to earnings ratios

answer

high; high

question

a technical analyst is most likely to be affiliated with which investment philosophy

answer

active mgmt

question

someone who invests in vanguard index 500 describes which approach

answer

passive

question

evidence by blake, Elton gruber indicates that actively managed bond funds

answer

underperform passive fixed income indexes by an amount equal to fund expenses

question

insiders are able to profitably trade and earn abnormal returns prior to announcement of positive news. this violates what:

answer

strong-form efficiency

question

in an efficient market and for an investor who believes in a passive approach to investing, what is the parimary duty of portfolio manager

answer

diversificatino

question

which fidelity Magellan portfolio manager is often referneces as an exxception

answer

peter lynch

question

tendency of poorly performing stocks and wellperforming stocks in one period to continue their performance into the next period

answer

momentum effect

question

concept might explain the ability to produce excess returns on this stock

answer

neglected-firm effect

question

when testing mutual fund performance over time, be careful of

answer

survivorship bias

question

testing many dif trading rules until you find one that would would have worked in the past

answer

data mining

question

models of financial markets that emphasize psychological factors affecting investor behavior

answer

behavioral finance

question

technical analysis focuses on

answer

finding repeating trends and patterns in prices

question

behaviorlists point out that even if market prices are __ there may be __

answer

distorted; limited arbitrage opportunities

question

when stock price breaks through the moving avg from below, this is considered to be

answer

a bullish signal

question

When the stock price falls below a moving average, a possible conclusion is that _____.

answer

B. market momentum has become negative

question

A support level is ___________________.

answer

a level below which the market is unlikely to fall

question

Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.

answer

rational; irrational

question

The only way for behavioral patterns to persist in prices is if ______________.

answer

there are limits to arbitrage activity

question

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______.

answer

conservatism

question

If investors overweight recent performance in forecasting the future, they are exhibiting ___

answer

representativeness bias

question

Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________.

answer

representativeness bias

question

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________.

answer

mental accounting

question

Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability?

answer

technical analysts

question

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________.

answer

metnal accounting

question

Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, _________________________________________.

answer

Shelly will have more regret over the loss than Bill

question

Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________.

answer

C. that she has a diminishing marginal utility of wealth

question

_________ is a value above which it is difficult for the market to rise.

answer

resistence level

question

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting _________

answer

loss aversion

question

In technical analysis, __________ is a value below which the market is relatively unlikely to fall

answer

support level

question

A possible limit on arbitrage activity that may allow behavioral biases to persist is _______.

answer

fundamental risk

question

The tendency of investors to hold on to losing investments is called the ________.

answer

disposition effect

question

Which one of the following best describes fundamental risk?

answer

You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.

question

Problems with behavioral finance include:

answer

all the above

question

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?

answer

overconfidence

Investment Mgmt – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards