Batch 5 Finance w Quiz

The correlation between an efficient portfolio, say the S&P500 index, and the risk-free asset is:

0

The Sharpe ratio of a portfolio P is defined as:

(rp-rf)/Op

How can you estimate benchmark returns?

1. approach measures the stock's abnormal returns 2. use CAPM model

Which statements about beta as a measure of risk are correct? Select all that apply.

1. beta measures the sensitivity of a security 2. the market portfolio has a beta of one 3. beta is a measure of market risk

What does behavioral finance do?

connects psychology and finance: 1. limited attention 2. investor mood 3. overconfidence

strong-form efficiency

market prices reflect all information both public and private

Weak form efficiency

market prices reflect all information contained in the apst

semi-strong form efficiency

market prices reflect all publicly available information

What is evidence for strong form of market efficiency?

money managers do not outperform

Given the following data for a stock: beta = 1.9; risk-free rate = 4%; market rate of return = 14%; and Expected rate of return on the stock = 13%. Then the stock is:

overpriced according to the CAPM as its expected return is lower than the one given by the CAPM

Investments A and B both offer an expected rate of return of 2.5%. If the standard deviation of A is 12% and that of B is 10%, then investors would:

prefer B to A

Event study methodology is used to test:

semi-strong form efficiency

A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short selling the stock of the firm that will be sued. This finding is in violation of the:

strong form market efficiency