Chapter 12 True/False

A weak-form efficient market is one in which prices reflect all public and private knowledge, including past and current information.

False

A weak-form efficient market is one in which prices reflect all public knowledge, including past and current information

False

Research suggests that a portfolio of 20 or 30 different stocks can eliminate most of a portfolio's systematic risk

False

The benefits of diversification are greatest when asset returns have positive correlations.

False

The historical percentage return for a single financial asset is equal to any dividends received minus the difference between the selling price and the purchase price, all divided by the purchase price.

False

The term "ex-ante" refers to the past or historical information

False

The variance is the square root of the standard deviation

False

The variance of a portfolio can be calculated by finding the variances of the individual components of the portfolio and finding the weighted average of those variances

False

Unsystematic risk is the risk that cannot be eliminated through diversification

False

Any predictable trend in the same direction as the price change would be evidence of an efficient market.

False - A predictable trend implies the market does not quickly and correctly process new information to determine asset prices

The Capital Asset Pricing Model states that the expected return on an asset depends on its level of unsystematic risk.

False - CAPM depends on its level of systematic risk, measured by its beta

The coefficient of variation is a measure of total return on a stock

False - CV is a measure of risk per unit of return

If the expected return is 10%, the standard deviation is 3%, about 68% of the time returns will be expected to fall between 10% and 13%

False - Within one σ of the mean is the mean ± 1 σ → 7% to 13%

The risk of a portfolio is simply equal to the weighted average variance of the securities that comprise it

False - You cannot use an equation similar 12-7 for the variance of portfolio of stocks

A strong-form efficient market is one in which prices reflect all public knowledge, including past and current information

False - and private information

Most nondiversifiable risk can be eliminated by creating a portfolio of around 30 stocks

False - diversification (systematic) risk cannot be eliminated by diversification

When we speak of ex-ante returns, we are referring to historical information or data.

False - expected or forecasted

Most market risk can be eliminated through diversification

False - market (systematic) risk cannot be eliminated by diversification

In an efficient market, both expected and unexpected news should cause stock prices to move up or down

False - only unexpected news should cause stock prices to move

A market system that allows for quick execution of customers' trades is said to be informationally efficient

False - see definition of informationally efficient market

The variance measures the risk per unit of return

False - variance σ^2 is units squared, CV gives risk per unit of return

If Stock A has a higher standard deviation than Stock B, it will also have a greater coefficient of variation

False - 𝐂𝐕 =𝛔/𝐑̅ so it also depends on the size of 𝐑̅, for a given σ → larger 𝐑̅ reduces the CV

If a financial asset has a historical variance of 25, then its standard deviation must be 12.5%.

False - 𝛔 = √𝟐𝟓 = 𝟓

A higher coefficient of variation indicates more risk per unit of return.

True

A portfolio is any combination of financial assets or investments

True

A weak-form efficient market is a market in which prices reflect all past information.

True

Beta measures the variability of an asset's returns relative to the market portfolio.

True

Diversification occurs when we invest in several different assets rather than just a single one.

True

Future returns and risk cannot be predicted precisely from past measures.

True

If a market is semi-strong form efficient, it also is by definition weak-form efficient

True

In an efficient market, investors cannot consistently earn above average profits after taking risk differences into account

True

In general, large company stocks are more risky than Treasury bonds

True

In general, securities with higher historical standard deviations have provided higher returns

True

In general, securities with lower returns have lower historical standard deviations

True

Standard deviation is stated in the same units of measurement (e.g., dollars, percent) as those of the data from which they were generated.

True

Standard deviation is the square root of the variance.

True

The coefficient of variation measures the risk per unit of return.

True

The existence of chartists or technicians suggest that some inventors believe that markets are not weak form efficient

True

The expected rate of return on a portfolio is the weighted average of the expected returns of the individual assets in the portfolio

True

The greatest level of risk reduction through diversification can be achieved when combining two securities whose returns are perfectly negatively correlated.

True

The market portfolio is a portfolio that contains all risky assets.

True

The only relevant risk for investors that hold well diversified portfolios of securities is nondiversifiable risk

True

The return on a portfolio is simply equal to the weighted average return of the securities that comprise it

True

The term "ex-ante" refers to expected or forecasted information

True

Although gold is a risky investment by itself, including gold in a stock portfolio can make the portfolio less risky.

True - Since gold is negatively correlated with stocks adding it to a portfolio of stocks reduces the risk of the portfolio

If standard deviation is used to measure the risk of stocks, one problem that arises is the inability to tell which stock is riskier by looking at the standard deviation alone

True - also consider coefficient of variation

If a financial asset has a historical variance of 16, then its standard deviation must be 4.

True - 𝛔 = √𝟏𝟔 = 𝟒

A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2 dividend provided an investor with a 14% return.

dollar return = ($45 - $40) + $2 = $7 → % 𝐫𝐞𝐭𝐮𝐫𝐧 = $𝟕/$𝟒𝟎 = 𝟏𝟕. 𝟓%