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FIN 3826 Ch 8, Investments Chapter 7, 7, 6, Chapter 5, FIN 3826 - ch 5 test bank, Investment Management Final Ch. 5

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"Buy a stock if its price moves up by 2% more than the Dow Average," is an example of a _________________. A. filter rule B. market anomaly C. fundamental approach D. passive trading strategy

. "Active investment management may generate additional returns at times of about 0.1%. However, the standard deviation of the typical well diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. allocation

. DeBondt and Thaler (1985) found that the poorest performing stocks in one time period experienced __________ performance in the following period and the best performing stocks in one time period experienced __________ performance in the following time period. A. good, good B. good, poor C. poor, good D. poor, poor

. Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57 and then he sold once he had eliminated his loss. If other investors do the same to establish a trading pattern this would contradict _______. A. the strong-form EMH B. the weak-form EMH C. technical analysis D. the semistrong-form EMH

. The CAL provided by combinations of one month T-bills and a broad index of common stocks is called the ______. A. SML B. CAPM C. CML D. Total Return Line

A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy? A. EMH B. Fundamental analysis C. Strong form market efficiency D. Technical analysis

A market anomaly refers to _______. A. an exogenous shock to the market that is sharp but not persistent B. a price or volume event that is inconsistent with historical price or volume trends C. a trading or pricing structure that interferes with efficient buying and selling of securities D. price behavior that differs from the behavior predicted by the efficient market hypothesis

56. You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%? A. $6,000 B. $4,000 C. $7,000 D. $3,000

A. $6,000

32. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately _________. A. .1152 B. .1270 C. .1521 D. .1342

A. .1152

31. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately _________. A. .1152 B. .1270 C. .1521 D. .1342

A. .1152 Variance = 0.8 x 1.2^2

82. The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock? A. .2% B. 1.5% C. 3.6% D. 4%

A. .2% Return = .03 + .4(.05) + .8(-.06) = .002

83. The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock? A. .2% B. 1.5% C. 3.6% D. 4%

A. .2% Return = .03 + .4(.05) + .8(-.06) = .002

10. Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio? A. .40 B. .50 C. .75 D. .80

A. .40 20%-10%/25%

29. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. A. .583 B. .225 C. .327 D. .128

A. .583 .0380 = (.62)(.242) + (.42)(.182) + 2(.6)(.4)(.24)(.18) ρ; ρ = .583

34. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is _________. A. 0% B. 40% C. 60% D. 100%

A. 0%

24. Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ______ over time. A. 1 B. 0 C. -1 D. .5

A. 1

24. Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ______ over time. A. 1 B. 0 C. -1 D. .5

A. 1

71. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return? A. 1% B. 2% C. -1% D. -2%

A. 1%

72. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return? A. 1% B. 2% C. -1% D. -2%

A. 1% Required return = 6% + (16% - 6%)(1.1) = 17% Abnormal return = 18% - 17% = 1%

22. You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta? A. 1.048 B. 1.033 C. 1 D. 1.037

A. 1.048

35. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is _________. A. 14% B. 15.6% C. 16.4% D. 18%

A. 14%

62. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in Treasury bills. A. 19% B. 25% C. 36% D. 50%

A. 19%

46. Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. A. 20% more B. slightly more C. 20% less D. slightly less

A. 20% more

If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment? A. 3.92% B. 4% C. 4.12% D. 6%

A. 3.92%

During the 1926-2013 period the geometric mean return on Treasury bonds was _________. A. 5.07% B. 5.56% C. 9.34% D. 11.43%

A. 5.07%

28. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment? A. 5.14% B. 7.59% C. 9.29% D. 8.43%

A. 5.14%

79. What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23. A. 9.7% B. 12.2% C. 14% D. 15.6%

A. 9.7%

70. Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker? A. Advisor A was better because he generated a larger alpha. B. Advisor B was better because she generated a larger alpha. C. Advisor A was better because he generated a higher return. D. Advisor B was better because she achieved a good return with a lower beta.

A. Advisor A was better because he generated a larger alpha Required return A = 5% + (13% - 5%)(1.5) = 17% Required return B = 5% + (13% - 5%)(1.2) = 14.6% αA = Actual return A - Required return A = 20% - 17% = 3% αB = Actual return B - Required return B = 15% - 14.6% = .4%

69. Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker? A. Advisor A was better because he generated a larger alpha. B. Advisor B was better because she generated a larger alpha. C. Advisor A was better because he generated a higher return. D. Advisor B was better because she achieved a good return with a lower beta.

A. Advisor A was better because he generated a larger alpha.

2. The _______ decision should take precedence over the _____ decision. A. asset allocation; stock selection B. bond selection; mutual fund selection C. stock selection; asset allocation D. stock selection; mutual fund selection

A. Asset allocation; stock selection

Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

A. Dollar-weighted return

Which one of the following measures time-weighted returns and allows for compounding?

A. Geometric average return

The formula (E(rp)-rf)/sigmap is used to calculate the _____________. A. Sharpe ratio B. Treynor measure C. coefficient of variation D. real rate of return

A. Sharpe ratio

Annual percentage rates can be converted to effective annual rates by means of the following formula: A. [1 + (APR/n)]n - 1 B. (APR)(n) C. (APR/n) D. (periodic rate)(n)

A. [1 + (APR/n)]n - 1

63. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y _________. A. are in equilibrium B. offer an arbitrage opportunity C. are both underpriced D. are both fairly priced

A. are in equilibrium

64. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y _________. A. are in equilibrium B. offer an arbitrage opportunity C. are both underpriced D. are both fairly priced

A. are in equilibrium

5. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______. A. asset A B. asset B C. no risky asset D. The answer cannot be determined from the data given.

A. asset A

18. Arbitrage is based on the idea that _________. A. assets with identical risks must have the same expected rate of return B. securities with similar risk should sell at different prices C. the expected returns from equally risky assets are different D. markets are perfectly efficient

A. assets with identical risks must have the same expected rate of return

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________. A. capital allocation line B. indifference curve C. investor's utility line D. security market line

A. capital allocation line

11. Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest? A. dollar-weighted return B. geometric average return C. arithmetic average return D. mean holding-period return

A. dollar-weighted return

12. If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________. A. expected returns to fall; risk premiums to fall B. expected returns to rise; risk premiums to fall C. expected returns to rise; risk premiums to rise D. expected returns to fall; risk premiums to rise

A. expected returns to fall; risk premiums to fall

4. Which one of the following measures time-weighted returns and allows for compounding? A. geometric average return B. arithmetic average return C. dollar-weighted return D. historical average return

A. geometric average return

50. Liquidity is a risk factor that __________. A. has yet to be accurately measured and incorporated into portfolio management B. is unaffected by trading mechanisms on various stock exchanges C. has no effect on the market value of an asset D. affects bond prices but not stock prices

A. has yet to be accurately measured and incorporated into portfolio management

51. Liquidity is a risk factor that __________. A. has yet to be accurately measured and incorporated into portfolio management B. is unaffected by trading mechanisms on various stock exchanges C. has no effect on the market value of an asset D. affects bond prices but not stock prices

A. has yet to be accurately measured and incorporated into portfolio management

77. A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole. A. higher than B. lower than C. equal to D. indeterminable compared to

A. higher than

78. A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole. A. higher than B. lower than C. equal to D. indeterminable compared to

A. higher than

46. In his famous critique of the CAPM, Roll argued that the CAPM ______________. A. is not testable because the true market portfolio can never be observed B. is of limited use because systematic risk can never be entirely eliminated C. should be replaced by the APT D. should be replaced by the Fama-French three-factor model

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

47. In his famous critique of the CAPM, Roll argued that the CAPM ______________. A. is not testable because the true market portfolio can never be observed B. is of limited use because systematic risk can never be entirely eliminated C. should be replaced by the APT D. should be replaced by the Fama-French three-factor model

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

54. A security's beta coefficient will be negative if ____________. A. its returns are negatively correlated with market-index returns B. its returns are positively correlated with market-index returns C. its stock price has historically been very stable D. market demand for the firm's shares is very low

A. its returns are negatively correlated with market-index returns

24. On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. A. left and above B. left and below C. right and above D. right and below

A. left and above

The normal distribution is completely described by its _______. A. mean and standard deviation B. mean and variance C. mode and standard deviation D. median and variance

A. mean and standard deviation

38. In a single-factor market model the beta of a stock ________. A. measures the stock's contribution to the standard deviation of the market portfolio B. measures the stock's unsystematic risk C. changes with the variance of the residuals D. measures the stock's contribution to the standard deviation of the stock

A. measures the stock's contribution to the standard deviation of the market portfolio

39. In a single-factor market model the beta of a stock ________. A. measures the stock's contribution to the standard deviation of the market portfolio B. measures the stock's unsystematic risk C. changes with the variance of the residuals D. measures the stock's contribution to the standard deviation of the stock

A. measures the stock's contribution to the standard deviation of the market portfolio

58. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you _________. A. place 40% of your money in the risky portfolio and the rest in the risk-free asset B. place 55% of your money in the risky portfolio and the rest in the risk-free asset C. place 60% of your money in the risky portfolio and the rest in the risk-free asset D. place 75% of your money in the risky portfolio and the rest in the risk-free asset

A. place 40% of your money in the risky portfolio and the rest in the risk-free asset

58. The measure of unsystematic risk can be found from an index model as _________. A. residual standard deviation B. R-square C. degrees of freedom D. sum of squares of the regression

A. residual standard deviation

59. The measure of unsystematic risk can be found from an index model as _________. A. residual standard deviation B. R-square C. degrees of freedom D. sum of squares of the regression

A. residual standard deviation

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________. A. security A B. security B C. security C D. security D

A. security A

59. If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________. A. stock's standard deviation B. variance of the market C. stock's beta D. covariance with the market index

A. stock's standard deviation

45. Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____. A. stocks B. bonds C. money market funds D. Treasury bills

A. stocks

86. One can profit from an arbitrage opportunity by A. taking a long position in the cheaper market and a short position in the expensive market. B. taking a short position in the cheaper market and a long position in the expensive market. C. taking a long position in both markets. D. taking a short position in both markets .

A. taking a long position in the cheaper market and a short position in the expensive market.

25. The beta of a security is equal to _________. A. the covariance between the security and market returns divided by the variance of the market's returns B. the covariance between the security and market returns divided by the standard deviation of the market's returns C. the variance of the security's returns divided by the covariance between the security and market returns D. the variance of the security's returns divided by the variance of the market's returns

A. the covariance between the security and market returns divided by the variance of the market's returns

The market risk premium is defined as __________.

A. the difference between the return on an index fund and the return on Treasury bills

The market risk premium is defined as __________. A. the difference between the return on an index fund and the return on Treasury bills B. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

A. the difference between the return on an index fund and the return on Treasury bills

25. The term complete portfolio refers to a portfolio consisting of _________________. A. the risk-free asset combined with at least one risky asset B. the market portfolio combined with the minimum-variance portfolio C. securities from domestic markets combined with securities from foreign markets D. common stocks combined with bonds

A. the risk-free asset combined with at least one risky asset

The reward-to-volatility ratio is given by _________.

A. the slope of the capital allocation line

The reward-to-volatility ratio is given by _________. A. the slope of the capital allocation line B. the second derivative of the capital allocation line C. the point at which the second derivative of the investor's indifference curve reaches zero D. the portfolio's excess return

A. the slope of the capital allocation line

59. Standard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

A. total risk

60. Standard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

A. total risk

According to Markowitz and other proponents of modern portfolio theory which of the following activities would not be expected to produce any benefits? A. Diversification B. Investing in Treasury bills C. Investing in stocks of utility companies D. Engaging in active portfolio management to enhance returns

According to historical data, over the long run which of the following assets has the best chance to provide the best after inflation, after tax rate of return? A. Long term Treasury bonds B. Corporate bonds C. Common stocks D. Preferred stocks

According to recent research securities markets fully adjust to earnings announcements _______. A. instantly B. in 1 day C. in 1 week D. gradually over time

An implication of the efficient market hypothesis is that __________. A. high beta stocks are consistently overpriced B. low beta stocks are consistently overpriced C. nonzero alphas will quickly disappear D. growth stocks are better buys than value stocks

You have the following rates of return for a risky portfolio for several recent years: 2011 35.23% 2012 18.67% 2013 −9.87% 2014 23.45% If you invested $1,000 at the beginning of 2011, your investment at the end of 2014 would be worth ___________. A. $2,176.60 B. $1,785.56 C. $1,645.53 D. $1,247.87

B. $1,785.56

64. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________. A. $300; $450 B. $150; $100 C. $100; $150 D. $450; $300

B. $150; $100

65. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%. A. $162; $595; $243 B. $243; $162; $595 C. $595; $162; $243 D. $595; $243; $162

B. $243; $162; $595

55. Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________. A. $3,000 B. $7,000 C. $7,500 D. $10,000

B. $7,000

32. The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________. A. -.0447 B. -.0020 C. .0020 D. .0447

B. -.0020 Covariance = -.50(.10)(.04)

71. Which of the following correlation coefficients will produce the most diversification benefits? A. -.6 B. -.9 C. 0 D. .4

B. -.9

81. The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio? A. 0 B. .45 C. .74 D. 1.35

B. .45 Reward-to-variability ratio = (.089 - .035)/.12 = .45

69. The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund? A. .8 B. .6 C. 9 D. 1

B. .6

52. A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta? A. 1 B. .75 C. .60 D. .55

B. .75

72. If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? A. .8 B. 1 C. 1.2 D. 1.5

B. 1

73. If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? A. .8 B. 1 C. 1.2 D. 1.5

B. 1 Market beta always equals 1 regardless of market volatility.

80. Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%? A. .0% B. 1% C. 2% D. 3%

B. 1% Residual = 15 - (3 + 1.1 × 10) = 1%

79. Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%? A. .0% B. 1% C. 2% D. 3%

B. 1% Residual = 15 - (3 + 1.1 × 10) = 1%

Most studies indicate that investors' risk aversion is in the range _____. A. 1-3 B. 1.5-4 C. 3-5.2 D. 4-6

B. 1.5-4

80. What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1. A. 0% B. 10.8% C. 18% D. 24%

B. 10.8%

82. The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock? A. 8.7% B. 11.2% C. 13.8% D. 15.2%

B. 11.2% Return = 3.5 + 9 - 1.3 = 11.2%

81. The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock? A. 8.7% B. 11.2% C. 13.8% D. 15.2%

B. 11.2% Return = 3.5 + 9 - 1.3 = 11.2%

16. An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______. A. 41.68% B. 11.32% C. 3.64% D. 13%

B. 11.32%

76. Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return? A. 15.9% B. 12.9% C. 13.2% D. 12%

B. 12.9% E[rnew] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(.5) = 12.9%

77. Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return? A. 15.9% B. 12.9% C. 13.2% D. 12%

B. 12.9% E[rnew] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(.5) = 12.9%

75. What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%? A. 3.8% B. 13.1% C. 15.6% D. 19.1%

B. 13.1% Expected return = 3.5 + (.8)(15.5 - 3.5) = 13.1%

76. What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%? A. 3.8% B. 13.1% C. 15.6% D. 19.1%

B. 13.1% Expected return = 3.5 + (.8)(15.5 - 3.5) = 13.1%

41. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The expected return on the minimum-variance portfolio is approximately _________. A. 10% B. 13.6% C. 15% D. 19.41%

B. 13.6%

38. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.) A. 14% B. 16% C. 18% D. 19%

B. 16%

31. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. A. 23% B. 19.76% C. 18.45% D. 17.67%

B. 19.76% σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45) σ2p = .039046 σp = 19.76%

40. The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________. A. .5 B. 2.5 C. 3.5 D. 5

B. 2.5 A = (.20 - .10)/.04 = 2.5

41. The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________. A. .5 B. 2.5 C. 3.5 D. 5

B. 2.5 A = (.20 - .10)/.04 = 2.5

83. A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project? A. 0% B. 25% C. 50% D. 75%

B. 25% E[rp] = (.5)(100) + (.5)(-50) = 25%

54. Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is _________. A. 1% B. 3% C. 6% D. 9%

B. 3%

Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment? A. 3.01% B. 3.09% C. 12.42% D. 16.71%

B. 3.09%

39. Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________. A. -1.7% B. 3.7% C. 5.5% D. 8.7%

B. 3.7%

40. Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________. A. -1.7% B. 3.7% C. 5.5% D. 8.7%

B. 3.7%

36. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is _________. A. 0% B. 5% C. 7% D. 20%

B. 5%

The arithmetic average of -11%, 15%, and 20% is ________.

B. 8%

The arithmetic average of -11%, 15%, and 20% is ________. A. 15.67% B. 8% C. 11.22% D. 6.45%

B. 8%

You have an EAR of 9%. The equivalent APR with continuous compounding is _____. A. 8.47% B. 8.62% C. 8.88% D. 9.42%

B. 8.62%

38. If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn? A. 5.48% B. 8.74% C. 9% D. 12%

B. 8.74%

68. A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____. A. 68.26% B. 95.44% C. 99.74% D. 100%

B. 95.44%

28. Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A; A B. A; B C. B; A D. B; B

B. A; B

29. Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A; A B. A; B C. B; A D. B; B

B. A; B

45. The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

76. As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall. A. I only B. I and II only C. III only D. I, II, and III

B. I and II only

In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in: I. Preventing the sum of the deviations from always equaling zero II. Exaggerating the effects of large positive and negative deviations III. A number for which the unit is percentage of returns A. I only B. I and II only C. I and III only D. I, II, and III

B. I and II only

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a higher risk premium than security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B. A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons. A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero. A. I only B. I and III only C. II only D. I, II, and III

B. I and III only

48. In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by: I. Including the unsystematic risk of a stock II. Including human capital in the market portfolio III. Allowing for changes in beta over time A. I and II only B. II and III only C. I and III only D. I, II, and III

B. II and III only

49. In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by: I. Including the unsystematic risk of a stock II. Including human capital in the market portfolio III. Allowing for changes in beta over time A. I and II only B. II and III only C. I and III only D. I, II, and III

B. II and III only

During the 1926-2010 period the Sharpe ratio was greatest for which of the following asset classes?

B. Large U.S. stocks

9. The arbitrage pricing theory was developed by _________. A. Henry Markowitz B. Stephen Ross C. William Sharpe D. Eugene Fama

B. Stephen Ross

28. In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? A. The capital market line always has a positive slope. B. The capital market line is also called the security market line. C. The capital market line is the best-attainable capital allocation line. D. The capital market line is the line from the risk-free rate through the market portfolio.

B. The capital market line is also called the security market line

27. In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? A. The capital market line always has a positive slope. B. The capital market line is also called the security market line. C. The capital market line is the best-attainable capital allocation line. D. The capital market line is the line from the risk-free rate through the market portfolio.

B. The capital market line is also called the security market line.

25. The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period. A. risky assets; Treasury bills B. Treasury bills; risky assets C. excess returns; risky assets D. index assets; bonds

B. Treasury bills; risky assets

The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period.

B. Treasury bills; risky assets

57. A stock's alpha measures the stock's ____________________. A. expected return B. abnormal return C. excess return D. residual return

B. abnormal return

58. A stock's alpha measures the stock's ____________________. A. expected return B. abnormal return C. excess return D. residual return

B. abnormal return

49. You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________. A. all fall on the line of best fit; positive slope B. all fall on the line of best fit; negative slope C. are widely scattered around the line; positive slope D. are widely scattered around the line; negative slope

B. all fall on the line of best fit; negative slope

25. According to the capital asset pricing model, in equilibrium _________. A. all securities' returns must lie below the capital market line B. all securities' returns must lie on the security market line C. the slope of the security market line must be less than the market risk premium D. any security with a beta of 1 must have an excess return of zero

B. all securities' returns must lie on the security market line

26. According to the capital asset pricing model, in equilibrium _________. A. all securities' returns must lie below the capital market line B. all securities' returns must lie on the security market line C. the slope of the security market line must be less than the market risk premium D. any security with a beta of 1 must have an excess return of zero

B. all securities' returns must lie on the security market line

20. According to the capital asset pricing model, a fairly priced security will plot _________. A. above the security market line B. along the security market line C. below the security market line D. at no relation to the security market line

B. along the security market line

2. The ______ measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar-weighted

B. arithmetic average

10. In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. A. unique risk B. beta C. the standard deviation of returns D. the variance of returns

B. beta

41. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________. A. buy stock X because it is overpriced B. buy stock X because it is underpriced C. sell short stock X because it is overpriced D. sell short stock X because it is underpriced

B. buy stock X because it is underpriced

42. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________. A. buy stock X because it is overpriced B. buy stock X because it is underpriced C. sell short stock X because it is overpriced D. sell short stock X because it is underpriced

B. buy stock X because it is underpriced

8. The ________ is equal to the square root of the systematic variance divided by the total variance. A. covariance B. correlation coefficient C. standard deviation D. reward-to-variability ratio

B. correlation coefficient

70. The expected return on the market is the risk-free rate plus the _____________. A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic return

B. equilibrium risk premium

71. The expected return on the market is the risk-free rate plus the _____________. A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic return

B. equilibrium risk premium

15. The risk that can be diversified away is __________. A. beta B. firm-specific risk C. market risk D. systematic risk

B. firm-specific risk

9. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return

B. geometric average return

Published data on past returns earned by mutual funds are required to be ______. A. dollar-weighted returns B. geometric returns C. excess returns D. index returns

B. geometric returns

68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. A. increase the systematic risk of the portfolio B. increase the unsystematic risk of the portfolio C. increase the return of the portfolio D. decrease the variation in returns the investor faces in any one year

B. increase the unsystematic risk of the portfolio

During the 1926-2013 period the Sharpe ratio was greatest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. bond world portfolio return in U.S. dollars

B. large U.S. stocks

58. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0

B. less than 1

26. Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. located on the capital market line to those located on the efficient frontier C. at or near the minimum-variance point on the efficient frontier D. that are risk-free to all other asset choices

B. located on the capital market line to those located on the efficient frontier

From 1926 to 2013 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks. A. lower; higher B. lower; lower C. higher; lower D. higher; higher

B. lower; lower

34. The possibility of arbitrage arises when ____________. A. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily B. mispricing among securities creates opportunities for riskless profits C. two identically risky securities carry the same expected returns D. investors do not diversify

B. misplacing among securities creates opportunities for riskless profits

33. The possibility of arbitrage arises when ____________. A. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily B. mispricing among securities creates opportunities for riskless profits C. two identically risky securities carry the same expected returns D. investors do not diversify

B. mispricing among securities creates opportunities for riskless profits

12. Diversification is most effective when security returns are _________. A. high B. negatively correlated C. positively correlated D. uncorrelated

B. negatively correlated

33. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A. fairly priced B. overpriced C. underpriced D. none of these answers

B. overpriced

32. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A. fairly priced B. overpriced C. underpriced D. none of these answers

B. overpriced In equilibrium, E(rX) = 5% + 1.15(15% - 5%) = 16.5%.

89. Compensation of money managers is _____ based on alpha or other appropriate risk-adjusted measures. A. never B. rarely C. almost always D. always

B. rarely

The excess return is the _________. A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury-bill rate C. rate of return to risk aversion D. index return

B. rate of return in excess of the Treasury-bill rate

51. Beta is a measure of ______________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

B. relative systematic risk

52. Beta is a measure of ______________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

B. relative systematic risk

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______. A. is normally risk neutral B. requires a risk premium to take on the risk C. knows he or she will not lose money D. knows the outcomes at the beginning of the holding period

B. requires a risk premium to take on the risk

43. A measure of the riskiness of an asset held in isolation is ____________. A. beta B. standard deviation C. covariance D. alpha

B. standard deviation

75. A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________. A. firm-specific risk B. systematic risk C. unique risk D. none of the options

B. systematic risk

18. Market risk is also called __________ and _________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

B. systematic risk; nondiversifiable risk

21. Harry Markowitz is best known for his Nobel Prize-winning work on _____________. A. strategies for active securities trading B. techniques used to identify efficient portfolios of risky assets C. techniques used to measure the systematic risk of securities D. techniques used in valuing securities options

B. techniques used to identify efficient portfolios of risky assets

The holding period return on a stock is equal to _________.

B. the capital gain yield over the period plus the dividend yield

The holding period return on a stock is equal to _________. A. the capital gain yield over the period plus the inflation rate B. the capital gain yield over the period plus the dividend yield C. the current yield plus the dividend yield D. the dividend yield plus the risk premium

B. the capital gain yield over the period plus the dividend yield

57. Arbitrage is __________________________. A. an example of the law of one price B. the creation of riskless profits made possible by relative mispricing among securities C. a common opportunity in modern markets D. an example of a risky trading strategy based on market forecasting

B. the creation of riskless profits made possible by relative misplacing among securities

56. Arbitrage is __________________________. A. an example of the law of one price B. the creation of riskless profits made possible by relative mispricing among securities C. a common opportunity in modern markets D. an example of a risky trading strategy based on market forecasting

B. the creation of riskless profits made possible by relative mispricing among securities

50. The term excess return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

B. the difference between the rate of return earned and the risk-free rate

22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolios tend to move inversely B. the returns on the stock and bond portfolios tend to vary independently of each other C. the returns on the stock and bond portfolios tend to move together D. the covariance of the stock and bond portfolios will be positive

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

52. According to capital asset pricing theory, the key determinant of portfolio returns is _________. A. the degree of diversification B. the systematic risk of the portfolio C. the firm-specific risk of the portfolio D. economic factors

B. the systematic risk of the portfolio

53. According to capital asset pricing theory, the key determinant of portfolio returns is _________. A. the degree of diversification B. the systematic risk of the portfolio C. the firm-specific risk of the portfolio D. economic factors

B. the systematic risk of the portfolio

6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up; right B. up; left C. down; right D. down; left

B. up; left

9. Which of the following statistics cannot be negative? A. Covariance B. Variance C. E(r) D. Correlation coefficient

B. variance

Year Beg Year $ #shares b/s 2011 50 100 b 2012 55 50 b 2013 51 75 s 2014 54 75s What is the dollar-weighted return over the entire time period? A. 2.87% B.74% C. 2.6% D. 2.21%

B.74%

87. An investor should do which of the following for stocks with negative alphas? A. go long B.sell short C. hold D. do nothing

B.sell short

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor ___________ A. is normally risk neutral B. requires a risk premium to take on the risk C. knows he or she will not lose money D. knows the outcomes at the beginning of the holding period

51. The holding-period return on a stock was 25%. Its ending price was $18, and its beginning price was $16. Its cash dividend must have been _________. A. $.25 B. $1 C. $2 D. $4

C. $2

53. The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been _________. A. $28.50 B. $33.20 C. $31.50 D. $29.75

C. $31.50

Your great aunt Zella invested $100 in 1925 in a portfolio of large U.S. stocks that earned a compound return of 10% annually.If she left that money to you, how much would be in the account 90 years later in 2015? A. $1,000 B. $9,900 C. $531,302 D. $5,843,325

C. $531,302

71. The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year? A. -3.64% B. -6.36% C. -6.44% D. -11.74%

C. -6.44%

59. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________. A. 1.040 B. .80 C. .50 D. .25

C. .50

30. The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________. A. .12 B. .36 C. .60 D. .77

C. .60

55. The market value weighted-average beta of firms included in the market index will always be _____________. A. 0 B. between 0 and 1 C. 1 D. none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

C. 1

72. What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A. -1 B. 0 C. 1 D. .5

C. 1

37. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________. A. 1.14 B. 1.2 C. 1.26 D. 1.5

C. 1.26

38. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________. A. 1.14 B. 1.2 C. 1.26 D. 1.5

C. 1.26

43. Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately _________. A. .60 B. 1 C. 1.67 D. 3.20

C. 1.67

42. Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately _________. A. .60 B. 1 C. 1.67 D. 3.20

C. 1.67 0.20 / 0.12

37. Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is _________. A. 6.75% B. 9% C. 10.75% D. 12%

C. 10.75% E(rn)= .04+3(.0225)= 10.75

36. Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is _________. A. 6.75% B. 9% C. 10.75% D. 12%

C. 10.75% 2.25% x 3 + 4%

42. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The standard deviation of return on the minimum-variance portfolio is _________. A. 0% B. 6% C. 12% D. 17%

C. 12%

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively. A. 10%; 6.7% B. 12%; 22.4% C. 12%; 15.7% D. 10%; 35%

C. 12%; 15.7%

Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment? A. 2.04% B. 12 % C. 12.24% D. 12.89%

C. 12.24%

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment? A. 6.38% B. 12.77% C. 13.17% D. 14.25%

C. 13.17%

80. The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock? A. 10% B. 11.5% C. 13.6% D. 14%

C. 13.6% Return = .04 + .6(.04) + 1.2(.06) = .136

81. The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock? A. 10% B. 11.5% C. 13.6% D. 14%

C. 13.6% Return = .04 + .6(.04) + 1.2(.06) = .136

The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year? A. 6.58% B. 8.86% C. 14.47% D. 18.66%

C. 14.47%

30. Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A. 13.5% B. 15% C. 16.25% D. 23%

C. 16.25% E(rA) = 7 + 0.5(1) + 1.25(7) = 16.25%

31. Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A. 13.5% B. 15% C. 16.25% D. 23%

C. 16.25% E(rA) = 7 + 0.5(1) + 1.25(7) = 16.25%

43. The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to _________. A. 12% B. 17% C. 18% D. 23%

C. 18%

44. The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to _________. A. 12% B. 17% C. 18% D. 23%

C. 18%

Year Beg Year $ #shares b/s 2011 50 100 b 2012 55 50 b 2013 51 75 s 2014 54 75s geometric average return for the period? A. 2.87% B. .74% C. 2.6% D. 2.21%

C. 2.6%

41. Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______. A. 8.67% B. 9.84% C. 21.28% D. 14.68%

C. 21.28%

39. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________. A. 25.5% B. 22.3% C. 21.4% D. 20.7%

C. 21.4%

62. You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______. A. 1.8 B. 2.48 C. 3.12 D. 5.49

C. 3.12 The Sharpe ration grows at a rate of so the 3-year Sharpe ration would be 1.8 × = 3.12.

49. You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________. A. -3.57% B. -3.45% C. 4.31% D. 8.03%

C. 4.31%

What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%? A. 3.72% B. 4.23% C. 4.74% D. 4.90%

C. 4.74%

33. Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________. A. 10% B. 20% C. 40% D. 60%

C. 40%

63. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. A. 0%; 60%; 40% B. 25%; 45%; 30% C. 40%; 24%; 16% D. 50%; 30%; 20%

C. 40%; 24%; 16%

47. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____. A. .22 B. .60 C. 42 D. .25

C. 42

57. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%. A. 100% B. 90% C. 45% D. 10%

C. 45%

85. If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return? A. 5% B. 15% C. 54.5% D. 114.5%

C. 54.5%

The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan? A. .50% B. 5% C. 6% D. 6.5%

C. 6%

You have an APR of 7.5% with continuous compounding. The EAR is _____. A. 7.5% B. 7.65% C. 7.79 % D. 8.25%

C. 7.79 %

8. Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A. 2% B. 6% C. 8% D. 12%

C. 8% 20% = rF + (18 - rF)(1.2); rF = 8%

8. Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A. 2% B. 6% C. 8% D. 12%

C. 8% 20% = rF + (18 - rF)(1.2); rF = 8%

What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%? A. 8% B. 8.33 % C. 8.47% D. 8.5 %

C. 8.47%

44. Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return? A. 7% B. 8.5% C. 8.8% D. 9.25%

C. 8.8% 6% + (1.5%)(1.2) + 1% = 8.8%

40. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is .35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately _________. A. 45% B. 67% C. 85% D. 92%

C. 85%

The geometric average of -12%, 20%, and 25% is _________.

C. 9.7%

The geometric average of -12%, 20%, and 25% is _________. A. 8.42% B. 11% C. 9.7% D. 18.88%

C. 9.7%

29. Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A; A B. A; B C. B; A D. B; B

C. B; A

30. Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________. A. A; A B. A; B C. B; A D. B; B

C. B; A

44. Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because _________. A. A; it offers an expected excess return of .2% B. A; it offers an expected excess return of 2.2% C. B; it offers an expected excess return of 1.8% D. B; it offers an expected return of 2.4%

C. B; it offers an expected excess return of 1.8%

45. Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because _________. A. A; it offers an expected excess return of .2% B. A; it offers an expected excess return of 2.2% C. B; it offers an expected excess return of 1.8% D. B; it offers an expected return of 2.4%

C. B; it offers an expected excess return of 1.8%

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______.

C. CML

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______. A. SML B. CAPM C. CML D. total return line

C. CML

47. Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size A. I only B. I and II only C. I and III only D. I, II, and III

C. I and III only

48. Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size A. I only B. I and II only C. I and III only D. I, II, and III

C. I and III only

Rank the following from highest average historical return to lowest average historical return from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

C. I, III, II, IV

Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

C. I, III, II, IV

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

C. I, III, II, IV

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV

C. I, III, II, IV

61. Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I only B. II only C. II and III only D. I, II, and III

C. II and III only

27. The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier A. I and II only B. II and III only C. III and IV only D. I and IV only

C. III and IV only

27. According to the CAPM, which of the following is not a true statement regarding the market portfolio. A. All securities in the market portfolio are held in proportion to their market values. B. It includes all risky assets in the world, including human capital. C. It is always the minimum-variance portfolio on the efficient frontier. D. It lies on the efficient frontier.

C. It is always the minimum-variance portfolio on the efficient frontier

26. According to the CAPM, which of the following is not a true statement regarding the market portfolio. A. All securities in the market portfolio are held in proportion to their market values. B. It includes all risky assets in the world, including human capital. C. It is always the minimum-variance portfolio on the efficient frontier. D. It lies on the efficient frontier.

C. It is always the minimum-variance portfolio on the efficient frontier.

During the 1926-2013 period which one of the following asset classes provided the lowest real return? A. Small U.S. stocks B. Large U.S. stocks C. Long-term U.S. Treasury bonds D. Equity world portfolio in U.S. dollars

C. Long-term U.S. Treasury bonds

During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset classes?

C. Long-term U.S. Treasury bonds

63. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________. A. SDA Corp. stock is underpriced B. SDA Corp. stock is fairly priced C. SDA Corp. stock's alpha is -.75% D. SDA Corp. stock alpha is .75%

C. SDA Corp. stock alpha is -.75%

62. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________. A. SDA Corp. stock is underpriced B. SDA Corp. stock is fairly priced C. SDA Corp. stock's alpha is -.75% D. SDA Corp. stock alpha is .75%

C. SDA Corp. stock's alpha is -.75%

23. The graph of the relationship between expected return and beta in the CAPM context is called the _________. A. CML B. CAL C. SML D. SCL

C. SML

23. The graph of the relationship between expected return and beta in the CAPM context is called the _________. A. CML B. CAL C. SML D. SCL

C. SML

15. The capital asset pricing model was developed by _________. A. Kenneth French B. Stephen Ross C. William Sharpe D. Eugene Fama

C. William Sharpe

15. The capital asset pricing model was developed by _________. A. Kenneth French B. Stephen Ross C. William Sharpe D. Eugene Fama

C. William Sharpe

7. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________. A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return

C. arithmetic average return

One method of forecasting the risk premium is to use the _______. A. coefficient of variation of analysts' earnings forecasts B. variations in the risk-free rate over time C. average historical excess returns for the asset under consideration D. average abnormal return on the index portfolio

C. average historical excess returns for the asset under consideration

20. Which one of the following stock return statistics fluctuates the most over time? A. Covariance of returns B. Variance of returns C. Average return D. Correlation coefficient

C. average return

69. If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______. A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks

C. calculate free coverlances

78. According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return? A. long-term Treasury bonds B. corporate bonds C. common stocks D. preferred stocks

C. common stocks

51. You are recalculating the risk of ACE stock in relation 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 ____________. A. covariance between ACE and the market has fallen B. correlation coefficient between ACE and the market has fallen C. correlation coefficient between ACE and the market has risen D. unsystematic risk of ACE has risen

C. correlation coefficient between ACE and the market has risen

45. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. A. directly related to the risk aversion of the particular investor B. inversely related to the risk aversion of the particular investor C. directly related to the beta of the stock D. inversely related to the alpha of the stock

C. directly related to the beta of the stock

46. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. A. directly related to the risk aversion of the particular investor B. inversely related to the risk aversion of the particular investor C. directly related to the beta of the stock D. inversely related to the alpha of the stock

C. directly related to the beta of the stock

3. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. A. geometric average return B. arithmetic average return C. dollar-weighted return D. index return

C. dollar-weighted return

17. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________. A. equal to the sum of the securities' standard deviations B. equal to -1 C. equal to 0 D. greater than 0

C. equal to 0

61. You run a regression of a stock's returns versus a market index and find the following: Based on the data, you know that the stock _____. A. earned a positive alpha that is statistically significantly different from zero B. has a beta precisely equal to .890 C. has a beta that is likely to be anything between .6541 and 1.465 inclusive D. has no systematic risk

C. has a beta that is likely to be anything between .6541 and 1.465 inclusive

16. If all investors become more risk averse, the SML will _______________ and stock prices will _______________. A. shift upward; rise B. shift downward; fall C. have the same intercept with a steeper slope; fall D. have the same intercept with a flatter slope; rise

C. have the same intercept with a steeper slope; fall

Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms. A. the same B. lower C. higher D. none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

C. higher

28. The _________ reward-to-variability ratio is found on the ________ capital market line. A. lowest; steepest B. highest; flattest C. highest; steepest D. lowest; flattest

C. highest; steepest

48. According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion D. choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

During the 1986-2013 period, the Sharpe ratio was lowest for which of the following asset classes? A. small U.S. stocks B. large U.S. stocks C. long-term U.S. Treasury bonds D. equity world portfolio in U.S. dollars

C. long-term U.S. Treasury bonds

14. Beta is a measure of security responsiveness to _________. A. firm-specific risk B. diversifiable risk C. market risk D. unique risk

C. market risk

23. You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________. A. more than 18% but less than 24% B. equal to 18% C. more than 12% but less than 18% D. equal to 12%

C. more than 12% but less than 18% σ2p = .02592 = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12).55 = .02592; σ = 16.1%

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(rA) = 10% σA = 20% Asset B E(rB) = 15% σB = 27% An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis. A. only asset A is acceptable B. only asset B is acceptable C. neither asset A nor asset B is acceptable D. both asset A and asset B are acceptable

C. neither asset A nor asset B is acceptable

56. Diversification can reduce or eliminate __________ risk. A. all B. systematic C. nonsystematic D. only an insignificant

C. nonsystematic

7. An investor's degree of risk aversion will determine his or her ______. A. optimal risky portfolio B. risk-free rate C. optimal mix of the risk-free asset and risky asset D. capital allocation line

C. optimal mix of the risk-free asset and risky asset

17. According to the capital asset pricing model, a security with a _________. A. negative alpha is considered a good buy B. positive alpha is considered overpriced C. positive alpha is considered underpriced D. zero alpha is considered a good buy

C. positive alpha is considered underpriced

55. The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________. A. places less emphasis on market risk B. recognizes multiple unsystematic risk factors C. recognizes only one systematic risk factor D. recognizes multiple systematic risk factors

C. recognizes only one systematic risk factor

56. The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________. A. places less emphasis on market risk B. recognizes multiple unsystematic risk factors C. recognizes only one systematic risk factor D. recognizes multiple systematic risk factors

C. recognizes only one systematic risk factor

36. Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data

C. small firms are riskier than large firms

60. Which of the following provides the best example of a systematic-risk event? A. A strike by union workers hurts a firm's quarterly earnings. B. Mad Cow disease in Montana hurts local ranchers and buyers of beef. C. The Federal Reserve increases interest rates 50 basis points. D. A senior executive at a firm embezzles $10 million and escapes to South America.

C. the Federal Reserve increases internet rates 50 basis points

35. An important characteristic of market equilibrium is _______________. A. the presence of many opportunities for creating zero-investment portfolios B. all investors exhibit the same degree of risk aversion C. the absence of arbitrage opportunities D. the lack of liquidity in the market

C. the absence of arbitrage opportunities

36. An important characteristic of market equilibrium is _______________. A. the presence of many opportunities for creating zero-investment portfolios B. all investors exhibit the same degree of risk aversion C. the absence of arbitrage opportunities D. the lack of liquidity in the market

C. the absence of arbitrage opportunities

8. The complete portfolio refers to the investment in _________. A. the risk-free asset B. the risky portfolio C. the risk-free asset and the risky portfolio combined D. the risky portfolio and the index

C. the risk-free asset and the risky portfolio combined

The complete portfolio refers to the investment in _________.

C. the risk-free asset and the risky portfolio combined

13. The expected rate of return of a portfolio of risky securities is _________. A. the sum of the securities' covariances B. the sum of the securities' variances C. the weighted sum of the securities' expected returns D. the weighted sum of the securities' variances

C. the weighted sum of the securities' expected returns

3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________. A. they had to pay huge fines for obstruction of justice B. their 401k accounts were held outside the company C. their 401k accounts were not well diversified D. none of these options

C. their 401k accounts were not well diversified

88. One extensive study found that about ______ of financial managers use CAPM to estimate cost of capital. A. one-third B. one-half C. three quarters D. ninety percent

C. three quarters

Which measure of downside risk predicts the worst loss that will be suffered with a given probablility? A. standard deviation B. variance C. value at risk D. Sharpe ratio

C. value at risk

57. To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1 B. .5 C. 0 D. -1

D. -1

88. What is the VaR of a $10 million portfolio with normally distributed returns at the 5% VaR? Assume the expected return is 13% and the standard deviation is 20%. A. 13% B. -13% C. 19.90% D. -19.90

D. -19.90

70. Which of the following correlation coefficients will produce the least diversification benefit? A. -.6 B. -.3 C. 0 D. .8

D. .8

13. The market portfolio has a beta of _________. A. -1 B. 0 C. .5 D. 1

D. 1

13. The market portfolio has a beta of _________. A. -1 B. 0 C. .5 D. 1

D. 1

7. Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A. .5 B. .7 C. 1 D. 1.2

D. 1.2 17% = 5% + [15% - 5%]βs; βs = 1.2

A loan for a new car costs the borrower .8% per month. What is the EAR? A. .80% B. 6.87% C. 9.6% D. 10.03%

D. 10.03%

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%

D. 11%

39. If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with? A. 3% B. 8% C. 11% D. 11.24%

D. 11.24%

During the 1926-2013 period the geometric mean return on small-firm stocks was ______. A. 5.31% B. 5.56% C. 9.34% D. 11.82%

D. 11.82%

75. According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%? A. 5% B. 9% C. 13% D. 14%

D. 14% 15.8 = 5 + 1.2 × (MRP); MRP = 9%; Expected market return = 5 + 9 = 14%

74. According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%? A. 5% B. 9% C. 13% D. 14%

D. 14% 15.8 = 5 + 1.2 × (MRP) MRP = 9%; Expected market return = 5 + 9 = 14%

You have the following rates of return for a risky portfolio for several recent years: 2011 35.23% 2012 18.67% 2013 −9.87% 2014 23.45% The annualized (geometric) average return on this investment is _____. A. 16.15% B. 16.87% C. 21.32% D. 15.60%

D. 15.60%

61. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________. A. 6% B. 8.75 % C. 10% D. 16.25%

D. 16.25%

83. The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock? A. 11.6% B. 13% C. 15.3% D. 19.5%

D. 19.5% Return = 3.5 + 4 + 12 = 19.5%

84. The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock? A. 11.6% B. 13% C. 15.3% D. 19.5%

D. 19.5% Return = 3.5 + 4 + 12 = 19.5%

16. Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A. 2 B. 6 C. 8 D. 20

D. 20

6. Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? A. 6% B. 15.6% C. 18% D. 21.6%

D. 21.6% E[rs] = 6% + [18% - 6%](1.3) = 21.6%

37. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________. A. 29% B. 44% C. 56% D. 71%

D. 71%

82. A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment? A. 25% B. 50% C. 62% D. 73%

D. 73% E[rp] = (.60)(1) + (.40)(-.5) = .40 σ2rp = (.60)(1 - .40)2 + (.40)(-.5 - .40)2 = .54 σrp = .73

73. According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%? A. 4% B. 4.8% C. 6.6% D. 8%

D. 8% 13.6 = 4 + 1.2 × (MRP); MRP = 8%

74. According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%? A. 4% B. 4.8% C. 6.6% D. 8%

D. 8% 13.6 = 4 + 1.2 × (MRP); MRP = 8%

27. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment? A. 12.8% B. 11% C. 8.9% D. 9.2%

D. 9.2%

85. The CAPM _______. A. predicts the relationship between risk and expected return of an asset B. provides a benchmark rate of return for evaluating possible investments C. helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace D. All of the options.

D. All of the options.

1. Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options

D. All of these options

85. The measure of risk used in the capital asset pricing model is ___________. A. specific risk B. the standard deviation of returns C. reinvestment risk D. beta

D. Beta

50. The SML is valid for _______________, and the CML is valid for ______________. A. only individual assets; well-diversified portfolios only B. only well-diversified portfolios; only individual assets C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets D. both well-diversified portfolios and individual assets; well-diversified portfolios only

D. Both well-diversified portfolios and individual assets; well-diversified portfolios only

47. Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk A. I only B. I and II only C. I, II, and III D. I and III

D. I and III

5. In a simple CAPM world which of the following statements is (are) correct? I. All investors will choose to hold the market portfolio, which includes all risky assets in the world. II. Investors' complete portfolio will vary depending on their risk aversion. III. The return per unit of risk will be identical for all individual assets. IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio. A. I, II, and III only B. II, III, and IV only C. I, III, and IV only D. I, II, III, and IV

D. I, II, III, IV

77. You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio A. I only B. I and II only C. I and III only D. I, II, and III

D. I, II, and III

74. Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A. Market risk B. Unique risk C. Unsystematic risk D. None of these options (With a correlation of 1, no risk will be reduced.)

D. None of these options (with a correlation of 1, no risk will be reduced)

55. According to the CAPM, investors are compensated for all but which of the following? A. Expected inflation B. Systematic risk C. Time value of money D. Residual risk

D. Residual risk

54. The expected return of the risky-asset portfolio with minimum variance is _________. A. the market rate of return B. zero C. the risk-free rate D. The answer cannot be determined from the information given.

D. The answer cannot be determined from the information given

53. The expected return of the risky-asset portfolio with minimum variance is _________. A. the market rate of return B. zero C. the risk-free rate D. The answer cannot be determined from the information given.

D. The answer cannot be determined from the information given.

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? A. money market fund B. U.S. T-bill C. short-term corporate bonds D. U.S. T-bill whose return was indexed to inflation

D. U.S. T-bill whose return was indexed to inflation

84. The measure of risk used in the capital asset pricing model is ___________. A. specific risk B. the standard deviation of returns C. reinvestment risk D. beta

D. beta

60. You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________. A. invest $125,000 in the risk-free asset B. invest $375,000 in the risk-free asset C. borrow $125,000 D. borrow $375,000

D. borrow $375,000

49. The SML is valid for _______________, and the CML is valid for ______________. A. only individual assets; well-diversified portfolios only B. only well-diversified portfolios; only individual assets C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets D. both well-diversified portfolios and individual assets; well-diversified portfolios only

D. both well-diversified portfolios and individual assets; well-diversified portfolios only

34. Building a zero-investment portfolio will always involve _____________. A. an unknown mixture of short and long positions B. only short positions C. only long positions D. equal investments in a short and a long position

D. equal investments in a short and a long position

35. Building a zero-investment portfolio will always involve _____________. A. an unknown mixture of short and long positions B. only short positions C. only long positions D. equal investments in a short and a long position

D. equal investments in a short and a long position

4. When all investors analyze securities in the same way and share the same economic view of the world, we say they have ____________________. A. heterogeneous expectations B. equal risk aversion C. asymmetric information D. homogeneous expectations

D. homogeneous expectations

The dollar-weighted return is the _________.

D. internal rate of return

The dollar-weighted return is the _________. A. difference between cash inflows and cash outflows B. arithmetic average return C. geometric average return D. internal rate of return

D. internal rate of return

54. According to the CAPM, investors are compensated for all but which of the following? A. expected inflation B. systematic risk C. time value of money D. residual risk

D. residual risk

11. Empirical results estimated from historical data indicate that betas _________. A. are always close to zero B. are constant over time C. of all securities are always between zero and 1 D. seem to regress toward 1 over time

D. seem to regress toward 1 over time

19. Investors require a risk premium as compensation for bearing ______________. A. unsystematic risk B. alpha risk C. residual risk D. systematic risk

D. systematic risk

19. Investors require a risk premium as compensation for bearing ______________. A. unsystematic risk B. alpha risk C. residual risk D. systematic risk

D. systematic risk

60. One of the main problems with the arbitrage pricing theory is __________. A. its use of several factors instead of a single market index to explain the risk-return relationship B. the introduction of nonsystematic risk as a key factor in the risk-return relationship C. that the APT requires an even larger number of unrealistic assumptions than does the CAPM D. the model fails to identify the key macroeconomic variables in the risk-return relationship

D. the model fails to identify the key macroeconomic variables in the risk-return relationship

61. One of the main problems with the arbitrage pricing theory is __________. A. its use of several factors instead of a single market index to explain the risk-return relationship B. the introduction of nonsystematic risk as a key factor in the risk-return relationship C. that the APT requires an even larger number of unrealistic assumptions than does the CAPM D. the model fails to identify the key macroeconomic variables in the risk-return relationship

D. the model fails to identify the key macroeconomic variables in the risk-return relationship

11. The correlation coefficient between two assets equals _________. A. their covariance divided by the product of their variances B. the product of their variances divided by their covariance C. the sum of their expected returns divided by their covariance D. their covariance divided by the product of their standard deviations

D. their covariance divided by the product of their standard deviations

73. Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. Market risk B. Nondiversifiable risk C. Systematic risk D. Unique risk

D. unique risk

19. Firm-specific risk is also called __________ and __________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

D. unique risk; diversifiable risk

14. In a well-diversified portfolio, __________ risk is negligible. A. nondiversifiable B. market C. systematic D. unsystematic

D. unsystematic

14. In a well-diversified portfolio, __________ risk is negligible. A. nondiversifiable B. market C. systematic D. unsystematic

D. unsystematic

53. The values of beta coefficients of securities are __________. A. always positive B. always negative C. always between positive 1 and negative 1 D. usually positive but are not restricted in any particular way

D. usually positive but are not restricted in any particular way

21. According to the capital asset pricing model, fairly priced securities have _________. A. negative betas B. positive alphas C. positive betas D. zero alphas

D. zero alphas

21. According to the capital asset pricing model, fairly priced securities have _________. A. negative betas B. positive alphas C. positive betas D. zero alphas

D. zero alphas

78. Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive? A. σ2rp < (W12σ12 + W22σ22) B. σ2rp = (W12σ12 + W22σ22) C. σ2rp = (W12σ12 - W22σ22) D. σ2rp > (W12σ12 + W22σ22)

D. σ2rp > (W12σ12 + W22σ22)

Even if the markets are efficient, professional portfolio management is still important because it provides investors with _________. I. low cost diversification II. provides a portfolio with a specified risk level III. provides better risk adjusted returns than an index A. I only B. I and II only C. II and III only D. I, II and III

Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior. A. short-run, short-run B. long-run, long-run C. long-run, short-run D. short-run, long run

Fama and French (1991) and Reinganum (1988) found that firms with __________ market/book ratios had higher stock returns. A. high B. low C. medium D. paired

Fama and French have suggested that many market anomalies can be explained as manifestations of ____________. A. regulatory effects B. high trading costs C. information asymmetry D. varying risk premiums

From 1926 to 2008 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks. A. lower; higher B. lower; lower C. higher; lower D. higher; higher

Growth stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios. A. low, low B. low, high C. high, low D. high, high

Historical returns have generally been ________ for stocks of small firms as/than for stocks of large firms A. same B. lower C. higher D. there is no evidence

Historically small firm stocks have earned higher returns than large firm stocks. When viewed in the context of an efficient market, this suggests that ___________. A. small firms are better run than large firms B. government subsidies available to small firms produce effects that are discernible in stock market statistics C. small firms are riskier than large firms D. small firms are not being accurately represented in the data

Historically the best asset for the long term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____. A. stocks B. bonds C. money market funds D. Treasury bills

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information including information that is available only to insiders. A. semi-strong B. strong C. weak D. perfect

If you wan to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate ______ A. geometric average return B. arithmetic average return C. dollar weighted return D. index return

Important characteristic(s) of market efficiency is that _________________. I. there are no arbitrage opportunities II. security prices react quickly to new information III. active trading strategies will not consistently outperform passive strategies A. I only B. II only C. I and III only D. I, II and III

In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called _________. A. the capital allocation line B. the indifference curve C. the investor's utility line D. the security market line

Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak form and semi-strong form efficient B. strong form efficient C. reasonably weak form but not semi- or strong form efficient D. neither weak form, semi- or strong form efficient

Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________. A. about 30 seconds B. about 10 minutes C. 6 months D. 2 years

Most people would readily agree that the stock market is not _________. A. weak form efficient B. semi-strong form efficient C. strong form efficient D. efficient at all

Most studies indicate that investors' risk aversion is in the range _____. A. 1-3 B. 2-4 C. 3-5 D. 4-6

One method to forecast the risk premium is to use the _______. A. coefficient of variation of analysts' earnings forecasts B. variations in the risk free rate over time C. average historical excess returns for the asset under consideration D. average abnormal return on the index portfolio

Published data on past returns earned by mutual funds are required to be ____ A. dollar weighted returns B. geometric returns C. excess returns D. index returns

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

S. capital allocation line

Security A has a higher standard deviation of returns than Security B. We would expect that ______. I. Security A would have a higher risk premium than Security B II. the likely range of returns for Security A in any given year would be higher than the likely range of returns for Security B III. the Sharpe measure of A will be higher than the Sharpe measure of B. A. I only B. I and II only C. II and III only D. I, II and III

Stock market analysts have tended to be ___________ in their recommendations to investors. A. slightly overly optimistic B. overwhelmingly optimistic C. slightly overly pessimistic D. overwhelmingly pessimistic

Stock prices that are stable over time _______. A. indicate that prices are useful indicators of true economic value B. indicate that the market is not incorporating new information into current stock prices C. ensure that an economy allocates its resources efficiently D. indicates that returns follow a random walk process

Studies show that the bid-ask spread for the least liquid stocks may be as high as ______. A. 3% B. 5% C. 9% D. 12%

Tests of mutual fund performance indicate that funds with ______________ tend to have poorer performance. A. more funds in the family B. higher expense and turnover ratios C. lower management fees D. larger asset size

The Fama and French evidence that high book to market firms outperform low book to market firms even after adjusting for beta means _________. A. high book to market firms are underpriced B. low book to market firms are underpriced C. either high book to market firms are underpriced or the book to market ratio is a proxy for a systematic risk factor D. high book to market firms have more post earnings drift

The broadest information set is included in the A. weak form efficiency argument B. semi-strong form efficiency argument C. strong form efficiency argument D. technical analysis trading method

The complete portfolio refers to the investment in _______ A. risk-free asset B. risky portfolio C. risk-free asset and the risky portfolio combined D. risky portfolio and the index

The dollar weighted average is the ______ A. difference between cash inflows and outflows B. arithmetic average return C. geometric average return D. IRR

The excess return is A. rate of return that can be earned with certainty B. rate of return in excess of the Treasury bill rate C. rate of return to risk aversion D. index return

The holding period return on a stock is equal to ______ A. capital gain yield over the period plus the inflation rate B. capital gain yield over the period plus the dividend yield C. current yield plus the dividend yield D. dividend yield plus the risk premium

The market risk premium is defined as______________ A. the difference between the return on an index fund and the return on Treasury Bills B. the difference between the return on a small firm mutual fund and the return on the Standard and Poor's 500 index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury Bills D. the difference between the return on the highest yielding asset and the lowest yielding asset

The primary objective of fundamental analysis is to identify __________. A. well run firms B. poorly run firms C. mis-priced stocks D. high P/E stocks

The rate of return on the ______ is known at the beginning of the holding period while the rate of return on ______ is not known until the end of the holding period. A. risky assets, Treasury bills B. Treasury bills, risky assets C. excess returns, risky assets D. index assets, bonds

The reward/ variability ratio is given by _______ A. the slope of the CAL B. the second derivative of the CAL C. the point at which the second derivative of the investor's indifference curve reaches zero D. portfolio excess return

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect. A. worst, best B. worst, worst C. best, worst D. best, best

The term random walk is used in investments to refer to ______________. A. stock price changes that are random but predictable B. stock prices that respond slowly to both old and new information C. stock price changes that are random and unpredictable D. stock prices changes that follow the pattern of past price changes

The weak form of the EMH states that ________ must be reflected in the current stock price. A. all past information including security price and volume data B. all publicly available information C. all information including inside information D. all costless information

This measure of returns ignores compounding A. geometric average B. arithmetic average C. IRR D. dollar weighted

Value stocks may provide investors with better returns than growth stocks if _______. I. value stocks are out of favor with investors II. prices of growth stocks include premiums for overly optimistic growth levels III. value stocks are likely to generate positive earnings surprises. A. I only B. II only C. I and III only D. I, II and III

Value stocks usually exhibit ___ price-to-book ratios and ___ price-to-earnings ratios. A. low, low B. low, high C. high, low D. high, high

When calculating the variance of a portfolio's returns squaring the deviations from the mean results in ________. I. preventing the sum of the deviations from always equaling zero II. exaggerating the effects of large positive and negative deviations III. a number in units of percentage of returns A. I only B. I and II only C. I and III only D. I, II and III

Which of the following are correct arguments supporting passive investment strategies? I. Active trading strategies may not guarantee higher returns but guarantee higher costs II. Passive investors can free ride on the activity of knowledge investors whose trades force prices to reflect currently available information III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons A. I only B. I and II only C. II and III only D. I, II and III

Which of the following statements is/are correct? A. If a market is weak form efficient it is also semi- and strong form efficient B. If a market is semi-strong efficient it is also strong form efficient C. If a market is strong form efficient it is also semi-strong but not weak form efficient D. If a market is strong form efficient it is also semi- and weak form efficient

Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the market return one week and the return the following week is zero. C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

Which of the following would violate the efficient market hypothesis? A. Intel has consistently generated large profits for years. B. Prices for stocks before stock splits show on average consistently positive abnormal returns. C. Earning abnormal returns after a firm announces surprise earnings. D. High earnings growth stocks fail to generate higher returns for investors than low earnings growth stocks.

Which one of the following measure time weighted returns? I. geometric average return II. arithmetic average return III. dollar weighted return A. I only B. II only C. I and II only D. I and III only

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? A. Money market fund B. U.S. T-bill C. Short term corporate bonds D. U.S. T-bill whose return was indexed to inflation

You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate between an additional one tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis? A. $12,000,000 B. $6,000,000 C. $3,000,000 D. $0

You are looking to invest in one of three stocks. Stock A has high expected earnings growth, Stock B has only modest expected earnings growth and Stock C is expected to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you? A. Stock A B. Stock B C. Stock C D. You cannot tell from the information given

You have calculated the historical dollar weighted return, annual geometric average return and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ______ A. dollar weighted return B. geometric average return C. arithmetic average return D. index return

You have calculated the historical dollar weighted return, annual geometric average return and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? A. dollar weighted return B. geometric average return C. arithmetic average return D. index return

You invest all of your money in one year T-bills. Which of the following statements is/are correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe measure is zero. A. I only B. I and III only C. II only D. I, II and III

Your timing was good last year. You invested more in your portfolio right before prices went up and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest? A. dollar weighted return B. geometric average return C. arithmetic average return D. mean holding period return

__________ is the return on a stock beyond what would be predicted from market movements alone. A. A normal return B. A subliminal return C. An abnormal return D. An excess return

3. Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price. II. All investors plan for one identical holding period. III. All investors analyze securities in the same way and share the same economic view of the world. IV. All investors have the same level of risk aversion. A. I, II, and IV only B. I, II, and III only C. II, III, and IV only D. I, II, III, and IV

b. I, II and III only

2. Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: I. Highly significant in predicting future stock returns II. Relatively useless in predicting future stock returns III. A good predictor of the firm's specific risk A. I only B. II only C. I and III only D. I, II, and III

b. II only

1. An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 D. closer to 0

c. closer to 1

. Fundamental analysis is likely to yield best results for _______. A. NYSE stocks B. neglected stocks C. stocks that are frequently in the news D. fast growing companies

. If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A. semi-strong B. strong C. weak D. perfect

. Small firms have tended to earn abnormal returns primarily in __________. A. the month of January B. the month July C. the trough of the business cycle D. the peak of the business cycle

A mutual fund which attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund. A. stock B. index C. hedge D. money market

A technical analyst is most likely to be affiliated with which investment philosophy? A. Active management B. Buy and hold C. Passive investment D. Index funds

A. expected returns to fall; risk premiums to fall

According to results by Seyhun __________. A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public B. investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public C. investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public D. investors cannot earn abnormal returns by trading before insiders

According to results by Seyhun the main reason why investors cannot earn excess returns by following inside trades after they become public is ______________. A. risk premium B. transaction costs C. the SEC late disclosure rule D. the stock reversal effect

According to the semi-strong form of the efficient markets hypothesis ____________. A. stock prices do not rapidly adjust to new information B. future changes in stock prices cannot be predicted from any information that is publicly available C. corporate insiders should have no better investment performance than other investors even if allowed to trade freely D. arbitrage between futures and cash markets should not produce extraordinary profits

Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________. A. an abnormal price change immediately following the announcement B. an abnormal price increase before the announcement C. an abnormal price decrease after the announcement D. no abnormal price change before or after the announcement

B. I, II, and III only

B. II only

9. The arbitrage pricing theory was developed by _________. A. Henry Markowitz B. Stephen Ross C. William Sharpe D. Eugene Fama

B. Stephen Ross

10. In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. A. unique risk B. beta C. the standard deviation of returns D. the variance of returns

B. beta

Banz found that, on average, the risk-adjusted returns of small firms __________. A. was higher than the risk-adjusted returns of large firms B. was the same as the risk-adjusted returns of large firms C. was lower than the risk-adjusted returns of large firms D. was negative

Basu found that firms with high P/E ratios __________. A. earned higher average returns than firms with low P/E ratios B. earned the same average returns as firms with low P/E ratios C. earned lower average returns than firms with low P/E ratios D. had higher dividend yields than firms with low P/E ratios

D. seem to regress toward 1 over time

1. An adjusted beta will be ______ than the unadjusted beta. A. lower B. higher C. closer to 1 D. closer to 0

C. closer to 1

Choosing stocks by searching for predictable patterns in stock prices is called ________. A. fundamental analysis B. technical analysis C. index management D. random walk investing

7. Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A. .5 B. .7 C. 1 D. 1.2

D. 1.2 17% = 5% + [15% - 5%]βs; βs = 1.2

6. Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? A. 6% B. 15.6% C. 18% D. 21.6%

D. 21.6% E[rs] = 6% + [18% - 6%](1.3) = 21.6%

D. I, II, III, and IV

D. homogeneous expectations

Evidence by Blake, Elton and Gruber indicates that on average actively managed bond funds A. outperform passive fixed-income indexes __________. B. under perform passive fixed-income indexes by a wide margin C. perform as well as passive fixed-income indexes D. under perform passive fixed-income indexes by an amount equal to fund expenses

Jaffee found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares. A. decreased, decreased B. decreased, increased C. increased, decreased D. increased, increased

Evidence supporting semi-strong form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securities B. rely on fundamental analysis to select securities C. use a passive trading strategy such as purchasing an index fund or an ETF D. select securities by throwing darts at the financial pages of the newspaper

Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock? A. January effect B. Neglected firm effect C. P/E effect D. Reversal effect

Fundamental indexing refers to ________. A. investing in index stocks in proportion to the stock's fundamental value B. investing in index stocks in proportion to the stock's market value C. investing an equal dollar amount in index stocks D. investing in an equal amount shares in each of the index stocks

If the U.S. capital markets are not informationally efficient ______. A. the markets cannot be allocationally efficient B. then systematic risk does not matter C. then no type of analysis can be used to generate abnormal returns D. then returns must follow a random walk

If the daily returns on the stock market are normally distributed with a mean of 0.05% and a standard deviation of 1.00%, the probability that the stock market would have a return of -23.00% or worse on one particular day (as it did on Black Monday) is approximately __________. A. 0.0% B. 0.1% C. 1.0% D. 10.0%

In a 1953 study of stock prices, Maurice Kendall found that ________. A. there were no predictable patterns in stock prices B. stock prices exhibited strong serial autocorrelation C. day to day stock prices followed consistent trends D. fundamental analysis could be used to generate abnormal returns

In a recent study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher. A. higher B. lower C. unaffected D. more skewed

In an efficient market and for an investor that believes in a passive approach to investing, what is the primary duty of a portfolio manager? A. Accounting for results B. Diversification C. Identifying undervalued stocks D. No need for a portfolio manager

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? A. Weak form efficiency B. Semi-strong form efficiency C. Strong form efficiency D. Technical analysis

J.M. Keyes put all his money in one stock and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J.M. got his picture on the front page of the Wall Street Journal. However the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. small firm

Most tests of semi-strong efficiency are _________. A. designed to test whether inside information can be used to generate abnormal returns B. based on technical trading rules C. unable to generate any evidence of market anomalies D. joint tests of market efficiency and the risk adjustment measure

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach? A. Active management B. Arbitrage C. Fundamental analysis D. Passive investment

Proponents of the EMH think technical analysts __________. A. should focus on relative strength B. should focus on resistance levels C. should focus on support levels D. are wasting their time

Proponents of the EMH typically advocate __________. A. a conservative investment strategy B. a liberal investment strategy C. a passive investment strategy D. an aggressive investment strategy

Random price movements indicate ________. A. irrational markets B. that prices cannot equal fundamental values C. that technical analysis to uncover trends can be quite useful D. that markets are functioning efficiently

The _________ effect may explain much of the small firm anomaly. I. January effect II. neglected effect III. liquidity effect A. I only B. II only C. II and III only D. I, II and III

The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________. A. January effect B. liquidity effect C. neglected firm effect D. P/E effect

The semi-strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information including inside information D. all costless information

The semi-strong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns. A. Technical analysis cannot; fundamental analysis can B. Technical analysis can; fundamental analysis can C. Technical analysis can; fundamental analysis cannot D. Technical analysis cannot; fundamental analysis cannot

The small firm in January effect is strongest ________. A. early in the month B. in the middle of the month C. late in the month D. in even numbered years

The strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information including inside information D. all costless information

The tendency of poorly performing stocks and well performing stocks in one period to continue their performance into the next period is called the ________________. A. fad effect B. martingale effect C. momentum effect D. reversal effect

When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns. A. positive; positive B. positive; negative C. negative; positive D. positive; zero

When testing mutual fund performance over time one must be careful of ___________, which means that a certain percentage of poorer performing funds fail over time which makes the performance of remaining funds seem more consistent over time. A. survivorship bias B. lucky event bias C. magnitude bias D. mean reversion bias

When the market risk premium rises, stock prices will ________. A. rise B. fall C. recover D. have excess volatility

Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets? A. Jeff Vinik B. Peter Lynch C. Robert Stansky D. William Hayes

Which of the following beliefs would not preclude charting as a method of portfolio management? A. The market is strong form efficient. B. The market is semi-strong form efficient. C. The market is weak form efficient. D. Stock prices follow recurring patterns.

Which of the following contradicts the proposition that the stock market is weakly efficient? A. Over 25% of mutual funds outperform the market on average. B. Insiders earn abnormal trading profits. C. Every January, the stock market earns above normal returns. D. Applications of technical trading rules fail to earn abnormal returns.

Which of the following is not a concept related to explaining abnormal excess stock returns? A. January effect B. Neglected firm effect C. P/E effect D. Preferred stock effect

Which of the following is not a method employed by followers of technical analysis? A. Charting B. Relative strength analysis C. Earnings forecasting D. Trading around support and resistance levels

Which of the following is not a method employed by fundamental analysts? A. Analyzing the Fed's next interest rate move B. Relative strength analysis C. Earnings forecasting D. Estimating the economic growth rate

Which of the following is not a topic related to the debate over market efficiency? A. IPO results B. Lucky event issue C. Magnitude issue D. Selection bias

Which of the following is not an issue that is central to the debate regarding market efficiency? A. The magnitude issue B. The tax loss selling issue C. The lucky event issue D. The selection bias issue

You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest but you do not believe stock prices reflect all publicly available or inside information. You are a proponent of ____________. A. semi-strong B. strong C. weak D. perfect

You believe that you can earn 2% more on your portfolio if you engage in full time stock research. However, the additional trading costs and tax liability from active management will cost you about 0.5%. You have a $800,000 stock portfolio. What is the most you can afford to spend on your research? A. $4,000 B. $8,000 C. $12,000 D. $16,000

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