Investment Theory, Models and Alternative Investments
A bat and a ball together cost $1.10 in total. The bat costs a dollar more than the ball. How much does the ball cost? $1.05 $1.10 $0.05 $0.10
$0.05
Calculate the future value of an investment that requires an initial deposit of $25,000 where the expected return is 8.6% compounded quarterly over 4 years. $34,774 $35,136 $17,788 $33,600
$35,136 Using your financial calculator: PV = -$25,000N = 16 (4 years x 4 quarters)I or R = 2.15 (8.6 / 4 quarters)Solve for FV...
Calculate the present value of an investment that will be worth $10,000 in 5 years and will average a 7.2% annual rate of return. $4,501 $6,379 $8,202 $7,064
$7,064 Using your financial calculator: FV = -$10,000N = 5I or R = 7.2%Solve for PV...
Calculate the real return of an investment that had a gross (nominal) return of 9.3% during a period that experienced 2.8% inflation. 6.50% 6.32% 6.53% 6.44%
(1.093 / 1.028) - 1 = 6.32%
According to data presented by Toby Moskowitz, correlation between value and momentum since 1980 was _______. 1.13 0.29 -0.48 0.56
-0.48
Nominal annual returns for U.S. stocks within two standard deviations of the mean fall inside what range? -55.2%, 67.7% -15.5%, 32.0% -31.6%, 44.8% -0.04%, 19.6%
-31.6%, 44.8%
If an investment's mean return is 7% with a standard deviation of 14.5%, what is the 68% range of returns? -22.0% to +36.0% -36.5% to +50.5% -7.5 to +21.5% 0% to 14%
-7.5 to +21.5%
Calculate the up-side and down-side market capture ratio for the following manager: Year 1 Year 2 Year 3 Manager return -.13 +.22 +.12 Benchmark return -.15 +.23 +.10 1.08, 0.87 0.87, 1.08 1.17, 1.15 1.03, 0.87
1.03, 0.87
A blending of risk premia styles (i.e., the "simple style strategy") has generated Sharpe ratios of the following range in all types of markets (e.g., growth up-inflation up, growth down-inflation down, etc.) since 1972: -0.26 to 1.09 -0.25 to 1.33 1.40 to 1.91 -0.01 to 1.12
1.40 to 1.91
According to Dalbar, the average equity mutual fund investor trailed the S&P 500 index over the last twenty years by approximately what percent? 5.3% 7.2% 2.1% 1.9%
1.9%
Compound annual returns since 1926 are as follows for: U.S. large stocks, U.S. small stocks, and Government bonds 12.4%, 17.2%, 7.5% 8.4%, 15.1%, 8.5% 10.0%, 12.1%, 5.5% 9.7%, 7.8%, 4.2%
10.0%, 12.1%, 5.5%
The gain needed this year to recoup a 50% loss from the year immediately before is _________. 200% 50% 100% 150%
100%
Since 1980, low popularity stocks have had a compound annual return of what? 15.30% 7.67% 12.02% 10.42%
15.30%
Standard deviations since 1926 are as follows for: U.S. large stocks U.S. small stocks Government bonds 16.4%, 24.2%, 12.1% 14.2%, 19.8%, 7.2% 19.9%, 31.9%, 9.9% 31.9%, 19.9%, 3.1%
19.9%, 31.9%, 9.9%
Calculate the yield to maturity (YTM) of a 6-year bond with a coupon of 4.0% given a par value of $1,000 and a current price of $1,100. 2.20% 3.84% 4.00% 4.60%
2.20% Using your financial calculator: PV = $-1,100FV = $1,000pmt = $40 (1,000 x 4%)n = 6Solve for I or R...
If an investment's mean return is 7% with a standard deviation of 14.5%, what is the probability that the investment will lose more than 22% in a given year? 7.5% 2.5% 1.0% 5.0%
2.5%
An investor holds a 3-year $1,000 bond with a 4% coupon with a 3.5% yield to maturity (YTM). What is the duration of this bond (i.e., on average, how long will the investor have to wait to get her money back)? 2.14 years 2.89 years 3.16 years 2.22 years
2.89 years
Calculate the 2-year net return and the annual return for the following investment... Year 1 = +10% Year 2 = +20% 32.00%, 14.89% 30.00%, 14.89% 32.00%, 15.00% 30.00%, 15.00%
32.00%, 14.89%
If an investment's mean return is 7% with a standard deviation of 14.5%, what is the probability that your client will experience a return below 2% with this hypothetical manager? 36.0% 3.5% 33.5% 13.5%
36.0%
The equity risk premium since 1871 (i.e., for the long run) was approximately what? 2.06% 8.42% 2.66% 4.08%
4.08%
In a lake there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long will it take to cover half the lake? 47 days 12 days 36 days 24 days
47 days
If it takes 5 minutes for 5 machines to make 5 widgets. How long would it take 100 machines to make 100 widgets? 10 minutes 20 minutes 100 minutes 5 minutes
5 minutes
Calculate the standard deviation of the following sample: Year Return 1 12% 2 8% 3 2% 4 16% 5.77 5.47 5.97 5.17
5.17
Calculate the standard deviation of the following sample: Year Return 1 12% 2 8% 3 2% 4 16% 5.77 5.47 5.97 5.17
5.97
No matter how you decompose returns (e.g., earnings, dividends, book on equity, etc.), income makes up roughly ______ of the return. 25% 50% 75% 33%
50%
The CS Tremont Hedge Fund Index and HFRI Hedge Fund Index had correlations to the MSCI World Index in the following range over the last 10 years: 54% to 76% 0% to 31% 12% to 27% -20 to 44%
54% to 76%
The value of human capital and financial capital tend to converge around what age in a typical life cycle? 55 75 45 65
55
The real, annual, realized returns of U.S. stocks over the long run has been: 12.1% 10.2% 6.6% 9.0%
6.6%
According to Toby Moskowitz's example on framing, over the last 80 years... - Stocks had gains in _____ of all individual months. - The average loss to gain ratio for those individual months was _____. - Stocks had gains in 92% of all 5-year periods. - The average loss to gain ratio for those 5-year periods was 64%. 60%, 98% 78%, 40% 40%, 78% 98%, 60%
60%, 98%
How many years will it take to double your wealth if your annual rate of return is 7.2%? 10 7 12 20
7.2 / 72 = 10 (RULE OF 72)
Calculate the weighted average return of the following: Investment Allocation Expected Return Stocks 60% 10.0% Bonds 35% 5.5% Cash 5% 1.5% 8.0% 2.7% 5.7% 8.8%
8.0%
Home bias is at least partially responsible for lack of diversification among U.S. investors who hold approximately ____ of their wealth in domestic assets. 64% 94% 52% 77%
94%
If the covariance is ________ I am gaining a benefit (through risk reduction) by combining investments or assets. > 0 < 0 0 -100 or greater
< 0
The formula for calculating net asset value is... A) (market value of assets - liabilities) / (shares outstanding) B) assets - liabilities C) share price x assets - liabilities D) (price + liabilities) x (shares outstanding)
A) (market value of assets - liabilities) / (shares outstanding)
Betas for hedge funds are hard to measure due to: I. illiquidity II. use of derivatives III. lack of historical performance IV. self-reporting of results A) I, II, and IV only B) II, III, and IV only C) II and I only D) I and III only
A) I, II, and IV only
Which of the following does the Efficient Markets Hypothesis not say? I. most investors behave rationally II. no role for active management or acting on information III. a belief that security returns are normally distributed IV. prices move randomly A) II, III, and IV only B) II and IV only C) I, II, and III only D) I and III only
A) II, III, and IV only
Which of the following sets of investments would likely be best to include in a tax-free or tax-deferred account relative to the other choices? A) actively managed small-cap fund stock, high (non-qualified) dividend stocks, preferreds B) index funds, REITs, annuities C) high (qualified) dividend stocks, municipal bonds, collectibles D) corporate bonds, closed-end muni bonds, low turnover actively managed mutual funds
A) actively managed small-cap fund stock, high (non-qualified) dividend stocks, preferreds
In a portfolio allocation that comprises risky assets, we should... A) combine the tangency portfolio with the riskless asset as appropriate. B) choose the portfolio that is expected to yield the highest return. C) combine the impact of risk and return to produce the optimal portfolio net of expenses. D) choose the minimum variance portfolio.
A) combine the tangency portfolio with the riskless asset as appropriate.
According to traditional investment theory, at a minimum one must forecast the following inputs: A) expected asset returns and standard deviations B) risk, return, correlations, expected fund expenses and inflation C) fiscal and monetary policy and their impact on growth and inflation D) market returns and time horizon but volatility is not possible to predict accurately
A) expected asset returns and standard deviations
________ is the expected risk-adjusted return on an asset. Delta Alpha Beta Gamma
Alpha
Which of the following are considered advantages or disadvantages of cap-weighted indexes? I. Total return of the index roughly mirrors the change in the total market value of all stocks. II. Rebalancing is not simple. III. Systematically this index owns too much of overpriced stocks and too little of bargain price stocks. IV. Heavily influenced by a few companies with the largest capitalizations. A) I, II, and III only B) III, IV, and I only C) II, III, and IV only D) IV, I, and II only
B) III, IV, and I only
The formula: [(earnings before interest and taxes x 1-tax rate) + depreciation and amortization - change in working capital - capital expenditure], represents which term below? A) weighted cost of capital B) free cash flow C) retained earnings D) dividend discount model
B) free cash flow
Attribution analysis seeks to separate and determine ________________________________. A) absolute and relative performance adjusted for risk taken. B) overall relative performance, impact of tactical allocation (timing) and security selection. C) net portfolio performance adjusted for expenses, risk and taxes. D) upside and downside capture ratio.
B) overall relative performance, impact of tactical allocation (timing) and security selection.
Regarding evidence supporting value in various style premia... _____________________________ say: these strategies earn more average return than they should, for their risk; they must therefore be exploiting mispricing. Rational finance people Neo-classical economists Modern economists Behavioral finance people
Behavioral finance people
Which of the following are considered advantages or disadvantages of equal-weighted indexes? I. easy to construct relatively tax-efficient investment structures II. difficult to keep the stocks equally weighted due to constant price fluctuations III. not difficult to manage large amounts of money in such an index IV. does not appear to add additional return vs. cap-weighted indexes over long periods of time A) II and III only B) I, II, and IV only C) I and II only D) II and IV only
C) I and II only
According to Kahneman, the "reflective system", described by which of the terms below, is one of two primary methods used to solve problems and make choices? A) uncontrolled, effortful, associative B) slow, unconscious, skilled C) controlled, deductive, self-aware D) effortless, fast, skilled
C) controlled, deductive, self-aware
The formula: [(dividend per share) / (discount rate - growth rate)] represents which term below? A) return on investment B) free cash flow C) dividend discount model D) return on assets
C) dividend discount model
This calculation determines the total cost of all forms of capital, equity, debt, preferred, etc.; each category is weighted proportionately to determine overall cost of funds. A ) dividend discount model B) free cash flow C) weighted cost of capital D) retained earnings
C) weighted cost of capital
Which market model below calculates the expected return of a portfolio based on the amount of market risk assumed? The model formula is stated as: E(RA) = Rf + BA (E(RM) - Rf) Fama French Factor Model Popularity Asset Pricing Model Arbitrage Pricing Model Capital Asset Pricing Model
Capital Asset Pricing Model
________________ is the tendency to search for, interpret, and recall information in a way that reinforces one's preexisting beliefs. Ambiguity bias Framing bias Confirmation bias Status quo bias
Confirmation bias
______________ is used to determine a bond's price sensitivity to future changes in interest rates and is also a weighted average length of time for an investor to recapture their initial investment. Maturity Duration Convexity Immunization
Duration
___________ can be calculated in several acceptable ways, but perhaps the simplest way to determine is by using this formula: ER = Rp - Rm Excess return Tracking error Alpha Jensen's alpha
Excess return
Which of the following is not a method of calculating Value-at-Risk? Delta Normal Gamma Omega Historical Monte Carlo Analysis
Gamma Omega
Identify criticisms of Modern Portfolio Theory (MPT) I. inputs contain errors II. asset correlations are fixed III. investors are exclusively risk-averse IV. risk is not known and constant I and III only II and IV only II and III only I and IV only
I and IV only
Popularity preferences can be: I. rational II. irrational III. permanent IV. temporary I, II, and III only II and IV only I and III only I, II, III, and IV
I, II, III, and IV
Each of the following - except for which factor below - helped drive stock prices significantly higher between 1995-2000? This often occurs at or near market tops and in pricing bubbles. I. increase in expected future cash flowsII. fall in the discount rateIII. rise in the risk premiumIV. fall in the real interest rate I, II, and III only II and III only I, II, and IV only II and IV only
I, II, and IV only
The following type of risk cannot be diversified away: I. idiosyncratic risk II. systematic risk III. unsystematic risk IV. market risk II and III only II and IV only I and IV only I and II only
II and IV only
Each of the following should be considered limitations of arbitrage: I. A close substitute for the securities is often not available. II. Arbitrage opportunities are limited to very few markets .III. Sometimes the strategy can do very poorly. IV. The errors causing mispricing to begin with can get worse. III, IV, and I only I, II, and III only IV, I, and II only II, III, and IV only
III, IV, and I only
Which of the following are considered advantages or disadvantages of fundamentally weighted indexes? I. Since the index is not influenced by price, it is not influenced by short-term emotions. II. Unlike market cap weighted indexes, pricing errors are not random. III. The index cannot be managed through ETFs or mutual funds on a relatively tax efficient basis. IV. The index does not use relative or absolute value to determine company weights in the index. III and IV only IV and I only I and II only II and III only
IV and I only
Which of the following is a ratio of portfolio returns above the benchmark (excess return) to the volatility of those returns (tracking error)? It identifies managers who beat their benchmarks and the consistency of those abilities. It measures the added return earned in exchange for additional risk assumed by using an active manager. Sharpe Ratio Gamma Ratio Information Ratio Sortino Ratio
Information Ratio
Which of the following is a measure that specifically compares a manager's return against the benchmark after adjusting for the "differences" in risk? Tracking Error M-squared R-squared Information Ratio
M-squared
The _______________ is a one-period CAPM based equilibrium model with additional non-risk preferences. Fama French factor model Popularity Asset Pricing Model (PAPM) Black Litterman model Arbitrage Pricing Theory (APT)
Popularity Asset Pricing Model (PAPM)
The following asserts that value is segmented into gains and losses relative to a reference point and that losses hurt more than gains bring pleasure: Adaptive Markets Hypothesis Prospect Theory Modern Portfolio Theory Efficient Markets Theory
Prospect Theory
Which statistical measure below represents the percentage of a fund or security's movements that can be explained by movements in the underlying benchmark? It can be used to select or validate a benchmark. It is useful in validating relative metrics including alpha (return) and beta (risk). The metric ranges from 0 to 100. R2 covariance correlation coefficient tracking error
R2
Which asset class has performed best and worst since the most recent financial crises, with annualized returns of 18.4% and -2.7% respectively? REITs, diversified commodities Developed international equities, U.S. core fixed income U.S. equities, global bonds Emerging markets equities, global bonds
REITs, diversified commodities
Key characteristics of an appropriate investment benchmark include each of the following except for ___________________. R^2 of 50 or higher unambiguous investable measurable
R^2 of 50 or higher
Regarding evidence supporting value in various style premia... _____________________________ say: the strategies are risky, but the standard measures of risk fail to capture this; look for new ways to measure risk under which the strategies do look risky. Neo-classical economists Modern economists Rational finance people Behavioral finance people
Rational finance people
______________ (as demonstrated through the gambler's fallacy) is the belief that even small samples should be representative of the population. Recency bias Representativeness Illusion of control Endowment effect
Representativeness
Which of the following is a measure of portfolio efficiency, defined as unit of return earned for each unit of risk taken (risk measured by standard deviation)? It is best used for non-diversified portfolios. Sortino Ratio Jensen's Alpha Treynor Ratio Sharpe Ratio
Sharpe Ratio
The 10-year cyclically adjusted PE ratio is called __________________________. Fama and French model Modigliani squared Shiller's CAPE ratio Jensen's PE
Shiller's CAPE ratio
Which of the following is a measure of portfolio efficiency, defined as return earned in excess of target for downside risk assumed? It is very useful in client-centric context. Sortino Ratio Treynor Ratio Jensen's Alpha Sharpe Ratio
Sortino Ratio
Which of the risk-adjusted measures of return below uses downside volatility (semi-standard deviation) to measure risk? Unlike the Sharpe ratio, _________ only uses negative returns in the calculation to measure downside risk. This measure is considered a more effective way to measure high volatility portfolios than other ratios . Q ratio Modigliani-squared Sortino ratio Treynor ratio
Sortino ratio
Daniel Kahneman describes the following as "intuitive, automatic, fast and often unconscious": System 1 System 2 System 3 System 4
System 1
Daniel Kahneman describes the following as "deliberative, effortful, slow and controlled": System 4 System 1 System 3 System 2
System 2
Which of the following is not a basic rule of duration? The duration of a bond is always less than the stated maturity. The greater the maturity, the greater the duration. The greater the coupon, the greater the duration. The duration of a zero-coupon bond is equal to the maturity.
The greater the coupon, the greater the duration.
_______________ says that the price, or value, of an asset equals the sum of its discounted expected future cash flows. The present value formula Modigliani-squared valuation Interpolated reserve value The future value formula
The present value formula
Which of the following is a measure of portfolio efficiency, defined as unit of return earned for each unit of risk taken (risk measured by beta)? It is best used for diversified portfolios. Jensen's Alpha Sharpe Ratio Treynor Ratio Sortino Ratio
Treynor Ratio
Your ________________ determines how happy you are with your portfolio. You are happier with ____________________________________________. risk profile, a higher expected return and lower variance utility function, a higher expected return and lower variance risk profile, a portfolio that fits your behavioral investor profile utility function, a portfolio that fits your behavioral investor profile
Utility function, a higher expected return and lower variance
Which of the following measures risk in dollar terms with probabilities of occurrence over a specific time frame? Value-at-Risk Modigliani-squared Sortino Ratio semi-standard deviation
Value-at-Risk
Which of the below is a measure of the percentage of holdings in a manager's portfolio that differs from the benchmark index? Statistic range: 0% to 100%. It is useful in identifying closet indexers. information ratio Modigliani-squared R2 active share
active share
Out-performance by one investment over another is often called ____________. beta delta gamma alpha
alpha
Net of costs and risk, alternative investments may give investors an opportunity to benefit from: beta and alternative beta alpha, beta, and alternative beta alpha and alternative beta alpha and beta
alpha and alternative beta
Prospect Theory demonstrates loss aversion with... an inverted yield curve. a flat z-score. an asymmetrical s-curve. a hyperbolic demand curve.
an asymmetrical s-curve.
People demonstrate the following when they make estimates or decisions starting from an initial value or belief: hindsight recency anchoring optimism
anchoring
___________ occurs when investors are influenced by purchase points or arbitrary price levels. They cling to these numbers as they decide whether to buy or sell. This prevents investors from viewing investments holistically. anchoring framing mental accounting regret aversion
anchoring
The simple average of the sum of all values measured, divided by the number of those values (and excludes the impact of compounding) is called _________________. geometric average effective annual rate arithmetic average total return
arithmetic average
Which of the following is not specifically recommend by Toby Moskowitz in order to help clients overcome or adjust to their biases? record decisions and outcomes consider downside protection if severely loss averse assess client risk tolerance based on how a client feels find a reference point for loss aversion
assess client risk tolerance based on how a client feels
How do we know the correct equity premium figure and what is the right risk premium or measure of risk? What kinds of tools help us with these macro-market problems? Brinson Beebower and Hood model asset pricing models mean variance optimization target date models
asset pricing models
"Readily available events in memory affect the judgment of frequency" describes the following heuristic: availability overconfidence regret illusion of control
availability
How do people really decide (i.e., make financial decisions)? seek to optimize the risk-return tradeoff seek to maximize expected utility based on behavioral principles and biases based on efficient markets and reason
based on behavioral principles and biases
Market exposure or risk directly associated with a market is often called _____________. alpha beta gamma delta
beta
According to Toby Moskowitz, _______ is your asset allocation and ________ is the timing and selection value around your allocation. alpha, beta gamma, delta beta, alpha delta, gamma
beta, alpha
Hedge fund betas across many strategy types have unfortunately yielded the following results over time: betas fairly low in up markets, betas fairly high during down markets betas fairly low in up markets, betas fairly low during down markets betas fairly high in up markets, betas fairly low during down markets betas fairly high in up markets, betas fairly high during down markets
betas fairly low in up markets, betas fairly high during down markets
The following term describes when individuals apply heuristics inappropriately which can negatively influence the decision-making process: intuition rational bounds biases optimizing thought
biases
Common problems with discounted cash flow include: - cash flows are hard to observe and record, and liabilities are always changing. - calculations are sensitive to small changes in inputs, and growth opportunities and rates are hard to pin down. - there is no comparable metric for comparison, and time is often of the essence in doing this analysis. - revenue and earnings are easy to manipulate, and public companies do not share the necessary information needed to make the calculation.
calculations are sensitive to small changes in inputs, and growth opportunities and rates are hard to pin down.
This type of index can be computed by summing up the value of the companies in the index and dividing the result by the number of stocks in the index. Larger stocks receive more proportional representation in the index. cap-weighted index hybrid equity index fundamentally weighted index equal weighted index
cap-weighted index
Over the long run, equity returns are driven by _______________, while bond returns are dominated by ____________. valuation, inflation debtors, creditors institutions, individuals capital gains and income, yield
capital gains and income, yield
The following are examples of what behavioral bias or mental heuristic? Investor seeks positive research opinions on existing portfolio holdings, while ignoring or discounting those that are negative. Portfolio is highly concentrated in stock where an investor works because investor believes he/she is an "insider" with inside view. confirmation bias cognitive dissonance mental accounting delayed gratification
confirmation bias
The following bias is used to identify when people tend to ignore evidence that is not consistent with their own view of the world. mental accounting conservatism bias recency bias endowment effect
conservatism bias
Strategies to combat ____________ and ____________ include underweighting mundane information that does not fit your initial view and show history of making this mistake. cognitive dissonance, overconfidence recency bias, anchoring conservatism, self-attribution bias ambiguity bias, mental accounting
conservatism, self-attribution bias
____________ measures the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes. It is also used to compare a bond's upside and downside price volatility. optimization immunization rate matching convexity
convexity
Which of the following is a measure of the degree to which returns on two risky assets move in tandem? A negative ___________means that the returns move inversely. A positive ____________ means that the returns move in a similar direction. ____________ is used as an intermediate step toward correlation. correlation standard deviation covariance variance
covariance
To calculate the feasible set available, in classic portfolio models, we add ____________ to our forecasts of returns and risk. covariances Treynor ratios information ratios Sharpe ratios
covariances
To find the manager tax ratio, ____________________________________. divide the net return by the gross return multiply tax rate by the portfolio gain minus the benchmark divide the gross return by the net return multiply after-tax return by tax rate - 1
divide the net return by the gross return
The ________________ is the investor's personal return during a given time period, includes the impact of cash flows. It is also known as the Internal Rate of Return (IRR) and measures the success of the individual investors personal experience. real return time-weighted return dollar-weighted return target return
dollar-weighted return
The following holds that individuals will value something more once they own it: cognitive dissonance gambler's fallacy endowment effect conservatism bias
endowment effect
Which term below is used to identify the average return of stocks minus the average return on T-Bills? size premium factor premium equity premium value premium
equity premium
An investor looking to capitalize on mergers, acquisitions, restructuring, etc. would likely be interested in the following hedge fund strategy: event driven strategy convertible arbitrage strategy market neutral strategy long/short equity hedge
event driven strategy
Inputs needed to build efficient portfolios under a mean-variance optimization model include each of the following _______________________________________. risk, return and target weights expected returns, risks, and correlations standard deviation, covariance and time periods beta, correlations and alpha
expected returns, risks, and correlations
According to Zauberman, "people often display _________________ discounting of future outcomes." extremely high moderately low extremely low moderately high
extremely high
If inflation is higher than expected, bond prices ________. If inflation is higher than expected, stock prices do not typically react much as the discount rate goes _______ and expected cash flows _________ and these tend to offset each other. rise, up, decrease fall, down, increase fall, up, increase rise, down, decrease
fall, up, increase
An index in which the selection and weighting criteria are based on factors such as revenue, dividends, book value, or other methods or risk factors is called a(an) ____________________________. cap-weighted index fundamentally weighted index hybrid equity index equal weighted index
fundamentally weighted index
Value can be described in Prospect Theory as... final wealth. twice as valuable as risk. a measure of optimization. gain or loss compared to a reference point.
gain or loss compared to a reference point.
The return based solely on the investment performance of assets held for the time period being measured and eliminates the impact of cash flows is called the ___________________. geometric average total return arithmetic average effective annual rate
geometric average
People often use the following to make quick decisions which can lead to financial mistakes: logic utility maximizing patterns rational thought heuristics
heuristics
Over the long run (i.e., historically speaking), a ______ dividend to price ratio signifies a ______ return on stocks. nominal, net high, high low, high high, low
high, high
According to the Capital Asset Pricing Model (CAPM), a fair return is determined by risk where _________ risk deserves _________ return. higher, higher higher, lower lower, optimal lower, lower
higher, higher
According to one study cited by Toby Moskowitz, there is a significant positive correlation between _______ portfolio turnover and _______ net returns. modest, negligible higher, lower lower, lower higher, higher
higher, lower
Each of the below, except the following, are examples of representativeness: gambler's fallacy excessive extrapolation regression to the mean house money effect
house money effect
When individuals choose their own lottery number and when craps players throw the dice harder when they need a higher number, both demonstrate which of the following? representativeness self-control bias illusion of control availability bias
illusion of control
Which of the terms below describes matching the duration of assets against projected liabilities to help protect from the impact of interest rate fluctuations? immunization optimization convexity stabilization
immunization
Risk and return provide a(n) ___________________ of investor behavior and security pricing. worthless view complete explanation irrational view incomplete explanation
incomplete explanation
Which of the following is not a conclusion of the Adaptive Market Hypothesis (AMH)? behavior can affect markets individuals make mistakes and fail to learn markets evolve as this process takes place competition drives adaptation and innovation
individuals make mistakes and fail to learn
The New Equilibrium Theory (NET) argues that investors demand higher returns for... more desirable security characteristics, for a given set of expected cash flows. more desirable security characteristics, for a given set of expected risk factors. less desirable security characteristics, for a given set of expected cash flows. less desirable security characteristics, for a given set of expected risk factors.
less desirable security characteristics, for a given set of expected cash flows.
_____________ stocks are typically considered "value" stocks. low book to price high price to book high price to cash flow low price to book
low price to book
The ________ the correlation between two assets, the ___________ the effect of diversification. lower, stronger higher, stronger more volatile, stronger more volatile, weaker
lower, stronger
What are the three steps to the basic asset allocation problem in traditional portfolio theory? A) identify assumptions, add customization given risk and time horizon of investor, build portfolio that meets as many of the criteria as possible B) make forecasts about assets, decide on a feasible set available, choose the optimal allocation that maximizes our utility C) determine time horizon, analyze risk preferences, create an appropriate portfolio D) analyze market conditions, consider investor profile and risk preferences, make appropriate and reasonable recommendations
make forecasts about assets, decide on a feasible set available, choose the optimal allocation that maximizes our utility
Investment manager A has a historical return of 9.4% with standard deviation of 29% and the beta is 1.2. Investment manager B has a historical return of 8.7% with a standard deviation of 30% and the beta is 0. Which fund manager is better and why? manager A, because his return is mostly alpha manager A, because his annual return is higher manager B, because her risk-adjusted return is much better manager B, because her return is all alpha
manager B, because her return is all alpha
Beta measures _________________. market risk total risk unsystematic risk idiosyncratic risk
market risk
Idiosyncratic risk is also called each of the following except: non-systematic risk unsystematic risk diversifiable risk market risk
market risk
The following factors make up the original Fama French model: equity, size (large), and value equity, growth, and momentum market, size (small preferred to large), and value market, fundamentals, and liquidity
market, size (small preferred to large), and value
The following describes the way in which people categorize, evaluate, and keep track of financial activities: ambiguity aversion bias mental accounting illusion of self-control anchoring and adjustment bias
mental accounting
The portfolio derived, using classic portfolio theory's two risky asset diagram, that offers the least amount of risk is called: optimized portfolio efficient frontier portfolio minimum variance portfolio diversified portfolio
minimum variance portfolio
The fourth factor added to the original Fama French 3-factor model (often attributed to Carhart) is ______________. growth momentum risk premia fundamentals
momentum
The correlation between U.S. stocks and 10-year U.S. Treasures has been _____________ for the last 15 years. mostly negative low but positive fluctuating between high positive and low negative very high
mostly negative
Use the following as your denominator when solving for the standard deviation of a sample and alternatively for a universe (population) respectively. n, n n-1, n n-1, n-1 n, n-1
n-1, n
Toby Moskowitz specifically recommends each of the following to help mitigate the effects of biases except for: - keep a list of failures to include with successes - when presenting historical numbers, include downside/worst case scenarios - set predetermined procedures for investment changes - narrow framing is helpful, keep focused on the overall portfolio and time horizon
narrow framing is helpful, keep focused on the overall portfolio and time horizon
The _____________ is where the ________________ meets the ______________. CML, SML, optimal portfolio utility curve, optimal portfolio, CAPM optimal portfolio, efficient frontier, utility curve efficient frontier, CAPM, CML
optimal portfolio, efficient frontier, utility curve
Setting procedures to limit influence such as limiting trading activity and forcing time delays (between events and trading activity) can help clients with _______________. house money effect conservatism bias status-quo bias overconfidence
overconfidence
Rank the following U.S. factors in return to risk premium from highest to lowest since 1972. popularity, fundamentals, momentum, size size, fundamentals, popularity, momentum fundamentals, momentum, size, popularity momentum, size, fundamentals, popularity
popularity, fundamentals, momentum, size
The efficient market hypothesis (EMH) states that... developed markets exhibit normal distribution at all times. all investors are rational. prices are equal to fundamental value. active management does not add value.
prices are equal to fundamental value.
The following bias is commonly to blame when investors buy high and sell low. anchoring framing mental accounting recency bias
recency bias
This condition, where taking action and losing feels worse than doing nothing and losing, is attributed to __________________. regret aversion cognitive dissonance overconfidence optimism bias
regret aversion
Dr. Ibbotson makes a case for considering _____________________ the retirement portfolio. maintaining perfect balance between equities and fixed income in adding equities in replacing bonds with annuities in removing alternative investments from
replacing bonds with annuities in
In traditional finance, "r" (the fair average return) is also called each of the following except for which below? discount rate required return riskless rate expected return
riskless rate
The ___________ form version of the efficient market hypothesis holds that stock prices reflect all publicly available company information. semi-strong weak semi-weak strong
semi-strong
Which of the following is a measurement of dispersion that: measures data that is below the mean or target value of a data set; is considered a better measurement of downside risk; and is the average of the squared deviations of all values less than the average or mean? covariance variance standard deviation semi-variance
semi-variance
The following is the risk that mispricing will get worse in the short run. market risk sentiment risk idiosyncratic risk equity premium risk
sentiment risk
This term describes asymmetry of data points from a normal distribution. If data points are grouped to the left it is described as negative ________ and if data points are grouped to the right it is described as positive _______. kurtosis skew correlation VaR
skew
As it relates specifically to "loss aversion," ________ amount risks are aversive, and ________ and _________ matter. large, framing, aggregation large, control, gain-loss expectations small, control, gain-loss expectations small, framing, aggregation
small, framing, aggregation
The Sharpe ratio uses ____________ to measure risk. standard deviation beta correlation coefficients mean variance optimization
standard deviation
_______________ below is a measure of the dispersion of a set of data from its mean. It illustrates the consistency experienced during the investment time period. standard deviation gamma kurtosis skewness
standard deviation
Which of the following is a bias in which an investor is predisposed, when faced with an array of options, to select the one that keeps conditions the same (i.e., the scientific principle of inertia)? It is often present with corporate executives. loss aversion endowment effect affinity bias status quo bias
status quo bias
According to Markowitz's portfolio selection model: everyone invests in the __________ portfolio regardless of their degree of risk aversion; more risk averse investors put more into risk-free asset; less risk averse investors put more into the __________ portfolio. optimal, optimal tangency, optimal optimal, tangency tangency, tangency
tangency, tangency
A common result of _______________ is for investors to hold onto losing positions too long and sell appreciating positions too early. recency bias the disposition effect self-attribution confirmation bias
the disposition effect
Two significant implications of Prospect Theory include: affinity bias and overconfidence. self-attribution bias and the recency effect. cognitive dissonance and regret aversion. the endowment effect and mental accounting.
the endowment effect and mental accounting.
People think that __________ slack will grow in the future at a faster rate than will __________ slack. money, reward time, reward money, time time, money
time, money
The _______________ measures the compound rate of growth in a portfolio (geometric mean) and eliminates distorting effects of cash flows used to measure the return of the investment manager. real return target return time-weighted return dollar-weighted return
time-weighted return
The _________________ demonstrates (is also called) the "portfolio manager return". time-weighted return dollar-weighted return weighted average return net real return
time-weighted return
Return is what you get _________ divided by what you paid _________. What you get tomorrow is the price of the asset, plus any cash flow it pays off. today, tomorrow tomorrow, today tomorrow, tomorrow today, today
tomorrow, today
Standard deviation measures ________________. total risk systematic risk market risk idiosyncratic risk
total risk
Which metric below is the divergence between the price behavior of a portfolio and the price behavior of the benchmark? It can help explain unexplained profits or losses and is calculated as the standard deviation of the difference between the portfolio return and the benchmark return (excess return). tracking error beta alpha Sortino ratio
tracking error
Annualized returns since 1951, as cited by Toby Moskowitz, show improvement in every quintile (expensive to cheap and losers to winners) for the following style premia. value and momentum size and liquidity carry and commodities growth and defensive
value and momentum
According to research by Fama and French, and others, _____________ appear to earn __________ returns than they deserve for their risk. value stocks, higher growth stocks, much higher growth stocks, slightly higher value stocks, lower
value stocks, higher
While we do not know if such history will repeat, the following style premia has exhibited correlations of under 10% with the MSCI World Equity Index since 1990: value, momentum, defensive momentum, carry, defensive value, momentum, carry value, momentum, carry, defensive
value, momentum, defensive
A measure of loss most frequently associated with extreme negative returns, _______________ is the quantile of a distribution below which lies q % of the possible values of that distribution. The 5% _____________, commonly estimated in practice, is the return at the 5th percentile when returns are sorted from high to low. downside deviation downside capture value-at-risk semi-variance
value-at-risk
