INVESTMENTS FINAL
4. The tendency of investors to blame others for their failures and take personal credit for their successes is referred to as representativeness. loss aversion. self−attribution bias. narrow framing.
self−attribution bias.
8. Even after adjusting for risk, ________ firms have, over long periods of time, earned higher returns than ________ firms. small; large large; small new; old old; new
small; large
Which of the following would invalidate the weak form of the efficient market hypothesis. A. Patterns in price behavior that consistently predict future price movements B. Market analysis proves useful in discovering investment opportunities C. Stocks of smaller firms consistently outperform larger firms D. Shortly before she is arrested, a pharmaceutical company researcher makes a large profit on her company's stock by buying just before a new drug is approved by the FDA
A. Patterns in price behavior that consistently predict future price movements
Asset allocation should focus on A. the investor's financial and family situation B. selection of individual securities within an asset class C. maximization of current income D. maximization of short-term profits
A. the investor's financial and family situation
Marti is 31 years old and is saving for retirement. Which one of the following portfolio allocations might best suit her situation if she is willing to accept a fair amount of risk in exchange for long-term capital appreciation? A. 60% bonds, 15% money funds, 25% real estate B. 5% money funds, 10% bonds, 85% growth stocks C. 25% bank CDs, 40% corporate bonds, 15% money market, 20% value stocks D. 50% mortgage bonds, 5% money market, 45% municipal bonds
B. 5% money funds, 10% bonds, 85% growth stocks
In an efficient market, prices appear to move randomly because A. investors do not process new information correctly B. only new information affects stock prices C. insider trading has an unpredictable effect on stock prices D. the number of investors who can forecast prices correctly is too small to have any effect
B. only new information affects stock prices
The fixed-weightings approach to asset allocation A. is based on an allocation of an equal percentage of the portfolio to each separate asset category B. requires periodic rebalancing of the portfolio to maintain the desired weights C. is based on periodic adjustments to category weights in response to market changes D. uses stock-index futures and bond futures in market timing strategy
B. requires periodic rebalancing of the portfolio to maintain the desired weights
According to the semi-strong form of the efficient market hypothesis, which of the following might lead to extraordinary profits? A. studying charts of a stock's past price behavior B. Thoroughly analyzing the state of the economy, the industry, and the company's fundamentals C. possessing private information not available to other investors D. carefully timing trades to buy when the price is low and sell when the price is high
C. possessing private information not available to other investors
An efficient market reflects A. only historical information B. only the information related to events that have already occurred C. all publicly known information related to past events and announced future events D. all information including predictions about future information
D. all information including predictions about future information
The holding period return (HPR) A. reflects only capital gains and losses for investment period of one year or less B. calculates the annual dividend yield on stocks or current interest yield on bonds C. is the most appropriate measure of returns for an investment period exceeding one year D. can be used to determine the actual total return on stocks, bonds, and other investments for periods of one year or less
D. can be used to determine the actual total return on stocks, bonds, and other investments for periods of one year or less
The strong form of the efficient market hypothesis contends that A. a select few institutional investors can earn abnormal profits B. no one can ever outperform the market C. no one can consistently earn a profit D. no one can consistently earn abnormal profits
D. no one can consistently earn abnormal profits
John Reardon purchased 100 shares of Tomko Corporation in December 2019 at a total cost of $1,762. He held the shares for 15 months and then sold them, netting $2,500. During the period he held the stock, the company paid him $3 per share in cash dividends. How much, if any, was the capital gain realized upon the sale of the stock? Calculate John's pretax HPR.
HPR = [($3*100)*($2500-$1762)]/$1762 = 58.9% IRR = [(1+0.589)^(1/1.25)]-1 = 44.89%
3. Believers in efficient markets tend to explain away market anomalies as I. random occurrences that create an illusion of causality. II. errors resulting from inaccurate measures of risk. III. the result of illegal price manipulation by corporate insiders. IV. the effect of normal human emotions such as fear and greed. I and II only I, II, III and IV I and III only I, II and III only
I and II only
The holding period return (HPR) of one's portfolio should be compared to investment goals I. to determine whether the rate of return is commensurate with the risk involved. II. to be sure one's portfolio is outperforming the S&P 500 Index III. to isolate any problem investments. IV. to determine when to change benchmarks from the S&P 500 to the NASDAQ Composite Index.
I and III only
7. Which of the following statements correctly present recommendations based on behavioral finance? I. Don't hesitate to sell a losing stock. II. Trade frequently. III. Chase performance. IV. Be humble and open−minded. I and II only I and IV only II and III only III and IV only
I and IV only
1. Which of the following are common but dysfunctional investor behaviors? I. overinvesting in companies with familiar names II. dividing their funds equally among available choices, even if several of the choices serve the same purpose III. holding on to a stock that has dropped in value because you would be willing to buy it at its current price IV. overestimating one's ability to pick successful investments
I, II and IV only
An asset allocation plan should consider which of the following factors? I. economic outlook II. capital preservation III. changing investment goals IV. investor risk tolerance
I, II, III, and IV
Which of the following are required to measure the performance of a diversified stock portfolio? I. Price changes II. Dividend payments III. An appropriate index to use as a benchmark IV. The risk-free interest rate
I, II, and III only
15. Which one of the following statements is correct? The market fully anticipates the information contained in an earnings announcement prior to the actual announcement. The market responds immediately to reflect insider information. Low P/E stocks tend to outperform high P/E stocks on a risk−adjusted basis. The weekend effect states that security prices tend to rise between Friday afternoon and Monday morning.
Low P/E stocks tend to outperform high P/E stocks on a risk−adjusted basis.
10. Efficient market proponents tend to explain market anomalies as temporary phenomena. statistical accidents. inaccurate risk measurements. all of the above
all of the above
12. The stock price of PHRM declined by 30% when the FDA did not approve a promising new therapy the company was developing. Patrick holds on to the stock and constantly searches the internet looking for favorable stories about the company while ignoring a cascade of negative reports. This is an example of narrow framing. belief perseverance. overconfidence. anchoring.
belief perseverance.
2. There is evidence to support the contention that company insiders generally earn a profit equal to that of public investors. cannot earn abnormal profits because they are not permitted to trade shares in their company's stock without a one−month advance notice to the SEC. have no distinct advantage when trading shares of their company's stock. can profit in a manner that counters the strong form of the efficient market hypothesis.
can profit in a manner that counters the strong form of the efficient market hypothesis.
13. A type of mutual fund with particular appeal to investors who accept the efficient market hypothesis is allocation fund. growth opportunities fund. emerging markets fund. index fund.
index fund.
14. Followers of the efficient market hypothesis believe that very few investors actually analyze or evaluate stocks before they make a purchase decision. individual traders can have a significant impact on the price of a security. investors react quickly and accurately to new information. the needed information to assess the market is available only to corporate insiders.
investors react quickly and accurately to new information.
11. The strong form of the efficient market hypothesis contends that no one can consistently earn a profit. no one can ever outperform the market. no one can consistently earn abnormal profits. a select few institutional investors can earn abnormal profits.
no one can consistently earn abnormal profits.
6. Investor overconfidence leads to too little trading. narrow framing. an overestimation of risk. overly optimistic predictions.
overly optimistic predictions.
9. Which one of the following activities is likely to be useful if the market is only weak form efficient? attempting to determine if stock prices have upward or downward momentum attempting to find repeating pattern in stock price behavior attempting to find the best times to buy and sell studying financial, economic and industry information about a company
studying financial, economic and industry information about a company
5. Followers of the random walk hypothesis believe that -support levels and resistance lines, when combined with basic chart formations, yield both buy and sell signals. -the price movements of stocks are unpredictable, and therefore security analysis will not help to predict future market behavior. -that traders can earn higher than normal returns by exploiting market anomalies such as the small−firm effect. -security analysis is the best tool to utilize when investing in the stock market.
the price movements of stocks are unpredictable, and therefore security analysis will not help to predict future market behavior.