ECON 1710 Midterm #2 Multiple Choice

___________ a relationship between expected return and risk. A. APT stipulates B. CAPM stipulates C. Both CAPM and APT stipulate D. Neither CAPM nor APT stipulate E. No pricing model has found

C. Both CAPM and APT stipulate

The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities. A. APT; CAPM B. APT; OPM C. CAPM; APT D. CAPM; OPM E. APT and OPM; CAPM

C. CAPM; APT

Which of the following are used by technical analysts to determine proper stock prices? I) trendlines II) earnings III) dividend prospects IV) expectations of future interest rates V) resistance levels A. I and V B. I, II, and III C. II, III, and IV D. II, IV, and V E. I and II

A. I and V

Patell and Woflson (1984) report that most of the stock price response to corporate dividend or earnings announcements occurs within ____________ of the announcement. A. 10 minutes B. 45 minutes C. 2 hours D. 4 hours E. 2 trading days

A. 10 minutes

Which of the following is (are) true regarding the APT? I) The Security Market Line does not apply to the APT. II) More than one factor can be important in determining returns. III) Almost all individual securities satisfy the APT relationship. IV) It doesn't rely on the market portfolio that contains all assets. A. II, III, and IV B. II and IV C. II and III D. I, II, and IV E. I, II, III, and IV

A. II, III, and IV

According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false? A. The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate. B. The expected rate of return on a security increases as its beta increases. C. A fairly priced security has an alpha of zero. D. In equilibrium, all securities lie on the security market line. E. All of these are correct.

A. The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate.

What is the relationship between the price of a straight bond and the price of a callable bond? A. The straight bond's price will be higher than the callable bond's price for low interest rates. B. The straight bond's price will be lower than the callable bond's price for low interest rates. C. The straight bond's price will change as interest rates change, but the callable bond's price will stay the same. D. The straight bond and the callable bond will have the same price. E. There is no consistent relationship between the two types of bonds.

A. The straight bond's price will be higher than the callable bond's price for low interest rates.

One of the assumptions of the CAPM is that investors exhibit myopic behavior. What does this mean? A. They plan for one identical holding period. B. They are price-takers who can't affect market prices through their trades. C. They are mean-variance optimizers. D. They have the same economic view of the world. E. They pay no taxes or transactions costs.

A. They plan for one identical holding period.

Of the following four investments, ________ is considered the least risky. A. Treasury bills B. corporate bonds C. U.S. agency issues D. Treasury bonds E. commercial paper

A. Treasury bills

The current yield on a bond is equal to A. annual interest payment divided by the current market price. B. the yield to maturity. C. annual interest divided by the par value. D. the internal rate of return. E. None of the options

A. annual interest payment divided by the current market price.

The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called ___________. A. arbitrage B. capital asset pricing C. factoring D. fundamental analysis E. technical analysis

A. arbitrage

According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. beta risk. B. unsystematic risk. C. unique risk. D. reinvestment risk. E. interest rate risk.

A. beta risk.

The _________ gives the number of shares for which each convertible bond can be exchanged. A. conversion ratio B. current ratio C. P/E ratio D. conversion premium E. convertible floor

A. conversion ratio

A common strategy for passive management is ____________. A. creating an index fund B. creating a small firm fund C. creating an investment club D. creating an index fund and creating an investment club E. creating a small firm fund and creating an investment club

A. creating an index fund

Jaffe (1974) found that stock prices _________ after insiders intensively sold shares. A. decreased B. did not change C. increased D. became extremely volatile E. became much less volatile

A. decreased

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight, during the peak of the citrus harvest. In an efficient market one would expect the price of Florida Orange's stock to A. drop immediately. B. remain unchanged. C. increase immediately. D. gradually decline for the next several weeks. E. gradually increase for the next several weeks.

A. drop immediately.

Basu (1977, 1983) found that firms with low P/E ratios A. earned higher average returns than firms with high P/E ratios. B. earned the same average returns as firms with high P/E ratios. C. earned lower average returns than firms with high P/E ratios. D. had higher dividend yields than firms with high P/E ratios. E. None of these are correct.

A. earned higher average returns than firms with high P/E ratios.

A zero-coupon bond is one that A. effectively has a zero percent coupon rate. B. pays interest to the investor based on the general level of interest rates, rather than at a specified coupon rate. C. pays interest to the investor without requiring the actual coupon to be mailed to the corporation. D. is issued by state governments because they don't have to pay interest. E. is analyzed primarily by focusing ("zeroing in") on the coupon rate.

A. effectively has a zero percent coupon rate.

In equilibrium, the marginal price of risk for a risky security must be A. equal to the marginal price of risk for the market portfolio. B. greater than the marginal price of risk for the market portfolio. C. less than the marginal price of risk for the market portfolio. D. adjusted by its degree of nonsystematic risk. E. unrelated to the marginal price of risk for the market portfolio.

A. equal to the marginal price of risk for the market portfolio.

Multifactor models such as the one constructed by Chen, Roll, and Ross, can better describe assets' returns by A. expanding beyond one factor to represent sources of systematic risk. B. using variables that are easier to forecast ex ante. C. calculating beta coefficients by an alternative method. D. using only stocks with relatively stable returns. E. ignoring firm-specific risk.

A. expanding beyond one factor to represent sources of systematic risk.

A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor. A. factor B. market C. index D. factor and market E. factor, market, and index

A. factor

2. When Maurice Kendall examined the patterns of stock returns in 1953 he concluded that the stock market was __________. Now, these random price movements are believed to be _________. A. inefficient; the effect of a well-functioning market B. efficient; the effect of an inefficient market C. inefficient; the effect of an inefficient market D. efficient; the effect of a well-functioning market E. irrational; even more irrational than

A. inefficient; the effect of a well-functioning market

Research by Jeremy Stein of MIT resolves the dispute over whether beta is a sufficient pricing factor by suggesting that managers should use beta to estimate A. long-term returns but not short-term returns. B. short-term returns but not long-term returns. C. both long- and short-term returns. D. book-to-market ratios. E. Stein did not make any suggestion to managers regarding beta.

A. long-term returns but not short-term returns.

According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. market risk. B. unsystematic risk. C. unique risk. D. reinvestment risk. E. interest rate risk.

A. market risk.

Floating-rate bonds are designed to ___________ while convertible bonds are designed to __________. A. minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock B. maximize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock C. minimize the holders' interest rate risk; give the investor the ability to benefit from interest rate changes D. maximize the holders' interest rate risk; give investor the ability to share in the profits of the issuing company E. None of the options

A. minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock

A well-diversified portfolio is defined as A. one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. B. one that contains securities from at least three different industry sectors. C. a portfolio whose factor beta equals 1.0. D. a portfolio that is equally weighted. E. a portfolio that is equally weighted and contains securities from at least three different industry sectors.

A. one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero.

A coupon bond is a bond that A. pays interest on a regular basis (typically every six months). B. does not pay interest on a regular basis, but pays a lump sum at maturity. C. can always be converted into a specific number of shares of common stock in the issuing company. D. always sells at par. E. None of the options

A. pays interest on a regular basis (typically every six months).

If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. hard

A. semistrong

According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A. systematic risk. B. unsystematic risk. C. unique risk. D. reinvestment risk. E. interest rate risk.

A. systematic risk.

Chartists practice A. technical analysis. B. fundamental analysis. C. regression analysis. D. insider analysis. E. psychoanalysis.

A. technical analysis.

Arbel (1985) found that A. the January effect was highest for neglected firms. B. the book-to-market value ratio effect was highest in January. C. the liquidity effect was highest for small firms. D. the neglected firm effect was independent of the small firm effect. E. small firms had higher book-to-market value ratios.

A. the January effect was highest for neglected firms.

The invoice price of a bond that a buyer would pay is equal to A. the asked price plus accrued interest. B. the asked price less accrued interest. C. the bid price plus accrued interest. D. the bid price less accrued interest. E. the bid price.

A. the asked price plus accrued interest.

The market risk, beta, of a security is equal to A. the covariance between the security's return and the market return 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. E. the variance of the security's return divided by the standard deviation of the market's returns.

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

The expected return-beta relationship of the CAPM is graphically represented by A. the security market line. B. the capital market line. C. the capital allocation line. D. the efficient frontier with a risk-free asset. E. the efficient frontier without a risk-free asset.

A. the security market line.

Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because ________. A. they may result from data snooping B. they are sources of systematic risk C. they can be explained by security characteristic lines D. they are more appropriate for a single-factor model E. they are macroeconomic factors

A. they may result from data snooping

The feature of the APT that offers the greatest potential advantage over the CAPM is the ______________. A. use of several factors instead of a single market index to explain the risk-return relationship B. identification of anticipated changes in production, inflation, and term structure as key factors in explaining the risk-return relationship C. superior measurement of the risk-free rate of return over historical time periods D. variability of coefficients of sensitivity to the APT factors for a given asset over time E. superior measurement of the risk-free rate of return over historical time periods and variability of coefficients of sensitivity to the APT factors for a given asset over time

A. use of several factors instead of a single market index to explain the risk-return relationship

Banz (1981) found that, on average, the risk-adjusted returns of small firms A. were higher than the risk-adjusted returns of large firms. B. were the same as the risk-adjusted returns of large firms. C. were lower than the risk-adjusted returns of large firms. D. were unrelated to the risk-adjusted returns of large firms. E. were negative.

A. were higher than the risk-adjusted returns of large firms.

A "fairly priced" asset lies A. above the security market line. B. on the security market line. C. on the capital market line. D. above the capital market line. E. below the security market line.

B. on the security market line.

The market portfolio has a beta of A. 0. B. 1. C. −1. D. 0.5. E. 0.75

B. 1.

_________ above which it is difficult for the market to rise. A. A book value is a value B. A resistance level is a value C. A support level is a value D. A book value and a resistance level are values E. A book value and a support level are values

B. A resistance level is a value

To take advantage of an arbitrage opportunity, an investor would I) construct a zero investment portfolio that will yield a sure profit. II) construct a zero beta investment portfolio that will yield a sure profit. III) make simultaneous trades in two markets without any net investment. IV) short sell the asset in the low-priced market and buy it in the high-priced market. A. I and IV B. I and III C. II and III D. I, III, and IV E. II, III, and IV

B. I and III

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A. Rf+ [E(RM)]. B. Rf+ [E(RM) − Rf]. C. [E(RM) − Rf]. D. E(RM) + Rf. E. Rf- [E(RM) − Rf].

B. Rf+ [E(RM) − Rf].

Which one of the following statements about convertibles is true? A. The longer the call protection on a convertible, the less the security is worth. B. The more volatile the underlying stock, the greater the value of the conversion feature. C. The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. D. The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. E. Convertibles are not callable.

B. The more volatile the underlying stock, the greater the value of the conversion feature.

Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios? A. The CAPM B. The multifactor APT C. Both the CAPM and the multifactor APT D. Neither the CAPM nor the multifactor APT E. No pricing model currently exists that provides guidance concerning the determination of the risk premium on any portfolio

B. The multifactor APT

Swingin' Soiree, Inc. is a firm that has its main office on the Right Bank in Paris. The firm just issued bonds with a final payment amount that depends on whether the Seine River floods. This type of bond is known as A. a contingency bond. B. a catastrophe bond. C. an emergency bond. D. an incident bond. E. an eventuality bond.

B. a catastrophe bond.

Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict A. required coupon rates for new bond issues. B. bankruptcy risk. C. the likelihood of a firm becoming a takeover target. D. the probability of a bond issue being called. E. None of the options

B. bankruptcy risk.

An overpriced security will plot A. on the Security Market Line. B. below the Security Market Line. C. above the Security Market Line. D. either above or below the Security Market Line depending on its covariance with the market. E. either above or below the Security Market Line depending on its standard deviation.

B. below the Security Market Line.

Standard deviation and beta both measure risk, but they are different in that A. beta measures both systematic and unsystematic risk. B. beta measures only systematic risk while standard deviation is a measure of total risk. C. beta measures only unsystematic risk while standard deviation is a measure of total risk. D. beta measures both systematic and unsystematic risk while standard deviation measures only systematic risk. E. beta measures total risk while standard deviation measures only nonsystematic risk.

B. beta measures only systematic risk while standard deviation is a measure of total risk.

In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A. unique risk. B. beta. C. standard deviation of returns. D. variance of returns. E. skewness.

B. beta.

In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is A. unique risk. B. systematic risk. C. standard deviation of returns. D. variance of returns. E. semi-variance.

B. beta.

A CDO is a A. command duty officer. B. collateralized debt obligation. C. commercial debt originator. D. collateralized debenture originator. E. common debt officer.

B. collateralized debt obligation.

Studies of stock price reactions to news are called A. reaction studies. B. event studies. C. drift studies. D. both reaction studies and drift studies. E. both event studies and drift studies.

B. event studies.

Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that A. bad news about Google was announced yesterday. B. good news about Google was announced yesterday. C. no news about Google was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

B. good news about Google was announced yesterday.

Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that A. bad news about Matthews was announced yesterday. B. good news about Matthews was announced yesterday. C. no news about Matthews was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

B. good news about Matthews was announced yesterday.

Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had average monthly returns of _______ while the stocks of firms within the lowest decile of book-to-market ratios had average monthly returns of________. A. greater than 1%; greater than 1% B. greater than 1%; less than 1% C. less than 1%; greater than 1% D. less than 1%; less than 1% E. less than 0.5%; greater than 0.5%

B. greater than 1%; less than 1%

According to the Capital Asset Pricing Model (CAPM), fairly priced securities A. have positive betas. B. have zero alphas. C. have negative betas. D. have positive alphas. E. have non-zero alphas.

B. have zero alphas.

Studies of liquidity spreads in security markets have shown that A. liquid stocks earn higher returns than illiquid stocks. B. illiquid stocks earn higher returns than liquid stocks. C. both liquid and illiquid stocks earn the same returns. D. illiquid stocks are good investments for frequent, short-term traders. E. only illiquid stocks should be held by most investors.

B. illiquid stocks earn higher returns than liquid stocks.

In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is A. unique risk. B. market risk. C. standard deviation of returns. D. variance of returns. E. semi-variance.

B. market risk.

Accrued interest A. is quoted in the bond price in the financial press. B. must be paid by the buyer of the bond and remitted to the seller of the bond. C. must be paid to the broker for the inconvenience of selling bonds between maturity dates. D. is quoted in the bond price in the financial press and must be paid by the buyer of the bond and remitted to the seller of the bond. E. is quoted in the bond price in the financial press and must be paid to the broker for the inconvenience of selling bonds between maturity dates.

B. must be paid by the buyer of the bond and remitted to the seller of the bond.

Ceteris paribus, the price and yield on a bond are A. positively related. B. negatively related. C. sometimes positively and sometimes negatively related. D. not related. E. indefinitely related.

B. negatively related.

A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in A. pure arbitrage. B. risk arbitrage. C. option arbitrage. D. equilibrium arbitrage. E. covered interest arbitrage.

B. risk arbitrage.

Your professor finds a stock-trading rule that generates excess risk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with ________. A. regret avoidance B. selection bias C. framing D. insider trading E. None of these is correct.

B. selection bias

If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. None of these are correct.

B. strong

The stock market follows a __________. A. random walk B. submartingale C. predictable pattern that can be exploited D. random walk and a predictable pattern that can be exploited E. submartingale and a predictable pattern that can be exploited

B. submartingale

Advantage(s) of the APT is(are) A. that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios. B. that the model does not require a specific benchmark market portfolio. C. that risk need not be considered. D. that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios and that the model does not require a specific benchmark market portfolio. E. that the model does not require a specific benchmark market portfolio and that risk need not be considered.

B. that the model does not require a specific benchmark market portfolio.

The yield to maturity on a bond is A. below the coupon rate when the bond sells at a discount and equal to the coupon rate when the bond sells at a premium. B. the discount rate that will set the present value of the payments equal to the bond price. C. based on the assumption that any payments received are reinvested at the coupon rate. D. None of the options

B. the discount rate that will set the present value of the payments equal to the bond price.

When Maurice Kendall first examined stock price patterns in 1953, he found that A. certain patterns tended to repeat within the business cycle. B. there were no predictable patterns in stock prices. C. stocks whose prices had increased consistently for one week tended to have a net decrease the following week. D. stocks whose prices had increased consistently for one week tended to have a net increase the following week. E. the direction of change in stock prices was unpredictable, but the amount of change followed a distinct pattern.

B. there were no predictable patterns in stock prices.

___________ the return on a stock beyond what would be predicted from market movements alone. A. An irrational return is B. An economic return is C. An abnormal return is D. An irrational return and an economic return are E. An irrational return and an abnormal return are

C. An abnormal return is

_________ below which it is difficult for the market to fall. A. An intrinsic value is a value B. A resistance level is a value C. A support level is a value D. An intrinsic value and a resistance level are values E. A resistance level and a support level are values

C. A support level is a value

Which of the following statements about the mutual fund theorem is true? I) It is similar to the separation property. II) It implies that a passive investment strategy can be efficient. III) It implies that efficient portfolios can be formed only through active strategies. IV) It means that professional managers have superior security selection strategies. A. I and IV B. I, II, and IV C. I and II D. III and IV E. II and IV

C. I and II

Which of the following are investment superstars who have consistently shown superior performance? I) Warren Buffet II) Phoebe Buffet III) Peter Lynch IV) Merrill Lynch V) Jimmy Buffet A. I, III, and IV B. II, III, and IV C. I and III D. III and IV E. I, III, IV, and V

C. I and III

Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? I) the expected return-beta relationship is maintained for all but a small number of well-diversified portfolios. II) the expected return-beta relationship is maintained for all well-diversified portfolios. III) the expected return-beta relationship is maintained for all but a small number of individual securities. IV) the expected return-beta relationship is maintained for all individual securities. A. I and III are correct. B. I and IV are correct. C. II and III are correct. D. II and IV are correct. E. Only I is correct.

C. II and III are correct.

Which of the following are used by fundamental analysts to determine proper stock prices? I) trendlines II) earnings III) dividend prospects IV) expectations of future interest rates V) resistance levels A. I, IV, and V B. I, II, and III C. II, III, and IV D. II, IV, and V E. All five items are used by fundamental analysts.

C. II, III, and IV

The APT was developed in 1976 by ____________. A. Lintner B. Modigliani and Miller C. Ross D. Sharpe E. Fama

C. Ross

Which statement is not true regarding the Capital Market Line (CML)? A. The CML is the line from the risk-free rate through the market portfolio. B. The CML is the best attainable capital allocation line. C. The CML is also called the security market line. D. The CML always has a positive slope. E. The risk measure for the CML is standard deviation.

C. The CML is also called the security market line.

Proponents of the EMH typically advocate A. buying individual stocks on margin and trading frequently. B. investing in hedge funds. C. a passive investment strategy. D. buying individual stocks on margin and trading frequently and investing in hedge funds. E. investing in hedge funds and a passive investment strategy.

C. a passive investment strategy.

An investor will take as large a position as possible when an equilibrium price relationship is violated. This is an example of _________. A. a dominance argument B. the mean-variance efficiency frontier C. a risk-free arbitrage D. the capital asset pricing model E. the SML

C. a risk-free arbitrage

An underpriced security will plot A. on the Security Market Line. B. below the Security Market Line. C. above the Security Market Line. D. either above or below the Security Market Line depending on its covariance with the market. E. either above or below the Security Market Line depending on its standard deviation.

C. above the Security Market Line.

A credit default swap is A. a fancy term for a low-risk bond. B. an insurance policy on the default risk of a federal government bond or loan. C. an insurance policy on the default risk of a corporate bond or loan. D. None of the options

C. an insurance policy on the default risk of a corporate bond or loan.

At issue, coupon bonds typically sell A. above par value. B. below par. C. at or near par value. D. at a value unrelated to par. E. None of the options

C. at or near par value.

The likelihood of an investment newsletter's successfully predicting the direction of the market for three consecutive years by chance should be A. between 50% and 70%. B. between 25% and 50%. C. between 10% and 25%. D. less than 10%. E. greater than 70%.

C. between 10% and 25%.

When a bond indenture includes a sinking fund provision, A. firms must establish a cash fund for future bond redemption. B. bondholders always benefit because principal repayment on the scheduled maturity date is guaranteed. C. bondholders may lose because their bonds can be repurchased by the corporation at below-market prices. D. firms must establish a cash fund for future bond redemption and bondholders always benefit because principal repayment on the scheduled maturity date is guaranteed. E. None of the options is true.

C. bondholders may lose because their bonds can be repurchased by the corporation at below-market prices.

If you believe in the reversal effect, you should A. buy bonds in this period if you held stocks in the last period. B. buy stocks in this period if you held bonds in the last period. C. buy stocks this period that performed poorly last period. D. go short. E. both buy stocks this period that performed poorly last period and go short.

C. buy stocks this period that performed poorly last period.

A support level is the price range at which a technical analyst would expect the A. supply of a stock to increase dramatically. B. supply of a stock to decrease substantially. C. demand for a stock to increase substantially. D. demand for a stock to decrease substantially. E. price of a stock to fall.

C. demand for a stock to increase substantially.

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases: A. directly with alpha. B. inversely with alpha. C. directly with beta. D. inversely with beta. E. in proportion to its standard deviation.

C. directly with beta.

Basu (1977, 1983) 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. E. None of these are correct.

C. earned lower average returns than firms with low P/E ratios

The term "arbitrage" refers to A. buying low and selling high. B. short selling high and buying low. C. earning risk-free economic profits. D. negotiating for favorable brokerage fees. E. hedging your portfolio through the use of options.

C. earning risk-free economic profits.

TIPS are A. securities formed from the coupon payments only of government bonds. B. securities formed from the principal payments only of government bonds. C. government bonds with par value linked to the general level of prices. D. government bonds with coupon rate linked to the general level of prices. E. zero-coupon government bonds.

C. government bonds with par value linked to the general level of prices

Two basic assumptions of technical analysis are that security prices adjust A. rapidly to new information and market prices are determined by the interaction of supply and demand. B. rapidly to new information and liquidity is provided by security dealers. C. gradually to new information and market prices are determined by the interaction of supply and demand. D. gradually to new information and liquidity is provided by security dealers. E. rapidly to information and to the actions of insiders.

C. gradually to new information and market prices are determined by the interaction of supply and demand.

According to the Capital Asset Pricing Model (CAPM), overpriced securities A. have positive betas. B. have zero alphas. C. have negative alphas. D. have positive alphas. E. have negative betas.

C. have negative alphas.

Jaffe (1974) found that stock prices _________ after insiders intensively bought shares. A. decreased B. did not change C. increased D. became extremely volatile E. became much less volatile

C. increased

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. You observe that Nicholas had an abnormal return of −1.2% yesterday. This suggests that A. the market is not efficient. B. Nicholas' stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

C. investors expected the earnings increase to be larger than what was actually announced.

QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that A. bad news about QQAG was announced yesterday. B. good news about QQAG was announced yesterday. C. no significant news about QQAG was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

C. no significant news about QQAG was announced yesterday.

Most corporate bonds are traded A. on a formal exchange operated by the New York Stock Exchange. B. by the issuing corporation. C. over the counter by bond dealers linked by a computer quotation system. D. on a formal exchange operated by the American Stock Exchange. E. on a formal exchange operated by the Philadelphia Stock Exchange.

C. over the counter by bond dealers linked by a computer quotation system.

A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date. A. callable B. coupon C. put D. Treasury E. zero-coupon

C. put

If you believe in the reversal effect, you should A. sell bonds in this period if you held stocks in the last period. B. sell stocks in this period if you held bonds in the last period. C. sell stocks this period that performed well last period. D. go long. E. sell stocks this period that performed well last period and go long.

C. sell stocks this period that performed well last period.

Capital Asset Pricing Theory asserts that portfolio returns are best explained by: A. economic factors. B. specific risk. C. systematic risk. D. diversification. E. unique risk.

C. systematic risk.

If investors do not know their investment horizons for certain A. the CAPM is no longer valid. B. the CAPM underlying assumptions are not violated. C. the implications of the CAPM are not violated as long as investors' liquidity needs are not priced. D. the implications of the CAPM are no longer useful. E. the implications of the CAPM are not violated as long as investors' liquidity needs are priced.

C. the implications of the CAPM are not violated as long as investors' liquidity needs are not priced.

For the CAPM that examines illiquidity premiums, if there is correlation among assets due to common systematic risk factors, the illiquidity premium on asset i is a function of A. the market's volatility. B. asset i's volatility. C. the trading costs of security i. D. the risk-free rate. E. the money supply.

C. the trading costs of security i.

In a well diversified portfolio A. market risk is negligible. B. systematic risk is negligible. C. unsystematic risk is negligible. D. nondiversifiable risk is negligible. E. risk does not exist.

C. unsystematic risk is negligible.

If you believe in the _______ form of the EMH, you believe that stock prices only 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. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. None of these are correct.

C. weak

Banz (1981) found that, on average, the risk-adjusted returns of large firms A. were higher than the risk-adjusted returns of small firms. B. were the same as the risk-adjusted returns of small firms. C. were lower than the risk-adjusted returns of small firms. D. were unrelated to the risk-adjusted returns of small firms. E. were negative.

C. were lower than the risk-adjusted returns of small firms.

The ________ is used to calculate the present value of a bond. A. nominal yield B. current yield C. yield to maturity D. yield to call E. None of the options

C. yield to maturity

An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. A. small positive B. small negative C. zero D. large positive E. large negative

C. zero

In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be A. positive and large. B. positive and small. C. zero. D. negative and small. E. negative and large.

C. zero.

In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger its nonsystematic risk approaches A. one. B. infinity. C. zero. D. negative one. E. None of these is correct.

C. zero.

Cumulative abnormal returns (CAR) A. are used in event studies. B. are better measures of security returns due to firm-specific events than are abnormal returns (AR). C. are cumulated over the period prior to the firm-specific event. D. are used in event studies and are better measures of security returns due to firm-specific events than are abnormal returns (AR). E. are used in event studies and are cumulated over the period prior to the firm-specific event.

D. are used in event studies and are better measures of security returns due to firm-specific events than are abnormal returns (AR).

The bond indenture includes A. the coupon rate of the bond. B. the par value of the bond. C. the maturity date of the bond. D. All of the options E. None of the options

D. All of the options

Which of the following factors were used by Fama and French in their multi-factor model? A. Return on the market index. B. Excess return of small stocks over large stocks. C. Excess return of high book-to-market stocks over low book-to-market stocks. D. All of these factors were included in their model. E. None of these factors were included in their model.

D. All of these factors were included in their model.

Which of the following factors did Chen, Roll and Ross include in their multifactor model? A. Change in industrial waste B. Change in expected inflation C. Change in unanticipated inflation D. Change in expected inflation and Change in unanticipated inflation E. All of these factors were included in their model

D. Change in expected inflation and Change in unanticipated inflation

Which of the following is not a type of international bond? A. Samurai bonds B. Yankee bonds C. Bulldog bonds D. Elton bonds E. All of the options are international bonds.

D. Elton bonds

The amount that an investor allocates to the market portfolio is negatively related to I) The expected return on the market portfolio. II) The investor's risk aversion coefficient. III) The risk-free rate of return. IV) The variance of the market portfolio A. I and II B. II and III C. II and IV D. II, III, and IV E. I, III, and IV

D. II, III, and IV

Which statement is not true regarding the market portfolio? A. It includes all publicly traded financial assets. B. It lies on the efficient frontier. C. All securities in the market portfolio are held in proportion to their market values. D. It is the tangency point between the capital market line and the indifference curve. E. It lies on a line that represents the expected risk-return relationship.

D. It is the tangency point between the capital market line and the indifference curve.

__________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts E. Credit analysts, Fundamental analysts, Systems analysts, and Technical analysts

D. Technical analysts

Which of the following is true about the security market line (SML) derived from the APT? A. The SML has a downward slope. B. The SML for the APT shows expected return in relation to portfolio standard deviation. C. The SML for the APT has an intercept equal to the expected return on the market portfolio. D. The benchmark portfolio for the SML may be any well-diversified portfolio. E. The SML is not relevant for the APT.

D. The benchmark portfolio for the SML may be any well-diversified portfolio.

What is the expected return of a zero-beta security? A. The market rate of return. B. Zero rate of return. C. A negative rate of return. D. The risk-free rate. E. A return much higher than the risk-free rate.

D. The risk-free rate.

To earn a high rating from the bond rating agencies, a firm should have A. a low times interest earned ratio. B. a low debt to equity ratio. C. a high quick ratio. D. a low debt to equity ratio and a high quick ratio. E. a low times interest earned ratio and a high quick ratio.

D. a low debt to equity ratio and a high quick ratio.

A zero-investment portfolio with a positive expected return arises when _________. A. an investor has downside risk only B. the law of prices is not violated C. the opportunity set is not tangent to the capital allocation line D. a risk-free arbitrage opportunity exists E. a risk-free arbitrage opportunity does not exist

D. a risk-free arbitrage opportunity exists

According to the Capital Asset Pricing Model (CAPM), A. a security with a positive alpha is considered overpriced. B. a security with a zero alpha is considered to be a good buy. C. a security with a negative alpha is considered to be a good buy. D. a security with a positive alpha is considered to be underpriced. E. a security with a positive beta is considered to be underpriced.

D. a security with a positive alpha is considered to be underpriced.

The capital asset pricing model assumes A. all investors are price takers. B. all investors have the same holding period. C. investors pay taxes on capital gains. D. all investors are price takers and all investors have the same holding period. E. all investors are price takers, all investors have the same holding period, and investors pay taxes on capital gains.

D. all investors are price takers and all investors have the same holding period.

The capital asset pricing model assumes A. all investors are rational. B. all investors have the same holding period. C. investors have heterogeneous expectations. D. all investors are rational, and all investors have the same holding period. E. all investors are rational, all investors have the same holding period, and investors have heterogeneous expectations.

D. all investors are rational, and all investors have the same holding period.

Callable bonds A. are called when interest rates decline appreciably. B. have a call price that declines as time passes. C. are called when interest rates increase appreciably. D. are called when interest rates decline appreciably and have a call price that declines as time passes. E. have a call price that declines as time passes and are called when interest rates increase appreciably.

D. are called when interest rates decline appreciably and have a call price that declines as time passes.

In a multi-factor APT model, the coefficients on the macro factors are often called ______. A. systemic risk B. factor sensitivities C. idiosyncratic risk D. factor betas E. both factor sensitivities and factor betas

E. both factor sensitivities and factor betas

The expected return-beta relationship A. is the most familiar expression of the CAPM to practitioners. B. refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. C. assumes that investors hold well-diversified portfolios. D. assumes that investors hold well-diversified portfolios, is the most familiar expression of the CAPM to practitioners, and refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. E. assumes that investors do not hold well-diversified portfolios.

D. assumes that investors hold well-diversified portfolios, is the most familiar expression of the CAPM to practitioners, and refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta.

Empirical results regarding betas estimated from historical data indicate that A. betas are constant over time. B. betas of all securities are always greater than one. C. betas are always near zero. D. betas appear to regress toward one over time. E. betas are always positive.

D. betas appear to regress toward one over time.

Studies of negative earnings surprises have shown that there is A. a negative abnormal return on the day negative earnings surprises are announced. B. a positive drift in the stock price on the days following the earnings surprise announcement. C. a negative drift in the stock price on the days following the earnings surprise announcement. D. both a negative abnormal return on the day negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. E. both a negative abnormal return on the day negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.

D. both a negative abnormal return on the day negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.

Studies of positive earnings surprises have shown that there is A. a positive abnormal return on the day positive earnings surprises are announced. B. a positive drift in the stock price on the days following the earnings surprise announcement. C. a negative drift in the stock price on the days following the earnings surprise announcement. D. both a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. E. both a positive abnormal return on the day positive earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.

D. both a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.

In a factor model, the return on a stock in a particular period will be related to A. factor risk. B. non-factor risk. C. standard deviation of returns. D. both factor risk and non-factor risk. E. There is no relationship between factor risk, risk premiums, and returns.

D. both factor risk and non-factor risk.

The risk premium on the market portfolio will be proportional to A. the average degree of risk aversion of the investor population. B. the risk of the market portfolio as measured by its variance. C. the risk of the market portfolio as measured by its beta. D. both the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its variance. E. both the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its beta.

D. both the average degree of risk aversion of the investor population and the risk of the market portfolio as measured by its variance.

The security market line (SML) A. can be portrayed graphically as the expected return-beta relationship. B. can be portrayed graphically as the expected return-standard deviation of market returns relationship. C. provides a benchmark for evaluation of investment performance. D. can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance. E. can be portrayed graphically as the expected return-standard deviation of market returns relationship and provides a benchmark for evaluation of investment performance.

D. can be portrayed graphically as the expected return-beta relationship and provides a benchmark for evaluation of investment performance.

The bond market A. can be quite "thin." B. primarily consists of a network of bond dealers in the over-the-counter market. C. consists of many investors on any given day. D. can be quite "thin" and primarily consists of a network of bond dealers in the over-the-counter market. E. primarily consists of a network of bond dealers in the over-the-counter market and consists of many investors on any given day.

D. can be quite "thin" and primarily consists of a network of bond dealers in the over-the-counter market.

In a multi-factor APT model, the coefficients on the macro factors are often called ______. A. systemic risk B. firm-specific risk C. idiosyncratic risk D. factor betas E. unique risk

D. factor betas

In a multi-factor APT model, the coefficients on the macro factors are often called ______. A. systemic risk B. firm-specific risk C. idiosyncratic risk D. factor loadings E. unique risk

D. factor loadings

Convertible bonds A. give their holders the ability to share in price appreciation of the underlying stock. B. offer lower coupon rates than similar nonconvertible bonds. C. offer higher coupon rates than similar nonconvertible bonds. D. give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds. E. give their holders the ability to share in price appreciation of the underlying stock and offer higher coupon rates than similar nonconvertible bonds.

D. give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds.

According to the Capital Asset Pricing Model (CAPM), underpriced securities A. have positive betas. B. have zero alphas. C. have negative betas. D. have positive alphas. E. have negative alphas.

D. have positive alphas.

Researchers have found that most of the small firm effect occurs A. during the spring months. B. during the summer months. C. in December. D. in January. E. randomly.

D. in January.

Studies of mutual fund performance A. indicate that one should not randomly select a mutual fund. B. indicate that historical performance is not necessarily indicative of future performance. C. indicate that the professional management of the fund insures above market returns. D. indicates both that one should not randomly select a mutual fund and that historical performance is not necessarily indicative of future performance. E. indicate both that historical performance is not necessarily indicative of future performance and that the professional management of the fund insures above market returns.

D. indicates both that one should not randomly select a mutual fund and that historical performance is not necessarily indicative of future performance.

LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that A. the market is not efficient. B. LJP stock will probably rise in value again tomorrow. C. investors view the international joint venture as bad news. D. investors view the international joint venture as good news. E. earnings are expected to decrease next quarter.

D. investors view the international joint venture as good news.

A hybrid strategy is one where the investor A. uses both fundamental and technical analysis to select stocks. B. selects the stocks of companies that specialize in alternative fuels. C. selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds. D. maintains a passive core and augments the position with an actively managed portfolio. E. None of these are correct.

D. maintains a passive core and augments the position with an actively managed portfolio.

Multifactor models seek to improve the performance of the single-index model by A. modeling the systematic component of firm returns in greater detail. B. incorporating firm-specific components into the pricing model. C. allowing for multiple economic factors to have differential effects. D. modeling the systematic component of firm returns in greater detail, incorporating firm-specific components into the pricing model, and allowing for multiple economic factors to have differential effects. E. none of these statements are true.

D. modeling the systematic component of firm returns in greater detail, incorporating firm-specific components into the pricing model, and allowing for multiple economic factors to have differential effects.

In terms of the risk/return relationship in the APT A. only factor risk commands a risk premium in market equilibrium. B. only systematic risk is related to expected returns. C. only nonsystematic risk is related to expected returns. D. only factor risk commands a risk premium in market equilibrium and only systematic risk is related to expected returns. E. only factor risk commands a risk premium in market equilibrium and only nonsystematic risk is related to expected returns.

D. only factor risk commands a risk premium in market equilibrium and only systematic risk is related to expected returns.

If stock prices follow a random walk A. it implies that investors are irrational. B. it means that the market cannot be efficient. C. price levels are not random. D. price changes are random. E. price movements are predictable.

D. price changes are random.

The APT differs from the CAPM because the APT _________. A. places more emphasis on market risk B. minimizes the importance of diversification C. recognizes multiple unsystematic risk factors D. recognizes multiple systematic risk factors E. places more emphasis on systematic risk

D. recognizes multiple systematic risk factors

The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called A. deferral. B. reissue. C. repurchase. D. refunding. E. None of the options

D. refunding.

The weak form of the efficient market hypothesis contradicts A. technical analysis, but supports fundamental analysis as valid. B. fundamental analysis, but supports technical analysis as valid. C. both fundamental analysis and technical analysis. D. technical analysis, but is silent on the possibility of successful fundamental analysis. E. None of these is correct.

D. technical analysis, but is silent on the possibility of successful fundamental analysis.

The APT requires a benchmark portfolio A. that is equal to the true market portfolio. B. that contains all securities in proportion to their market values. C. that need not be well-diversified. D. that is well-diversified and lies on the SML. E. that is unobservable.

D. that is well-diversified and lies on the SML.

The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that A. the market is not efficient. B. King stock will probably rise in value tomorrow. C. King stock will probably fall in value tomorrow. D. the approval was already anticipated by the market. E. None of these is correct.

D. the approval was already anticipated by the market.

The following factors might affect stock returns: A. the business cycle. B. interest rate fluctuations. C. inflation rates. D. the business cycle, interest rate fluctuations, and inflation rates. E. the relationship between past FRED spreads.

D. the business cycle, interest rate fluctuations, and inflation rates.

A bond will sell at a discount when A. the coupon rate is greater than the current yield and the current yield is greater than yield to maturity. B. the coupon rate is greater than yield to maturity. C. the coupon rate is less than the current yield and the current yield is greater than the yield to maturity. D. the coupon rate is less than the current yield and the current yield is less than yield to maturity. E. None of the options is true.

D. the coupon rate is less than the current yield and the current yield is less than yield to maturity.

The main difference between the three forms of market efficiency is that A. the definition of efficiency differs. B. the definition of excess return differs. C. the definition of prices differs. D. the definition of information differs. E. they were discovered by different people.

D. the definition of information differs.

The factor F in the APT model represents A. firm-specific risk. B. the sensitivity of the firm to that factor. C. a factor that affects all security returns. D. the deviation from its expected value of a factor that affects all security returns. E. a random amount of return attributable to firm events.

D. the deviation from its expected value of a factor that affects all security returns.

The Security Market Line (SML) is A. the line that describes the expected return-beta relationship for well-diversified portfolios only. B. also called the Capital Allocation Line. C. the line that is tangent to the efficient frontier of all risky assets. D. the line that represents the expected return-beta relationship. E. also called the Capital Market Line.

D. the line that represents the expected return-beta relationship.

At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with ________. A. regret avoidance B. selection bias C. overconfidence D. the lucky event issue E. None of these is correct.

D. the lucky event issue

The debate over whether markets are efficient will probably never be resolved because of ________. A. the lucky event issue B. the magnitude issue C. the selection bias issue D. the lucky event issue, magnitude issue, and selection bias issue E. None of these answers are correct.

D. the lucky event issue, magnitude issue, and selection bias issue

Debt securities are often called fixed-income securities because A. the government fixes the maximum rate that can be paid on bonds. B. they are held predominantly by older people who are living on fixed incomes. C. they pay a fixed amount at maturity. D. they promise either a fixed stream of income or a stream of income determined by a specific formula. E. they were the first type of investment offered to the public, which allowed them to "fix" their income at a higher level by investing in bonds.

D. they promise either a fixed stream of income or a stream of income determined by a specific formula.

A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________. A. would be; it was a clear response to macroeconomic news B. would be; it was not a clear response to macroeconomic news C. would not be; it was a clear response to macroeconomic news D. would not be; it was not a clear response to macroeconomic news E. None of these are correct.

D. would not be; it was not a clear response to macroeconomic news

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity. A. current yield B. dividend yield C. P/E ratio D. yield to maturity E. discount yield

D. yield to maturity

The difference between a random walk and a submartingale is the expected price change in a random walk is ______ and the expected price change for a submartingale is ______. A. positive; zero B. positive; positive C. positive; negative D. zero; positive E. zero; zero

D. zero; positive

An important difference between CAPM and APT is A. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition. B. CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. C. implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. D. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition, CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium, implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. E. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition and assumes many small changes are required to bring the market back to equilibrium.

E. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition and assumes many small changes are required to bring the market back to equilibrium.

A CDS is a A. command duty supervisor. B. collateralized debt security. C. commercial debt servicer. D. collateralized debenture security. E. credit default swap.

E. credit default swap.

Which one of the following statements about convertibles is false? I) The longer the call protection on a convertible, the less the security is worth. II) The more volatile the underlying stock, the greater the value of the conversion feature. III) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. IV) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. A. I only B. II only C. I and III D. IV only E. I, III, and IV

E. I, III, and IV

Which statement is true regarding the market portfolio? A. It includes all publicly traded financial assets. B. It lies on the efficient frontier. C. All securities in the market portfolio are held in proportion to their market values. D. It is the tangency point between the capital market line and the indifference curve. E. It includes all publicly traded financial assets, lies on the efficient frontier, and all securities in the market portfolio are held in proportion to their market values.

E. It includes all publicly traded financial assets, lies on the efficient frontier, and all securities in the market portfolio are held in proportion to their market values.

Which of the following factors did Chen, Roll and Ross not include in their multifactor model? A. Change in industrial production B. Change in expected inflation C. Change in unanticipated inflation D. Excess return of long-term government bonds over T-bills E. Neither the change in industrial production, change in expected inflation, change in unanticipated inflation, nor excess return of long-term government bonds over T-bills were included in their model.

E. Neither the change in industrial production, change in expected inflation, change in unanticipated inflation, nor excess return of long-term government bonds over T-bills were included in their model.

Which statement is true regarding the Capital Market Line (CML)? A. The CML is the line from the risk-free rate through the market portfolio. B. The CML is the best attainable capital allocation line. C. The CML is also called the security market line. D. The CML always has a positive slope. E. The CML is the line from the risk-free rate through the market portfolio, is the best attainable capital allocation line, and it always has a positive slope.

E. The CML is the line from the risk-free rate through the market portfolio, is the best attainable capital allocation line, and it always has a positive slope.

Which of the following is false about the security market line (SML) derived from the APT? A. The SML has a downward slope. B. The SML for the APT shows expected return in relation to portfolio standard deviation. C. The SML for the APT has an intercept equal to the expected return on the market portfolio. D. The benchmark portfolio for the SML may be any well-diversified portfolio. E. The SML has a downward slope, the SML for the APT shows expected return in relation to portfolio standard deviation, and the SML for the APT has an intercept equal to the expected return on the market portfolio are all false.

E. The SML has a downward slope, the SML for the APT shows expected return in relation to portfolio standard deviation, and the SML for the APT has an intercept equal to the expected return on the market portfolio are all false.

Of the following four investments, ________ is considered the safest. A. commercial paper B. corporate bonds C. U.S. agency issues D. Treasury bonds E. Treasury bills

E. Treasury bills

A firm with a low rating from the bond rating agencies would have A. a low times interest earned ratio. B. a low debt to equity ratio. C. a low quick ratio. D. a low debt to equity ratio and a low quick ratio. E. a low times interest earned ratio and a low quick ratio.

E. a low times interest earned ratio and a low quick ratio.

The capital asset pricing model assumes A. all investors are fully informed. B. all investors are rational. C. all investors are mean-variance optimizers. D. taxes are an important consideration. E. all investors are fully informed, all investors are rational, and all investors are mean-variance optimizers.

E. all investors are fully informed, all investors are rational, and all investors are mean-variance optimizers.

The capital asset pricing model assumes A. all investors are price takers. B. all investors have the same holding period. C. investors have homogeneous expectations. D. all investors are price takers and all investors have the same holding period. E. all investors are price takers, all investors have the same holding period, and investors have homogeneous expectations.

E. all investors are price takers, all investors have the same holding period, and investors have homogeneous expectations.

The CAPM applies to A. portfolios of securities only. B. individual securities only. C. efficient portfolios of securities only. D. efficient portfolios and efficient individual securities only. E. all portfolios and individual securities.

E. all portfolios and individual securities.v]

Collateralized bonds A. rely on the general earning power of the firm for the bond's safety. B. are backed by specific assets of the issuing firm. C. are considered the safest variety of bonds. D. All of the options are true. E. are backed by specific assets of the issuing firm and are considered the safest variety of bonds.

E. are backed by specific assets of the issuing firm and are considered the safest variety of bonds.

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. should focus on financial statements. E. are wasting their time.

E. are wasting their time.

Work by Amihud and Mendelson (1986, 1991) A. argues that investors will demand a rate of return premium to invest in less liquid stocks. B. may help explain the small firm effect. C. may be related to the neglected firm effect. D. may help explain the small firm effect and may be related to the neglected firm effect. E. argues that investors will demand a rate of return premium to invest in less liquid stocks, may help explain the small firm effect, and may be related to the neglected firm effect.

E. argues that investors will demand a rate of return premium to invest in less liquid stocks, may help explain the small firm effect, and may be related to the neglected firm effect.

In developing the APT, Ross assumed that uncertainty in asset returns was a result of A. a common macroeconomic factor. B. firm-specific factors. C. pricing error. D. neither common macroeconomic factors nor firm-specific factors. E. both common macroeconomic factors and firm-specific factors.

E. both common macroeconomic factors and firm-specific factors.

The weak form of the efficient market hypothesis asserts that A. stock prices do not rapidly adjust to new information contained in past prices or past data. B. future changes in stock prices cannot be predicted from past prices. C. technicians cannot expect to outperform the market. D. stock prices do not rapidly adjust to new information contained in past prices or past data and future changes in stock prices cannot be predicted from past prices. E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market.

E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market.

Bond analysts might be more interested in a bond's yield to call if A. the bond's yield to maturity is insufficient. B. the firm has called some of its bonds in the past. C. the investor only plans to hold the bond until its first call date. D. interest rates are expected to rise. E. interest rates are expected to fall.

E. interest rates are expected to fall.

According to proponents of the efficient market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably to A. perform fundamental analysis. B. exploit market anomalies. C. invest in Treasury securities. D. invest in derivative securities. E. invest in mutual funds.

E. invest in mutual funds.

Proponents of the EMH typically advocate A. an active trading strategy. B. investing in an index fund. C. a passive investment strategy. D. an active trading strategy and investing in an index fund. E. investing in an index fund and a passive investment strategy.

E. investing in an index fund and a passive investment strategy.

A finding that _________ would provide evidence against the semistrong form of the efficient market theory. A. low P/E stocks tend to have positive abnormal returns B. trend analysis is worthless in determining stock prices C. one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon D. low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

Subordination clauses in bond indentures A. may restrict the amount of additional borrowing the firm can undertake. B. are always bad for investors. C. provide higher priority to senior creditors in the event of bankruptcy. D. All of the options are true. E. may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.

E. may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.

Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be ________. A. extremely profitable for long-term traders B. extremely profitable for short-term traders C. marginally profitable for long-term traders D. marginally profitable for short-term traders E. not sufficiently profitable to cover trading costs

E. not sufficiently profitable to cover trading costs

If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected excess return must be A. inversely proportional to the risk-free rate. B. inversely proportional to its standard deviation. C. proportional to its weight in the market portfolio. D. proportional to its standard deviation. E. proportional to its beta coefficient.

E. proportional to its beta coefficient.

In an efficient market, __________. A. security prices react quickly to new information B. security prices are seldom far above or below their justified levels C. security analysis will not enable investors to realize superior returns consistently D. one cannot make money E. security prices react quickly to new information, are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently

E. security prices react quickly to new information, are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently

The bonds of Ford Motor Company have received a rating of "B" by Moody's. The "B" rating indicates A. the bonds are insured. B. the bonds are junk bonds. C. the bonds are referred to as "high-yield" bonds. D. the bonds are insured or junk bonds. E. the bonds are "high-yield" or junk bonds.

E. the bonds are "high-yield" or junk bonds.