FIN 401: Exam 2 Review

If the put/call ratio increases, market contrarians may interpret this as what kind of signal? A. Buy signal B. Sell signal C. Hold signal D. This is not interpreted as a signal

A. Buy signal

A trin ratio of greater than 1 is considered a __________. A. bearish signal B. bullish signal C. bearish signal by some technical analysts and a bullish signal by other technical analysts D. trend reversal signal

A. bearish signal

If you are not a contrarian, you consider a high put/call ratio to be a __________. A. bearish signal B. bullish signal C. trend confirmation signal D. signal to enter the options market

A. bearish signal

A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal. A. bearish; bullish B. bullish; bearish C. bearish; false D. bullish; false

A. bearish; bullish

Trend analysts who follow bonds are most likely to monitor the ____________. ∋ B. odd-lot trading C. short interest D. trin statistic

A. confidence index

Testing many different trading rules until you find one that would have worked in the past is called _______. A. data mining B. perceived patterning C. pattern searching D. behavioral analysis

A. data mining

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

A. expected returns to fall; risk premiums to fall

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

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

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

A. investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public

A major problem with technical trading strategies is that ________. A. it is very difficult to identify a true trend before the fact B. it is very difficult to identify the correct trend after the fact C. it is so easy to identify trends that all investors quickly do so D. Kondratieff showed that you can't identify trends without 48 to 60 years of data

A. it is very difficult to identify a true trend before the fact

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________. A. loss aversion B. regret avoidance C. mental accounting D. framing bias

A. loss aversion

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

A. low; low

The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price. A. market breadth B. market volume C. odd-lot trading D. short interest

A. market breadth

The trin statistic is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

A. sentiment

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

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

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

A. the month of January

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

A. there were no predictable patterns in stock prices

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

A. total risk

Banz 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 negative

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

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

A. worst; best

If the daily returns on the stock market are normally distributed with a mean of .05% and a standard deviation of 1%, the probability that the stock market would have a return of -23% or worse on one particular day (as it did on Black Monday) is approximately __________. A. .0% B. .1% C. 1% D. 10%

A. .0%

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

A. .2%

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

A. 1

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

A. 1%

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

A. 1.048

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

A. Active management

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

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

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

A. IPO results

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern? A. Overconfidence B. Loss aversion C. Mental accounting D. Calendar bias

A. Overconfidence

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

A. all past information, including security price and volume data

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

A. an abnormal price change immediately after the announcement

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

A. are in equilibrium

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

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

When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________. A. buy the stock B. hold the stock C. sell the stock D. short the stock

A. buy the stock

Behavioralists point out that even if market prices are ____________, there may be _______________. A. distorted; limited arbitrage opportunities B. distorted; fundamental efficiency C. allocationally efficient; limitless arbitrage opportunities D. distorted; allocational efficiency

A. distorted; limited arbitrage opportunities

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

A. early in the month

In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher. A. higher B. lower C. unaffected D. more skewed

A. higher

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

A. higher than

One type of passive portfolio management is ________. A. investing in a well-diversified portfolio without attempting to search out mispriced securities B. investing in a well-diversified portfolio while only seeking out passively mispriced securities C. investing an equal dollar amount in index stocks D. investing in an equal amount of shares in each of the index stocks

A. investing in a well-diversified portfolio without attempting to search out mispriced securities

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

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

Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are. A. magnitude B. selection bias C. lucky event D. allocation

A. magnitude

The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________. A. market breadth B. market volume C. trin ratio D. relative strength ratio

A. market breadth

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

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

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

A. positive; positive

Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______. A. rational; irrational B. irrational; rational C. greedy; philanthropic D. philanthropic; greedy

A. rational; irrational

Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak-form and semistrong-form efficient B. strong-form efficient C. reasonably weak-form but not semistrong- or strong-form efficient D. neither weak-, semistrong-, nor strong-form efficient

A. reasonably weak-form and semistrong-form efficient

If investors overweight recent performance in forecasting the future, they are exhibiting _______. A. representativeness bias B. framing error C. memory bias D. overconfidence

A. representativeness bias

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

A. residual standard deviation

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

A. semistrong

Short interest is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

A. sentiment

The put/call ratio is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

A. sentiment

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

A. survivorship bias

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

A. the markets cannot be allocationally efficient

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

A. trading rule

The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying _________. A. when the long-term direction of the market is positive B. when the long-term direction of the market is negative C. when the long-term direction of the market is stable D. good stocks without regard to the long-term direction of the market

A. when the long-term direction of the market is positive

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

B.

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

B. Diversification

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

B. I and II only

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

B. I, II, and III only

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

B. II and III only

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

B. Peter Lynch

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

B. Relative strength analysis

Which of the following is considered a sentiment indicator? A. A 200-day moving average B. Short interest C. Credit balances in brokerage accounts D. Relative strength

B. Short interest

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

B. Stephen Ross

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

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

Following a period of falling prices, the moving average will _____. A. be below the current price B. be above the current price C. be equal to the current price D. become more volatile than it had been before prices fell

B. be above the current price

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

B. beta

According to market technicians, a trin statistic of less than 1 is considered a __________. A. bearish signal B. bullish signal C. volume decline D. signal reversal

B. bullish signal

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

B. equilibrium risk premium

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

B. index

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

B. indicate that the market is not incorporating new information into current stock prices

According to technical analysts, a shift in market fundamentals will __________. A. be reflected in stock prices immediately B. lead to a gradual price change that can be recognized as a trend C. lead to high volatility in stock market prices D. leave prices unchanged

B. lead to a gradual price change that can be recognized as a trend

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

B. liquidity effect

An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________. A. loss aversion B. mental accounting C. overreaction D. winner's curse

B. mental accounting

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

B. mispricing among securities creates opportunities for riskless profits

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

B. overwhelmingly optimistic

The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________. A. congestion area B. penetration point C. resistance level D. support level

B. penetration point

An important assumption underlying the use of technical analysis techniques is that ___________________. A. security prices adjust rapidly to new information B. security prices adjust gradually to new information C. security dealers will provide enough liquidity to keep price changes relatively small D. all investors have immediate and costless access to information

B. security prices adjust gradually to new information

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

B. technical analysis

According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________. A. the price index pierces the left shoulder B. the price index pierces the right shoulder C. the price index pierces the head D. none of these options takes place

B. the price index pierces the right shoulder

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

B. $6,000,000

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

B. 1

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

B. 1%

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

B. 11.2%

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

B. 12.9%

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

B. 13.1%

Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________. A. 5%; are excessively conservative B. 15%; overestimate their ability C. 20%; suffer from framing biases D. 25%; engage in mental accounting

B. 15%; overestimate their ability

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

B. 2.5

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

B. 3.7%

The effect of liquidity on stock returns might be related to: I. The small-firm effect II The book-to-market effect III The neglected-firm effect IV. The P/E effect A. I and II only B. I and III only C. II and IV only D. I, II, and III only

B. I and III only

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

B. II only

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

B. Neglected-firm effect

Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, _________________________________________. A. Bill will have more regret over the loss than Shelly B. Shelly will have more regret over the loss than Bill C. Bill and Shelly will have equal regret over their losses D. Bill's and Shelly's risk aversion will increase in the future

B. Shelly will have more regret over the loss than Bill

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

B. The tax-loss selling issue

A support level is ___________________. A. a level beyond which the market is unlikely to rise B. a level below which the market is unlikely to fall C. an equilibrium price level justified by characteristics such as earnings and cash flows D. the peak of a market wave or cycle

B. a level below which the market is unlikely to fall

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

B. abnormal return

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

B. about 10 minutes

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

B. all publicly available information

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

B. along the security market line

Contrarian investors consider a high put/call ratio a __________. A. bearish signal B. bullish signal C. trend confirmation signal D. signal to enter the options market

B. bullish signal

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

B. buy stock X because it is underpriced

If you believed in the reversal effect, you should __________. A. buy bonds this period if you held stocks last period B. buy stocks this period that performed poorly last period C. buy stocks this period that performed well last period D. do nothing if you held the stock last period

B. buy stocks this period that performed poorly last period

The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________. A. bond price index B. confidence index C. relative strength index D. trin ratio

B. confidence index

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

B. fall

Technical analysis focuses on _____________________. A. finding opportunities for risk-free investing B. finding repeating trends and patterns in prices C. changing prospects for earnings growth of particular firms or industries D. forecasting technical regulatory changes

B. finding repeating trends and patterns in prices

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

B. future changes in stock prices cannot be predicted from any information that is publicly available

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

B. good; poor

When the stock price falls below a moving average, a possible conclusion is that _____. A. market momentum has become positive B. market momentum has become negative C. there is no regular pattern for this stock's market momentum D. professional analysts' opinions are invalid until the stock price rises again

B. market momentum has become negative

The four-factor model used to construct performance benchmarks for mutual funds uses the three Fama and French factors and one additional factor related to _________. A. the tenure of the fund manager B. momentum C. fees D. the age of the fund manager

B. momentum

Trading activity and average returns in brokerage accounts tend to be _________. A. uncorrelated B. negatively correlated C. positively correlated D. positively correlated for women and negatively correlated for men

B. negatively correlated

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

B. neglected stocks

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

B. overpriced

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

B. relative systematic risk

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

B. resistance level

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

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

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

B. the systematic risk of the portfolio

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

B. the weak-form EMH

The only way for behavioral patterns to persist in prices is if ______________. A. markets are not weak-form efficient B. there are limits to arbitrage activity C. there are no significant trading costs D. market psychology is inconsistent over time

B. there are limits to arbitrage activity

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

B. Strong

_____________ is a tool that can help identify the direction of a stock's price. A. Prospect theory B. Framing C. A moving average D. Conservatism

C. A moving average

__________ is the return on a stock beyond what would be predicted from market movements alone. A. A normal return B. A subliminal return C. An abnormal return D. None of these options

C. An abnormal return

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

C. Investors earn abnormal returns months after a firm announces surprise earnings.

An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on this complete portfolio is higher than her existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund? A. Framing bias B. Excessive volatility C. Loss aversion D. Mental accounting

C. Loss aversion

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

C. SML

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

C. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

According to Elliot's wave theory, stock market behavior can be explained as _________________. A. a series of medium-term wave cycles with no short-term trend B. a series of long-term wave cycles with no short-term trend C. a series of superimposed long-term and short-term wave cycles D. sine and cosine functions

C. a series of superimposed long-term and short-term wave cycles

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

C. closer to 1

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

C. directly related to the beta of the stock

A possible limit on arbitrage activity that may allow behavioral biases to persist is _______. A. technical trends in prices B. momentum effects C. fundamental risk D. trend reversals

C. fundamental risk

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

C. increased; decreased

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

C. mispriced stocks

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

C. nonzero alphas will quickly disappear

In technical analysis, __________ is a value below which the market is relatively unlikely to fall. A. book value B. resistance level C. support level D. the Dow line

C. support level

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

C. the absence of arbitrage opportunities

Moving averages are ______ indicators. A. sentiment B. flow of funds C. trend D. fundamental

C. trend

You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the most you can afford to spend on your research? A. $4,000 B. $8,000 C. $12,000 D. $16,000

C. $12,000

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

C. 1.26

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

C. 10.75%

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

C. 13.6%

On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________. A. -10,449,000 B. -167 C. 167 D. 10,449,000

C. 167

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

C. 18%

You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have? A. 0 B. 1 C. 2 D. 3

C. 2

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

C. 8%

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

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

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

C. Earnings forecasting

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

C. Every January, the stock market earns above-normal returns.

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

C. I and III only

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

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

Which of the following is not a sentiment indicator? A. Confidence index B. Short interest C. Odd-lot trading D. Put/call ratio

C. Odd-lot trading

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

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

You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you? A. Stock A B. Stock B C. Stock C D. The answer cannot be determined from the information given.

C. Stock C

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

C. Strong-form efficiency

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

C. William Sharpe

Which one of the following best describes fundamental risk? A. A stock is overpriced, but your fund does not allow you to engage in short sales. B. Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error. C. You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results. D. A stock is trading in two different markets at two different prices.

C. You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.

When a stock price breaks through the moving average from below, this is considered to be ______. A. the starting point for a new moving average B. a bearish signal C. a bullish signal D. none of these options

C. a bullish signal

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

C. a passive investment strategy

Relative strength is ______ indicator. A. a fundamental B. an economic C. a technical D. an international

C. a technical

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

C. all information, including inside information

An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator. A. bullish B. neutral C. bearish D. trend reversal

C. bearish

In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________. A. buy signal B. sell signal C. congestion area D. trend reversal

C. congestion area

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______. A. representativeness bias B. framing error C. conservatism D. memory bias

C. conservatism

The tendency of investors to hold on to losing investments is called the ________. A. overweighting effect B. head-in-the-sand effect C. disposition effect D. prospector effect

C. disposition effect

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

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

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

C. either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

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

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

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

C. lucky event

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

C. momentum effect

It is difficult to test the Kondratieff wave theory because _________. A. it applies to only Russian stocks B. its main proponent found contrary research results C. only two independent data points are generated each century D. the stock market is too volatile to generate smooth waves

C. only two independent data points are generated each century

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

C. positive alpha is considered underpriced

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

C. recognizes only one systematic risk factor

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

C. stock price changes that are random and unpredictable

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

C. strong-form efficiency argument

Market breadth is a ______ indicator. A. sentiment B. flow of funds C. technical D. fundamental

C. technical

Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________. A. regret avoidance B. overconfidence C. that she has a diminishing marginal utility of wealth D. prospect theory loss aversion

C. that she has a diminishing marginal utility of wealth

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

C. use a passive trading strategy such as purchasing an index fund or an ETF

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

C. Strong Form Efficient

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

C. Weak

In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds ______. A. had negative alphas before fees were considered. B. had positive alphas after fees were considered. C. had negative alphas after fees were considered. D. had negative alphas before fees were considered and had negative alphas after fees were considered.

C. had negative alphas after fees were considered.

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

D. 1

You find that the trin ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have? A. 0 B. 1 C. 2 D. 3

D. 3

According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________. A. 18 months B. 4 years C. 8 years D. 50 years

D. 50 years

A point and figure chart: I. Gives a sell signal when the stock price penetrates previous lows II. Tracks significant upward or downward movements III. Has no time dimension IV. Indicates congestion areas A. I and II only B. II and III only C. I, III, and IV only D. I, II, III, and IV

D. I, II, III, and IV

Among the important characteristics of market efficiency is (are) that: I. There are no arbitrage opportunities. II. Security prices react quickly to new information. III. Active trading strategies will not consistently outperform passive strategies. A. I only B. II only C. I and III only D. I, II, and III

D. I, II, and III

Problems with behavioral finance include: I. The behavioralists tell us nothing about how to exploit any irrationality. II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction. III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait. A. I only B. II only C. I and III only D. I, II, and III

D. I, II, and III

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

D. I, II, and III

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

D. Passive investment

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

D. Residual risk

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

D. Stock prices follow recurring patterns.

Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability? A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts

D. Technical analysts

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

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

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. A. data mining B. fundamental analysis C. charting D. behavioral finance

D. behavioral finance

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

D. beta

When the housing bubble burst in 2007, it set off the worst financial crisis _____. A. in 25 years. B. in 40 years. C. in 50 years. D. in 75 years.

D. in 75 years.

When technical analysts say a stock has good "relative strength," they mean that in the recent past __________. A. it has performed well compared to its closest competitors B. it has exceeded its own historical high C. trading volume in the stock has exceeded the normal trading volume D. it has outperformed the market index

D. it has outperformed the market index

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting

D. mental accounting

During a period when prices have been rising, the _________ will be _______ the current price. A. relative strength index; declining with B. relative strength index; declining faster than C. moving average; above D. moving average; below

D. moving average; below

Technical traders view mutual fund investors as _________ market timers. A. excellent B. frequent C. neutral D. poor

D. poor

The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________. A. intermediate trend level B. minor trend level C. resistance level D. support level

D. support level

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

D. technical analysis cannot; fundamental analysis cannot

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

D. that markets are functioning efficiently

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

D. unsystematic

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

D. zero alphas

On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________. A. .90; bullish B. .90; bearish C. 1.11; bullish D. 1.11; bearish

D. 1.11; bearish

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

D. 1.2

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

D. 14%

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

D. 19.5%

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

D. 21.6%

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

D. I, II, III, and IV

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

D. I, II, and III

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

D. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

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

D. Preferred stock effect

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

D. Technical analysis

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

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

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

D. equal investments in a short and a long position

According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______. A. instantly B. in 1 day C. in 1 week D. gradually over time

D. gradually over time

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

D. high; high

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

D. homogeneous expectations

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

D. joint tests of market efficiency and the risk-adjustment measure

In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of ________________. A. loss aversion B. mental accounting C. overreaction D. managerial overconfidence

D. managerial overconfidence

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________. A. overconfidence B. representativeness C. forecast errors D. mental accounting

D. mental accounting

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

D. price behavior that differs from the behavior predicted by the efficient market hypothesis

Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________. A. mental accounting B. framing bias C. conservatism D. representativeness bias

D. representativeness bias

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

D. seem to regress toward 1 over time

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

D. short-run; long run

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

D. systematic risk

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

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

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

D. underperform passive fixed-income indexes by an amount equal to fund expenses

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

D. varying risk premiums

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

D. 8%

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

D. are wasting their time