finance

the CAPM is a model that relates the req rate of return on a security to its unsystematic risk true or false

FALSE

portfolios are called well diversified when they include a large number of securities in such proportions that the residual or diversifiable risk of the portfolio is negligible true or false

TRUE

a stock's alpha measures the stock's a. expected return b. abnormal return c. excess return d. residual return

abnormal return

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 info d. all costless information

all publicly available information

technical analysis focuses on

b. finding repeating trends and patterns in price

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. a. data mining b. fundamental analysis c. charting d. behavioral finance

behavioral finance

The measure of risk used in the capital asset pricing model is ___________. a. the standard deviation of returns b. reinvestment risk c. specific risk d. beta

beta

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. concervatism d. memory bias

conservatism

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

fundamental risk

choosing socks by searching for predictable patterns in stock prices is called a. fundamental analysis b. technical analysis c. index management d. random walk investing

technical analysis

the risk free premium for exposure to exchange rates is 5% and the firm has a beta relative to exchange rates of 0.4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of 0.8, if the risk free rate is 3%, what is the expected return on the stock? a. .20% b. 1.55% c. 3.69% d. 4.04%

0.20%

the risk free and the expected market rate of return are 5% and 15%. According to the CAPM, the expected rate of return on security X with beta of 1.2 is a. 6% b. 10% c. 47% d. 17%

17%

the two-factor model on a stock provides a risk premium for exposure to market risk of 14%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk free rate of 5%. The beta for exposure to market risk is 1, and the beta for exposure to commodity is also 1. What is the expected return on the stock? a. 11.64% b. 13.05% c. 19.5% d. 22.50%

22.5%

markets with security prices that offer arbitrage opportunities usually do not change prices quickly true or false

FALSE

prospect theory is a behavioral bias which can only be attributable to economic and financial decision making true or false

FALSE

anomalies refer to patterns of returns that seem to contradict the efficient market hypothesis true or false

TRUE

even given a probability distribution of returns, investors often make inconsistent or systematically suboptimal decisions true or false

TRUE

one component of portfolio selection involves a personal side, in which ann investor's risk aversion determines the allocation of the complete portfolio between the mutual fund and the risk free asset true or false

TRUE

while intermediate volatility, accruals and earnings quality and more rapidly growing firms tend to have lower future returns, gross profitability seems to predict higher stock returns true or false

TRUE

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

a passive investment strategy

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 info d. all costless information

all past information, including security price and volume data

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. a. directly related to the beta of the stock b. inversely related to the risk aversion of the particular investor c. directly related to the risk aversion of the particular investor d. inversely related to the alpha of the stock

directly related to the beta of the stock

A stock has a beta of 1.5. 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

higher than

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. homogenous expectations

homogeneous expectations

in 2001, the journal of finance published can investors profit from prophets. The results of this paper make clear the importance of a. anomalies being the result of extensive data snooping by academics b. incorporating transaction costs into examining whether investors can profit from publicly available recommendations of security analysts c. market efficiencies not easily being exploited by traders d. considering data mining as an explanation for market efficiencies and the use of an active portfolio strategy by traders

incorporating transaction costs into examining whether investors can profit from publicly available recommendations of security analysts

A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund. a. stock b. index c. hedge d. money market

index

one benefit with the arbitrage pricing theory is a. it req all investors to be mean variance optimizers b. it fails to give us a benchmark for rates of return that can be used in capital budgeting c. it does mot serve many of the same functions of the CAPM d. it can be generalized to accomedate multiple sources of systematic risk in a manner much like the multifactor of CAPM

it can be centralized to accomedate multiple sources of systematic risk in a manner much like the multifactor of CAPM

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

mispriced stocks

The possibility of arbitrage arises when ____________. a. there is no consensus among investors regarding the future direction of the market b. two identically risky securities carry the same expected returns c. mispricing among securities creates opportunities for riskless profits d. investors fo not diversify

mispricing among securities creates opportunities for riskless profits

according to the capital asset pricing model, a fairly priced security will plot a. above the security market line b. on the security market line c. below the security market line d. at no relation to the security market line

on the security market line

What is the name of the theory central to the idea that when an investor is presented with an equal choice, he/ she will choose the one presented in terms of potential gains? a. risk tolerant theory b. prospect theory c. momentum theory d. accountability theory

prospect theory

refers to the recent performance of a given stock or industry compared to that of a border market index a. breadth b. relative strength c. momentum d. confidence index

relative strength

short interest is a ___ indictor, while moving averages are ___ indicators a. sentiment; trend b. flow of funds; sentiment c. market structure; sentiment d. fundamental; sentiment

sentiment; trend

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

that markets are functioning efficiently

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

the absence of arbitrage opportunities

in money from momentum, research fellow shelly liang points to the positive feedback trading hypothesis, which says traders may buy a stock simply because the price is going up. However, she ultimately concludes that a. investors should still proceed in a momentum strategy b. investors should proceed with a strategy based on traditional portfolio management c. the best course might be to find a mid-point between momentum strategy and traditional portfolio management d. higher level of information will not lead to higher momentum profits

the best course might be to find a mid-point between momentum strategy and traditional portfolio management

In on the persistence in mutual fund perf, Carhart reexamines the issue of consistency in mutual fund perf to see whether better performers in one period continue to outperform in later periods. His results don't support a. the amounts by which prof managers as a group beat or are beaten by the market fall within the margin of statistical uncertainty b. the performance of prof managers being broadly consistent with market efficiency c. the existence of skilled or informed mutual fund portfolio managers d. the notion that mundane explanations of strategy and investment costs account for almost all of the impt predictibility in mutual fund returns

the existence of skilled or informed mutual fund portfolio managers

In a well-diversified portfolio, __________ risk is negligible. a. nondiversifiable b. systematic c. unsystematic d. market

unsystematic