Chapter 12 True/False
A weak-form efficient market is one in which prices reflect all public and private knowledge, including past and current information.
False
A weak-form efficient market is one in which prices reflect all public knowledge, including past and current information
False
Research suggests that a portfolio of 20 or 30 different stocks can eliminate most of a portfolio's systematic risk
False
The benefits of diversification are greatest when asset returns have positive correlations.
False
The historical percentage return for a single financial asset is equal to any dividends received minus the difference between the selling price and the purchase price, all divided by the purchase price.
False
The term "ex-ante" refers to the past or historical information
False
The variance is the square root of the standard deviation
False
The variance of a portfolio can be calculated by finding the variances of the individual components of the portfolio and finding the weighted average of those variances
False
Unsystematic risk is the risk that cannot be eliminated through diversification
False
Any predictable trend in the same direction as the price change would be evidence of an efficient market.
False - A predictable trend implies the market does not quickly and correctly process new information to determine asset prices
The Capital Asset Pricing Model states that the expected return on an asset depends on its level of unsystematic risk.
False - CAPM depends on its level of systematic risk, measured by its beta
The coefficient of variation is a measure of total return on a stock
False - CV is a measure of risk per unit of return
If the expected return is 10%, the standard deviation is 3%, about 68% of the time returns will be expected to fall between 10% and 13%
False - Within one σ of the mean is the mean ± 1 σ → 7% to 13%
The risk of a portfolio is simply equal to the weighted average variance of the securities that comprise it
False - You cannot use an equation similar 12-7 for the variance of portfolio of stocks
A strong-form efficient market is one in which prices reflect all public knowledge, including past and current information
False - and private information
Most nondiversifiable risk can be eliminated by creating a portfolio of around 30 stocks
False - diversification (systematic) risk cannot be eliminated by diversification
When we speak of ex-ante returns, we are referring to historical information or data.
False - expected or forecasted
Most market risk can be eliminated through diversification
False - market (systematic) risk cannot be eliminated by diversification
In an efficient market, both expected and unexpected news should cause stock prices to move up or down
False - only unexpected news should cause stock prices to move
A market system that allows for quick execution of customers' trades is said to be informationally efficient
False - see definition of informationally efficient market
The variance measures the risk per unit of return
False - variance σ^2 is units squared, CV gives risk per unit of return
If Stock A has a higher standard deviation than Stock B, it will also have a greater coefficient of variation
False - 𝐂𝐕 =𝛔/𝐑̅ so it also depends on the size of 𝐑̅, for a given σ → larger 𝐑̅ reduces the CV
If a financial asset has a historical variance of 25, then its standard deviation must be 12.5%.
False - 𝛔 = √𝟐𝟓 = 𝟓
A higher coefficient of variation indicates more risk per unit of return.
True
A portfolio is any combination of financial assets or investments
True
A weak-form efficient market is a market in which prices reflect all past information.
True
Beta measures the variability of an asset's returns relative to the market portfolio.
True
Diversification occurs when we invest in several different assets rather than just a single one.
True
Future returns and risk cannot be predicted precisely from past measures.
True
If a market is semi-strong form efficient, it also is by definition weak-form efficient
True
In an efficient market, investors cannot consistently earn above average profits after taking risk differences into account
True
In general, large company stocks are more risky than Treasury bonds
True
In general, securities with higher historical standard deviations have provided higher returns
True
In general, securities with lower returns have lower historical standard deviations
True
Standard deviation is stated in the same units of measurement (e.g., dollars, percent) as those of the data from which they were generated.
True
Standard deviation is the square root of the variance.
True
The coefficient of variation measures the risk per unit of return.
True
The existence of chartists or technicians suggest that some inventors believe that markets are not weak form efficient
True
The expected rate of return on a portfolio is the weighted average of the expected returns of the individual assets in the portfolio
True
The greatest level of risk reduction through diversification can be achieved when combining two securities whose returns are perfectly negatively correlated.
True
The market portfolio is a portfolio that contains all risky assets.
True
The only relevant risk for investors that hold well diversified portfolios of securities is nondiversifiable risk
True
The return on a portfolio is simply equal to the weighted average return of the securities that comprise it
True
The term "ex-ante" refers to expected or forecasted information
True
Although gold is a risky investment by itself, including gold in a stock portfolio can make the portfolio less risky.
True - Since gold is negatively correlated with stocks adding it to a portfolio of stocks reduces the risk of the portfolio
If standard deviation is used to measure the risk of stocks, one problem that arises is the inability to tell which stock is riskier by looking at the standard deviation alone
True - also consider coefficient of variation
If a financial asset has a historical variance of 16, then its standard deviation must be 4.
True - 𝛔 = √𝟏𝟔 = 𝟒
A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2 dividend provided an investor with a 14% return.
dollar return = ($45 - $40) + $2 = $7 → % 𝐫𝐞𝐭𝐮𝐫𝐧 = $𝟕/$𝟒𝟎 = 𝟏𝟕. 𝟓%