Chapter 2

All financial assets are issued in a primary market and publicly traded in a secondary market.

False - Not all financial assets are issued in primary markets (derivatives are not) and not all are able tradable in public markets.

Which combination of returns and standard deviation provides the highest Sharpe ratio? Assume a 3% risk free rate.

return = 21%, standard deviation = 25% - Sharpe ratio = (0.21 − 0.03 ) / 0.25 = 0.72

If a portfolio had a return of 8%, the risk-free asset return was 3%, and the standard deviation of the portfolio's excess returns was 20%, the Sharpe measure would be

(8 − 3)/20 = 0.25

The best measure of a portfolio's risk adjusted performance is the _________.

Sharpe measure - The Sharpe ratio is the only measurement that factors in risk adjusted returns.

The process of marketing a public offering is usually referred to as ____________.

Underwriting

Which of the following measures of risk best highlights the potential loss from extreme negative returns?

Value at risk (VaR)

A portfolio generates a Sharpe ratio of 0.83. Which of the following benchmark Sharpe ratios show the portfolio outperformed?

a. 0.81 b. 0.79 c. 0.65 d. 0.62 Correct! e. All of them - A higher Sharpe ratio indicates over performance.

The risk premium for common stocks

cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. - investors would be unwilling to accept the lower returns for the increased risk.

If a distribution has "fat tails," it exhibits

excess kurtosis.

Which of the following is true regarding private placements of primary security offerings?

he shares are sold directly to a small group of institutional or wealthy investors. - Firms can save on registration costs, but the result is that the securities cannot trade in the secondary markets and therefore are less liquid. Public offerings are better suited for very large issues.

Kurtosis is a measure of

how fat the tails of a distribution are.

Firms raise capital by issuing stock

in the primary market -Funds from the sale of new issues flow to the issuing corporation, making this a primary market transaction.

When a distribution is negatively skewed,

standard deviation underestimates risk.

Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2018 show that

stocks offered investors greater rates of return than bonds and bills. - stocks offer a greater return and greater volatility than the other investment alternatives. Inflation sometimes exceeded the T-bill return.

The holding-period return (HPR) on a share of stock is equal to

the capital gain yield during the period plus the dividend yield.

Skewness is a measure of

the symmetry of the distribution - measure of the normality of a distribution.