Fin 410 Final
Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to
over confidence
Single men trade far more often than women. This is due to greater ________ among men.
overconfidence
The price that the buyer of a call option pays to acquire the option is called the
premium
An example of ________ is that it is not as painful to have purchased a blue-chip stock that decreases in value, as it is to lose money on an unknown start-up firm.
regret avoidance
Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is
regret avoidance
In an efficient market, __________.
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
A European call option allows the buyer to
sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.
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.
semistrong
The price that the buyer of a call option pays for the underlying asset if she executes her option is called the
strike or exercise price
The anomalies literature ____________.
suggests that several strategies would have provided superior returns
In the context of the Capital Asset Pricing Model (CAPM) the relevant risk is
systematic risk.
Researchers have found that most of the small firm effect occurs
in January.
The market portfolio has a beta of
1
Studies of Siamese twin companies find __________ which __________ the EMH.
incorrect relative pricing; does not support
Jaffe (1974) found that stock prices _________ after insiders intensively bought shares.
increased
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.
Strong
Which statement is not true regarding the Capital Market Line (CML)?
The CML is also called the security market line.
Which statement is not true regarding the market portfolio?
Which statement is not true regarding the market portfolio?
A protective put strategy is
a long put plus a long position in the underlying asset.
You buy one Xerox June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3.
a long straddle
Proponents of the EMH typically advocate
a passive investment strategy.
According to the Capital Asset Pricing Model (CAPM),
a security with a positive alpha is considered to be underpriced.
Studies of mutual fund performance
indicates both that one should not randomly select a mutual fund and that historical performance is not necessarily indicative of future performance.
An underpriced security will plot
above the Security Market Line.
The capital asset pricing model assumes
all investors are fully informed, all investors are rational, and all investors are mean-variance optimizers.
The capital asset pricing model assumes (2)?
all investors are price takers and all investors have the same holding period.
The CAPM applies to
all portfolios and individual securities.
Work by Amihud and Mendelson (1986, 1991)
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.
The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call
is in the money and sells for a higher price than if the market price of AT&T stock is $40.
The likelihood of an investment newsletter's successfully predicting the direction of the market for three consecutive years by chance should be
between 10% and 25%.
Studies of positive earnings surprises have shown that there is
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.
If you believe in the reversal effect, you should
buy stocks this period that performed poorly last period.
An American call option allows the buyer to
buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.
________ bias means that investors are too slow in updating their beliefs in response to evidence.
conservatism
The current market price of a share of JNJ stock is $60. If a put option on this stock has a strike price of $55, the put
is out of the money and sells for a lower price than if the market price of JNJ stock is $50.
Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will _______.
decrease; decrease
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
drop immediately
Barber and Odean (2001) report that men __________ than women.
earn lower returns
Basu (1977, 1983) found that firms with high P/E ratios
earned lower average returns than firms with low P/E ratios.
In equilibrium, the marginal price of risk for a risky security must be
equal to the marginal price of risk for the market portfolio.
Studies of stock price reactions to news are called
event studies.
If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors.
forcasting
An example of ________ is that a person may reject an investment when it is posed in terms of risk surrounding potential gains but may accept the same investment if it is posed in terms of risk surrounding potential losses.
framing
Two basic assumptions of technical analysis are that security prices adjust
gradually to new information and market prices are determined by the interaction of supply and demand.
According to the Capital Asset Pricing Model (CAPM), fairly priced securities
have zero alphas.
Studies of liquidity spreads in security markets have shown that
illiquid stocks earn higher returns than liquid stocks.
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
the approval was already anticipated by the market.
The main difference between the three forms of market efficiency is that
the definition of information differs.
A call option on a stock is said to be at the money if
the exercise price is equal to the stock price.
A covered call position is
the purchase of a share of stock with a simultaneous sale of a call on that stock.
The maximum loss a buyer of a stock put option can suffer is equal to
the put premium
Which of the following factors affect the price of a stock option
the risk-free rate, the riskiness of the stock, and the time to expiration.
The expected return - beta relationship of the CAPM is graphically represented by
the security market line.
The potential loss for a writer of a naked call option on a stock is
unlimited
In a well diversified portfolio
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.
weak
Banz (1981) found that, on average, the risk-adjusted returns of small firms
were higher than the risk-adjusted returns of large firms.
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 ______.
zero; positive
