Finance

Which of the following statements correctly present recommendations based on behavioral finance?

Don't hesitate to sell a losing stock, be humble and open minded

Which of the following statements about rating agencies is true?

During the financial crisis of 2007-2009 it became clear that rating agencies severely underestimated the risks of some issues

A semi−annual coupon rate of​ 7% means that the bond will pay​ $70 interest every 6 months.

False

If a company's revenues and earnings are highly predictable, it's stock price will also be highly predictable

False

If half of or all actively managed mutual funds out perform the market indexes in any given year, the efficient market hypothesis cannot be valid

False

Investors skilled in exploiting behavioral errors and market anomalies can consistently outperform the market by a wide margin

False

Loss aversion is the behavior of excessively conservative investors

False

Research in psychology indicates that most people have very little faith in their ability to perform complex tasks

False

There is strong evidence that investors who trade frequently outperform the market

False

Which one of the following statements is correct?

Low P/E stocks tend to outperform high P/E stocks on a risk adjusted basis

Rhonda purchased a 12​%, ​zero-coupon bond with a 20​-year maturity and a $15,000par value 20 years ago. The bond matures tomorrow. How much will Rhonda receive in total from this​ investment, assuming all payments are made on these bonds as​ expected?

Rhonda will receive the ​$15,000 which represents the principal and accrued interest on the bond during its lifetime.

The practice of bundling mortgages of other types of loans into pools and selling pieces of the pool as bond like instruments to investors known as

SECURITIZATION

Which of the following accurately reflect appropriate investment guidelines?

Sell losing stocks unless you are willing to buy them at the current price, take corrective action when so indicated

Most bonds pay interest

Semiannually

A debenture is secured only by the issuer's promise to repay the debt

True

Although bond prices can move substantially up or​ down, the income stream is stable and predictable

True

A​ bond's rating will be affected by bond features as well as by the financial stability of the issuer.

True

In a efficient market, the only way to earn higher returns is t invest in riskier securities

True

Self - attribution is the trait of believing one's successful choices are the result of skill and hard work whereas failures are due to bad luck or the fault of others

True

Stocks of small companies have a historical tendency to outperform large cap stocks in the month of January

True

The process of buying an underpriced security and selling an equivalent overpriced security until the prices converge is known as arbitrage

True

The risk premium component of a​ bond's market interest rate is related to the characteristics of the particular bond and its issuer.

True

When a bond is​ called, the investor faces the prospect of reinvesting the funds at a lower rate.

True

The rapid decline in value and near collapse of mortgage backed security market in 2007-2008 was initiated by

a decline in real estate values

An efficient market reflects

all information including predictions about future information

The tendency of naive investors to buy high and sell low can be explained by the behavioral tendency known as

anchored

Which of the following characteristics are referred to as representativeness?

basing conclusions on small samples, underestimating the effects of random chance

The stock price of PHRM declined by​ 30% when the FDA did not approve a promising new therapy the company was developing. Patrick holds on to the stock and constantly searches the internet looking for favorable stories about the company while ignoring a cascade of negative reports. This is an example of

belief perseverance

Which of the following types of risk affect​ bonds?

call risk business risk purchasing power risk liquidity risk

There is evidence to support the contention that company insiders

can profit in a manner that counters the strong form of the efficient market hypothesis

In a severe​ recession, the major source of risk faced by investors who purchase junk bonds is

default risk

Which type of risk is based on the financial integrity of a bond​ issuer?

default risk

Which of the following are advantages of owning​ bonds?

diversification properties current income lower risk than stocks

Collateralized mortgage obligations are relatively low-risk investments

false

Subordinated debentures

have a lower claim on assets than simple debentures

Bob expects to retire in a few years and his primary goal is to avoid major losses in his 401-K account. Which of the following bond characteristics should he be seeking?

high ratings short maturities

People tend to

ignore information that contradicts their current beliefs

Under normal economic​ conditions, the major source of risk faced by investors who purchase investment grade bonds is

interest rate risk

Which one of the following variables has the greatest effect on bond prices?

interest rates

Bond investors will experience capital gains when

market interest rates are falling.

One market anomaly that offers some evidence in support of charting or other forms of technical analysis is

momentum

Heather has the equivalent of one​ year's income in an insured savings account. Her 401−K fund offers a choice of a government bond​ fund, an​ S&P 500 Index​ fund, and a balanced fund that holds roughly equal amounts of stocks and bonds. If she decided to allocate​ 1/3 of her retirement investments to each​ fund, she may be a victim of

narrow framing

The strong form of the efficient market hypothesis contends that

no one can consistently earn abnormal profts

In an efficient market prices appear to move randomly because

only new information affects stock prices

Which of the following are common but dysfunctional investor behaviors?

over-investing in companies with familiar names, dividing their funds equally among available choices, even if several of the choices serve the same purpose, overestimating one's ability to pick successful investments

Four "decision traps" identified by behavioral finance are

overconfidence, representativeness, loss aversion, narrow framing

Which of the following would invalidate the weak form of the efficent market hypothesis

patterns in price behavior that consistently predict future price movements

According to the semi - strong form of the efficient market hypothesis, which of the following might lead to extraordinary profits?

possessing private information not available to other investors

Believers inefficient markets tend to explain away market anomalies as

random occurrences that create an illusion of casualty, errors resulting from inaccurate measures of risk

when the economy is moving toward a recession, the yield on riskier bonds will tend to

rise

Under which bond provision is the issue prior to maturity

sinking fund feature

Even after adjusting for risk, ---- firms have, over long periods of time, earned higher returns than ---- firms

small; large

Bonds are rated by

standard and poors moody's fitch's

Efficient market proponents tend to explain market anomalies as

temporary phenomena, statistical accidents, inaccurate risk measurements

When a bond's rating changes from AA to A and investors did not anticipate the change

the coupon rate will stay the same and the price will fall

Followers of the random walk hypothesis believe that

the price movements of stocks are unpredictable, and therefore security analysis will not help to predict future market behavior

Which of the following statemnts are correct in respect to high yield bonds?

they are junk bonds with highly unpredictable rates of return the issuing corporation usually has an excessive amount of debt the possess a high level of default and market risk they are often subordinated debentures

Which of the following are true concerning bond ratings?

they have a greater impact on the price and yield of jumk bonds that on investment grade bonds they provide investors with a convenient way to assess the relative risk of various bond issues they have a significant effect on a bonds price and yield

I fyou want to reduce the price volatility of your bond portfolio, you should shorten the time to maturity of your portfolio

true

Municipal bonds are most attractive to residents of states with high income tax rates

true

the various CMO tranches can have significantly different degrees of prepayment risk

true

A note is generally defined as debt with a initial term to maturity of

two to ten years