MGT 332 pulled
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain ignoring transactions cost?
$10,000
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. You also place a stop-buy order at $60. What is your maximum possible loss?
$2,000
Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $70,000. The offering price for the shares was $25, but immediately upon issue, the share price jumped to $41. What is the best estimate of the total cost to Barnegat Light of the equity issue?
$3,270,000
You purchased 100 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below the stock price of __________ you would get a margin call. Assume the stock pays no dividend and ignore interest on margin.
$35.71
Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?
$40.25 or less
You sold short 200 shares of common stock at $50 per share. The initial margin is 60%. Your initial investment was __________.
$6,000
Assume you purchased 200 shares of XYZ common stock on margin at $80 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is __________.
$6400
Bank discount formula
(asked price) x (days until maturity/360)= x 1-x= y y x 10,000
Standard Deviation of a Single Asset
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Variance of a Portfolio of Assets (Formula)
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Real Return (Inflation) (Formula)
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Money Weighted Return (Formula)
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Portfolio Risk of a Risk Free Asset
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Risk of a Two Asset Portfolio (Formula)
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Geometric Mean Return (Formula)
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Real Return (Risk Premium) (Formula)
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Expected Return of a Risk Free Asset (Formula)
,https://o.quizlet.com/cUBCA1IeQ5zCypBmJV0sRg_m.png
Arithmetic or Mean Return (Formula)
,https://o.quizlet.com/e1Grv8UHk8vrCaisBb7dKg_m.png
Variance of a Single Asset (Formula)
,https://o.quizlet.com/jbYMKj.Ll9wl8pE4oich1w_m.png
Return of a Two Asset Portfolio (Formula)
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Three Components of Nominal Return
- Real Risk-Free Rate - Inflation Rate - Risk Premium
You purchased 300 shares of common stock on margin for $50 per share. The initial margin is 60% and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $40 per share. Ignore interest on margin.
-33%
Trading costs range between ______ and _______.
0.25%; 30%
Classification of Equity
1. Common Stock 2. Preferred Stock
Types of bonds
1. T-notes and bonds 2. TIPS 3. Federal Agency Debt 4. International Bonds (Eurodollars) 5. Municipal Bonds 6. Corporate Bonds 7. Mortgages and MBS
Types of Money market securities
1. Tbills 2. CD's 3. Commercial Paper 4. Banker's acceptances 5. Eurodollars 6. Repos and Reverses 7. Brokers' call 8. Federal Funds 9. Libor
options associated with corporate bonds
1. callable bonds- give firm option to repurtchase bonds at a stipulated price 2. convertible bonds- bondholder has option to convert each bond into a stipulated number of stock
characteristics of Money markets
1. cash equivalent instruments 2. short term 3. marketeable 4. liquid 5. low-risk
characteristics of capital markets and examples
1. longer-term 2. higher risk securities examples: long term debt markets, equity, derivative markets
Characteristics of common stock
1. residual claim 2. limited liability
kinds of corporate bonds
1. secured bonds- backed by collateral 2. unsecured bonds- not backed by collateral 3. subordinated debentures- even lower claim to firm's assets in event of bankruptcy
A block transaction is one where at least __________ shares are traded; these account for approximately __________ of all trading.
10,000; 50%
The average abnormal return earned on investing in IPOs is __________ according to a recent study by Ritter and Weiss.
16%
According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration.
2 years
About ______ of all trades were initiated over the internet in 1999.
20%
A level _____ subscriber to the NASDAQ system may enter bid and ask prices.
3
The shares of approximately __________ firms trade on the New York Stock Exchange.
3,100
A ______ drop in the Dow Jones Industrial Average would stop trading for the day.
30%
According to Ross, Shapiro and Smith, when the spread between the quoted bid and ask price is $0.25 or greater, approximately __________ of the trades taking place on the New York Stock Exchange will be executed "inside the quotes".
50%
The securities of more than _______ firms are listed on the Nasdaq Stock Market.
6,000
Explicit costs of an IPO tend to be around ______ of the funds raised.
7%
Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.
75%
The share of over-the-counter (NASDAQ) market trading volume that is related to trading in New York Stock Exchange (NYSE) listed firms is approximately ________.
8%
The New York Stock Exchange accounts for approximately __________ of total exchange trading in the United States.
85%
Holding Period Return (Formula)
= Capital Gain + Dividend Yield,https://o.quizlet.com/9yMpV6hyNzweV3sq4Z.b5g_m.png
Certificate of Deposit
A bank time deposit.
Reverse Repo
A dealer finds an investor holding government securities and buys them with an agreement to sell them at a higher price in a future date.
Capital Allocation Line
A graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset
Security Market Line
A graphical representation of the capital asset pricing model with beta on the x-axis and the expected return on the y-axis
Asset Class
A group of assets that have similar characteristics, attributes, and risk/return relationships.
Informational Efficient Market
A market in which asset prices reflect new information quickly and rationally.
Primary Market
A market in which new issues of securities are offered to the public.
Beta
A measure of how sensitive an assets return is to overall market.
Geometric Mean Return
A measure of returns that assumes the investment amount is reset at the beginning of each year and accounts for the compounding of returns.
Net Return
A measure of what the investment has earned for the investor after deducting all managerial and administrative expenses.
Return Revenue Generating Model
A model that can provide an estimate of the expected return of a security given certain parameters and estimates of the values of the independent variables in the model
Multifactor models
A model that can provide an estimate of the expected return of a security given certain parameters and estimates of the values of the independent variables in the model. Can be built using different kinds of factors such as macro economic, fundamental, and statistical factors.
Correlation
A number between −1 and +1 that measures the co-movement (linear association) between two random variables.
Correlation coefficient
A number between −1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined
Skewness
A quantitative measure of skew (lack of symmetry)
Load
A sales commission charged on a mutual fund.
Derivative Asset
A security with a payoff that depends on the prices of other securities.
Capital Market Line
A specific CAL that uses the market portfolio as the optimal risky portfolio
Arbitrage pricing theory
A theoretical model that proposes a linear relationship between expected return and risk.
Open-End Fund
A type of managed company. A fund that issues or redeems its shares at net asset value. Price cannot fall below NAV bc these funds stand to redeem shares at NAV. Offering price > NAV bc it includes a load.
Investment Policy Statement
A written planning document that describes a client's investment objectives and risk tolerance over a relevant time horizon, along with constraints that apply to the client's portfolio.
31. Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately __________.0810. A. .1152 b. .1270 c. .1521 d. .1342
A. .1152
68. What is the alpha of a portfolio with a beta of 2 and actual return of 15%? A. 0% b. 13% c. 15% d. 17%
A. 0%
83. The risk premium for exposure to exchange rates is 5% and the firm has a beta relative to exchanges 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 3.0%, what is the expected return on this stock? A. 0.2% b. 1.5% c. 3.6% d. 4.0%
A. 0.2%
23. Research has revealed that regardless of what the current estimate of a firm's beta is, it will tend to move closer to ______ over time. A. 1 b. 0 c. -1 d. 0.5
A. 1
72. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the stock in one year for $28. The stock's beta is 1.1, Rf is 6% and E[rm] = 16%. What is the stock's abnormal return? A. 1% b. 2% c. -1% d. -2%
A. 1%
21. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta? A. 1.048 b. 1.033 c. 1.000 d. 1.037
A. 1.048
82. The two factor model on a stock provides a risk premium for exposure to market risk of 8%, a risk premium for exposure to interest rate of (-2.3%), and a risk free rate of 3.0%. What is the expected return on the stock? A. 8.7% b. 11.0% c. 13.3% d. 15.2%
A. 8.7%
70. Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which advisor was the better stock picker? A. Advisor A was better because he generated a larger alpha b. Advisor B was better because he generated a larger alpha c. Advisor A was better because he generated a higher return d. Advisor B was better because he achieved a good return with a lower beta
A. Advisor A was better because he generated a larger alpha
63. Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1.00. Portfolio Y has an expected return of 9.5% and a beta of 0.25. In this situation, you would conclude that portfolios X and Y __________. A. Are in equilibrium b. Offer an arbitrage opportunity c. Are both underpriced d. Are both fairly priced
A. Are in equilibrium
18. Arbitrage is based on the idea that __________. A. Assets with identical risks must have the same expected rate of return b. Securities with similar risk should sell at different prices c. The expected returns from equally risky assets are different d. Markets are perfectly efficient
A. Assets with identical risks must have the same expected rate of return
risk premiums to rise
A. Expected returns to fall
50. Liquidity is a risk factor that ____. A. Has yet to be accurately measured and incorporated into portfolio management b. Is unaffected by trading mechanisms on various stock exchanges c. Has no effect on the market value of an asset d. Affects bond prices but not stock prices
A. Has yet to be accurately measured and incorporated into portfolio management
78. A stock has a beta of 1.3. The unsystematic risk of this stock is ____________ the stock market as a whole. A. Higher than b. Lower than c. Equal to d. Indeterminable compared to
A. Higher than
2. Fama and French claim that after controlling for firm size and the ratio of book value to market value, beta is insignificant in explaining stock returns. This claim I. is supported by their analysis of historical stock return data II. is based on a well developed theoretical model III. implies that unsystematic risk is actually priced A. I only b. I and II only c. II and III only d. I, II and III
A. I only
46. In his famous critique of the CAPM, Roll argued that the CAPM _______________. A. Is not testable because the true market portfolio can never be observed b. Is of limited use because systematic risk can never be entirely eliminated c. Should be replaced by the APT d. Should be replaced by the Fama French 3 factor model
A. Is not testable because the true market portfolio can never be observed
38. In a single factor market model the beta of a stock A. Measures the stock's contribution to the standard deviation of the market portfolio b. Measures the stock's unsystematic risk c. Changes with the variance of the residuals d. Measures the stock's contribution to the standard deviation of the stock
A. Measures the stock's contribution to the standard deviation of the market portfolio
58. The measure of unsystematic risk can be found from an index model as A. Standard error b. Multiple R c. Degrees of freedom d. Sum of squares of the regression
A. Standard error
24. The beta of a security is equal to __________. A. The covariance between the security and market returns divided by the variance of the market's returns b. The covariance between the security and market returns divided by the standard deviation of the market's returns c. The variance of the security's returns divided by the covariance between the security and market returns d. The variance of the security's returns divided by the variance of the market's returns
A. The covariance between the security and market returns divided by the variance of the market's returns
59. Standard deviation is a measure of ____________. A. Total risk b. Relative systematic risk c. Relative non-systematic risk d. Relative business risk
A. Total risk
Asset Allocation
Allocation of an investment portfolio across broad asset classes.
Active Investment
An approach to investing in which the investor seeks to outperform a given benchmark by continuously monitoring their activity in order to exploit profitable conditions.
Price-Weighted Average
An average computed by adding the prices of the stocks and dividing by a "divisor."
Capital Asset pricing model
An equation describing the expected return on any asset (or portfolio) as a linear function of its beta.
Equally Weighted Index
An index computed from a simple average of returns.
Market Capitalization Weighting
An index weighting method in which the weight assigned to each constituent security is determined by dividing its market capitalization by the total market capitalization (sum of the market capitalization) of all securities in the index.
Capital Market Expectations
An investor's expectations concerning the risk and return prospects of asset.
Banker's Acceptance
An order to a bank by a customer to pay a sum of money at a future date.
Equity
An ownership share in a corporation.
Security Analysis
Analysis of the value of securities.
12b - 1 fees
Annual fees charged by a mutual fund to pay for marketing and distribution costs. Named after the SEC rule that allows this.
sum of each HP returns in each period / number of period
Artihmetic average
Real Assets
Assets used to produce goods and services.
Risk-Return Trade-Off
Assets with higher expected returns entail greater risk.
Active Management
Attempting to identify mispriced securities or to forecast broad market trends.
7. Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 12%? a. .5 B. .7 c. 1.2 d. 1.4
B. .7
73. If the beta of the market index is 1.0 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? a. 0.8 B. 1.0 c. 1.2 d. 1.5
B. 1.0
77. Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long term interest rates. Industrial production growth is expected to be 3% and long term interest rates are expected to increase by 1% and based on this data You are analyzing a stock is that has a beta of 1.2 on the industrial production factor and 0.5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2% what is your best guess of the stock's return? a. 15.9% B. 12.9% c. 13.2% d. 12.0%
B. 12.9%
76. What is the expected return on a stock with a beta of 0.8, given a risk free rate of 3.5% and an expected market return of 15.6%? a. 3.8% B. 13.2% c. 15.6% d. 19.1%
B. 13.2%
43. The risk-free rate and the expected market rate of return are 5% and 15% respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to __________. a. 12% B. 17% c. 18% d. 23%
B. 17%
40. The variance of the return on the market portfolio is .0400 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is __________. a. 0.5 B. 2.5 c. 3.5 d. 5.0
B. 2.5
39. Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is __________. a. -1.7% B. 3.7% c. 5.5% d. 8.7%
B. 3.7%
67. What is the expected return for a portfolio with a beta of 0.5? a. 5% B. 7.5% c. 12.5% d. 15%
B. 7.5%
28. Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio __________. a. A, A B. A, B c. B, A d. B, B
B. A, B
57. A stock's alpha measures the stock's ________________________________. a. Expected return B. Abnormal return c. Excess return d. Residual return
B. Abnormal return
25. According to the capital asset pricing model, __________. a. All securities' returns must lie on the capital market line B. All securities' returns must lie on the security market line c. The slope of the security market line must be less than the market risk premium d. Any security with a beta of 1 must have an excess return of zero
B. All securities' returns must lie on the security market line
10. In the context of the capital asset pricing model, the systematic measure of risk is __________. a. Unique risk B. Beta c. Standard deviation of returns d. Variance of returns
B. Beta
41. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should __________. a. Buy stock X because it is overpriced B. Buy stock X because it is underpriced c. Sell short stock X because it is overpriced d. Sell short stock X because it is underpriced
B. Buy stock X because it is underpriced
71. The expected return on the market is the risk free rate plus the ______________. a. Diversified returns B. Equilibrium risk premium c. Historical market return d. Unsystematic return
B. Equilibrium risk premium
3. Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price II. All investors plan for one identical holding period III. All investors analyze securities in the same way and share the same economic view of the world IV. All investors have the same level of risk aversion a. I, II and IV only B. I, II and III only c. II, III and IV only d. I, II, III and IV
B. I, II and III only
48. In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by ______________. I. including the unsystematic risk of a stock II. including human capital in the market portfolio III. allowing for changes in beta over time a. I and II only B. II and III only c. I and III only d. I, II and III
B. II and III only
33. The possibility of arbitrage arises when _____________. a. There is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily B. Mis-pricing among securities creates opportunities for riskless profits c. Two identically risky securities carry the same expected returns d. Investors do not diversify
B. Mis-pricing among securities creates opportunities for riskless profits
10
B. Monthly
32. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is __________. a. Fairly priced B. Overpriced c. Underpriced d. None of the above
B. Overpriced
51. Beta is a measure of _______________. a. Total risk B. Relative systematic risk c. Relative non-systematic risk d. Relative business risk
B. Relative systematic risk
9. The arbitrage pricing theory was developed by __________. a. Henry Markowitz B. Stephen Ross c. William Sharpe d. Eugene Fama
B. Stephen Ross
27. In a world where the CAPM holds which one of the following is not a true statement regarding the capital market line? a. The capital market line always has a positive slope B. The capital market line is also called the security market line c. The capital market line is the best attainable capital allocation line d. The capital market line is the line from the risk-free rate through the market portfolio
B. The capital market line is also called the security market line
56. Arbitrage is ___________________________. a. Is an example of the law of one price B. The creation of riskless profits made possible by relative mispricing among securities c. Is a common opportunity in modern markets d. An example of a risky trading strategy based on market forecasting
B. The creation of riskless profits made possible by relative mispricing among securities
52. According to capital asset pricing theory, the key determinant of portfolio returns is __________. a. The degree of diversification B. The systematic risk of the portfolio c. The firm specific risk of the portfolio d. Economic factors
B. The systematic risk of the portfolio
Passive Management
Buying and holding a diversified portfolio without attempting to identify mispriced securities.
37. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is __________. a. 1.14 b. 1.20 C. 1.26 d. 2.40
C. 1.26
66. What is the beta for a portfolio with an expected return of 12.5%? a. 0 b. 1 C. 1.5 d. 2
C. 1.5
42. Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately __________. a. 0.60 b. 1.00 C. 1.67 d. 3.20
C. 1.67
65. What is the expected return on the market? a. 0% b. 5% C. 10% d. 15%
C. 10%
36. Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is __________. a. 6.75% b. 9.0% C. 10.75% d. 12.0%
C. 10.75%
75. According to the CAPM, what is the expected market return given an expected return on a security of 14.6%, a stock beta of 1.2, and a risk free interest rate of 5.0%? a. 4.0% b. 8.0% C. 13.0% d. 16.0%
C. 13.0%
81. The risk premium for exposure to aluminum commodity prices is 4% and the firm has a beta relative to aluminum commodity prices of 0.6. The risk premium for exposure to GDP changes is 6% and the firm has a beta relative to GDP of 1.2. If the risk free rate is 4.0%, what is the expected return on this stock? a. 10.0% b. 11.5% C. 13.6% d. 14.0%
C. 13.6%
30. Consider the multi-factor APT with two factors. Portfolio A has a beta of 0. 5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. a. 13.5% b. 15.0% C. 16.25% d. 23.0%
C. 16.25%
8. Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? a. 2% b. 6% C. 8% d. 12%
C. 8%
29. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio __________. a. A, A b. A, B C. B, A d. B, B
C. B, A
44. Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy because __________. a. A, it offers an expected excess return of 0.8% b. A, it offers an expected excess return of 2.2% C. B, it offers an expected excess return of 1.8% d. B, it offers an expected return of 2.4%
C. B, it offers an expected excess return of 1.8%
1. An adjusted beta will be ______ than the unadjusted beta. a. Lower b. Higher C. Closer to 1 d. Closer to 0
C. Closer to 1
45. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is ________________. a. Directly related to the risk aversion of the particular investor b. Inversely related to the risk aversion of the particular investor C. Directly related to the beta of the stock d. Inversely related to the alpha of the stock
C. Directly related to the beta of the stock
Based on the data you know that the stock a. Earned a positive alpha that is statistically significantly different from zero b. Has a beta precisely equal to 0.890 C. Has a beta that could be anything between 0.6541 and 1.465 inclusive d. Has no systematic risk
C. Has a beta that could be anything between 0.6541 and 1.465 inclusive
rise
C. Have the same intercept with a steeper slope
47. Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book to market ratio II. Unexpected change in industrial production III. Firm size a. I only b. I and II only C. I and III only d. I, II and III
C. I and III only
26. According to the CAPM which of the following is not a true statement regarding the market portfolio. a. All securities in the market portfolio are held in proportion to their market values b. It includes all risky assets in the world, including human capital C. It is always the minimum variance portfolio on the efficient frontier d. It lies on the efficient frontier
C. It is always the minimum variance portfolio on the efficient frontier
17. According to the capital asset pricing model, a security with a __________. a. Negative alpha is considered a good buy b. Positive alpha is considered overpriced C. Positive alpha is considered underpriced d. Zero alpha is considered a good buy
C. Positive alpha is considered underpriced
55. The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM ______________. a. Places less emphasis on market risk b. Recognizes multiple unsystematic risk factors C. Recognizes only one systematic risk factor d. Recognizes multiple systematic risk factors
C. Recognizes only one systematic risk factor
62. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, __________. a. SDA Corp. stock is underpriced b. SDA Corp. stock is fairly priced C. SDA Corp. stock's alpha is -0.75% d. SDA Corp. stock alpha is 0.75%
C. SDA Corp. stock's alpha is -0.75%
22. The graph of the expected return beta relationship in the CAPM context is called the __________. a. CML b. CAL C. SML d. Term Structure
C. SML
35. 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 a lack of liquidity in the market
C. The absence of arbitrage opportunities
15. The capital asset pricing model was developed by __________. a. Kenneth French b. Stephen Ross C. William Sharpe d. Eugene Fama
C. William Sharpe
all combination of risky asset and risk free asset lie on
CAL
risk return combinations available by varying asset allocation, that is, by choosing different values of y.
CAL
what connect the risk free asset to the risky asset
CAL
plot of risk return combination available by varying portfolio allocation between a risk free asst and a risky portfolio
Capital allocation line
CAL using the market index portfolio as the risky asset
Capital market line (CML)
Security Selection
Choice of specific securities within each asset class.
Financial Assets
Claims on real assets or the income generated by them.
Investment
Commitment of current resources in the expectation of deriving greater resources in the future.
Mutual Fund
Common name for open-end company. Each has a specified investment policy. Accounts for about 90% of investment company assets. It's NAV is quoted once a day.
Sector Funds
Concentrate on particular industries.
Agency Problems
Conflicts of interest between managers and stockholders.
13. The market portfolio has a beta of __________. a. -1.0 b. 0 c. 0.5 D. 1.0
D. 1.0
84. The two factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5% and a risk free rate of 4.0%. What is the expected return on the stock? a. 11.6% b. 13.0% c. 15.3% D. 19.5%
D. 19.5%
6. Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? a. 6% b. 15.6% c. 18% D. 21.6%
D. 21.6%
74. According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk free interest rate of 4.0%? a. 4.0% b. 4.8% c. 6.6% D. 8.0%
D. 8.0%
well diversified portfolios only
D. Both well diversified portfolios and individual assets
79. There are two independent economic factors M1 and M2. The risk-free rate is 5% and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below which equation provides the correct pricing model? a. E(rP) = 5 + 1.12bP1 + 11.86bP2 b. E(rP) = 5 + 4.96bP1 + 13.26bP2 c. E(rP) = 5 + 3.23bP1 + 8.46bP2 D. E(rP) = 5 + 8.71bP1 + 9.68bP2
D. E(rP) = 5 + 8.71bP1 + 9.68bP2
34. Building a zero-investment portfolio will always involve _____________ a. An unknown mixture of short and long positions b. Only short positions c. Only long positions D. Equal investments in a short and a long position
D. Equal investments in a short and a long position
4. 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. Homogeneous expectations
D. Homogeneous expectations
5. In a simple CAPM world which of the following statements is/are correct? I. All investors will choose to hold the market portfolio, which includes all risky assets in the world II. Investors' complete portfolio will vary depending on their risk aversion III. The return per unit of risk will be identical for all individual assets IV. The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio a. I, II and III only b. II, III and IV only c. I, III and IV only D. I, II, III and IV
D. I, II, III and IV
85. Since the APT does not specify which factors should be used to determine risk premiums, how should we decide which factors to investigate? a. Researchers should focus on factors that affect firms and industries b. Researchers should look for the most important unsystematic factors c. Researchers should concentrate on better defining the market portfolio D. Researchers should consider factors that correlate highly with uncertainty in consumption and investment opportunities
D. Researchers should consider factors that correlate highly with uncertainty in consumption and investment opportunities
54. According to the CAPM, investors are compensated for all but which of the following? a. Expected inflation b. Systematic risk c. Time value of money D. Residual risk
D. Residual risk
11. Empirical results estimated from historical data indicate that betas __________. a. Are always close to zero b. Are constant over time c. Of all securities are always between zero and one D. Seem to regress toward one over time
D. Seem to regress toward one over time
19. Investors require a risk premium as compensation for bearing _______________. a. Unsystematic risk b. Alpha risk c. Residual risk D. Systematic risk
D. Systematic risk
60. One of the main problems with the arbitrage pricing theory is a. Its use of several factors instead of a single market index to explain the risk-return relationship b. The introduction of non-systematic risk as a key factor in the risk-return relationship c. That the APT requires an even larger number of unrealistic assumptions than the CAPM D. The model fails to identify the key macro-economic variables in the risk-return relationship
D. The model fails to identify the key macro-economic variables in the risk-return relationship
53. The expected return of the risky asset portfolio with minimum variance is __________. a. The market rate of return b. Zero c. The risk-free rate D. There is not enough information to answer this question
D. There is not enough information to answer this question
14. In a well diversified portfolio, __________ risk is negligible. a. Nondiversifiable b. Market c. Systematic D. Unsystematic
D. Unsystematic
20. According to the capital asset pricing model, fairly priced securities have __________. a. Negative betas b. Positive alphas c. Positive betas D. Zero alphas
D. Zero alphas
Treasury Notes or Bonds
Debt obligations of the federal government with original maturities of one year or more.
How are funds sold?
Direct-marketed funds= sold through mail, offices, and internet. Investors buy from fund directly.
Eurodollars
Dollar-denominated deposits at foreign banks or foreign branches of American banks.
Capital Allocation Line (Formula)
E(Rp) = Expected Return of the Portfolio Rf = Risk Free Rate E(Ri) = Expected Return of the Investment,https://o.quizlet.com/F.Nv5ZQNNFzs1fyKW580VA_m.png
Utility (Formula)
E(r) = Expected Returns A = Risk aversion,https://o.quizlet.com/RzRr1evf6J79.oZC38-BrQ_m.png
Holding Period Return Compounded (Formula)
Example for a three year period return,https://o.quizlet.com/pmjhz2lKuczRr4GXsWWLYA_m.png
.25, .25 and -.20 been result of single per period return
Example of geometric average
Investment Companies
Financial intermediaries that collects funds from individual investors and invest those funds in a potentially wide range of securities. They provide a mechanism for small investors to "team up" to obtain the benefits of large-scale investing.
Investment Companies
Firms managing funds for investors. An investment company may manage several mutual funds.
Investment Bankers
Firms specializing in the sale of new securities to the public, typically by underwriting the issue.
Index fund
Fund that tries to match the performance of a broad market index, like the SP500. Buys shares in securities in an index in proportion to the security's representation in that index.
Federal Funds
Funds in the accounts of commercial banks at the Federal Reserve Bank.
International Funds
Global funds = invest in securities worldwide, including US.
rate of return over a given investment period over a single period
HPR
Balanced funds
Hold both equities and fixed-income funds.
(Ending Price - Begining Price + Cash dividend)/ Begining Price
Holding Period Return
Money Markets
Include short-term, highly liquid, and relatively low-risk debt instruments.
Market Value-Weighted Index
Index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value.
Financial Intermediaries
Institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers.
Money Market MM
Invest in money market securities (commercial paper, repos, or CDs). Average maturity of assets is around 1mo.
Real Estate Investment Trusts
Invest in real estate or loans secured by real estate. Highly leveraged. Equity trusts = invest in real estate directly. Mortgage trusts = mortgage and construction loans.
Equity Funds
Invest mostly in stock, but may hold fixed-income securities. Income funds=hold shares of firms with high dividend yields. Growth funds=focuses on prospects instead of capital gains, but are riskier.
Private Equity
Investments in companies that are not traded on a stock exchange.
LIBOR (London Interbank Offer Rate)
Lending rate among banks in the London market.
Corporate Bonds
Long-term bonds issued by corporations typically paying semiannual coupons and returning the face value of the bond at maturity.
Variance
Measure of the volatility or the dispersion of returns.
Information ratio
Measures the abnormal return per-unit of risk added by the security to a well diversified portfolio.
Venture Capital (VC)
Money invested to finance a new firm.
Unit Investment Trust
Money pooled from many investors that is invested in a portfolio fixed for the life of the fund. Shares of the trust are called "redeemable trust certificates." Has little active management.
__________ is a false statement about the NYSE.
More than 3000 companies are listed on the NYSE
Funds of Funds
Mutual funds that primarily invest in shares of other mutual funds.
The computer-linked price quotation system for the OTC is called __________.
NASDAQ
Total Risk (Variance)
Nonsystematic Risk + Systematic Risk
Preferred Stock
Nonvoting shares in a corporation, usually paying a fixed stream of dividends.
Futures Contract
Obliges traders to purchase or sell an asset at an agreed upon price at a specified future date.
Exchange-Traded Funds
Offshoots of mutual funds that allow investors to trade index portfolios just as they do stocks. ETFs experience price changes throughout the day as they are bought and sold. An ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.
What are the four general classes of fees?
Operating expenses: costs incurred by mutual fund in operating the portfolio, including admin expenses and advisory fees paid to investment manager. Periodically are deducted from assets of fund.
Common Stocks
Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends.
Commingled Funds
Partnerships of investors that pool funds. Ex: a bank manages the fund for a fee. Instead of shares, the offer units.
Fixed-Income (Debt) Securities
Pay a specified cash flow over a period of time.
Securitization
Pooling loans into standardized securities backed by those loans, which can then be traded like any other security.
Passive Portfolio
Portfolios that replicate and track market indices, which are passively constructed on the basis of market prices and market capitalizations
Secondary Market
Previously issued securities are traded among investors.
Functions of an investment company
Record keeping and administration. Diversification and divisibility. Professional management. Lower transaction costs.
___________ investor will weight their portfolio heavily toward ________
Risk averse, Tbills
Systematic Risk
Risk of breakdown in the financial system, particularly due to spillover effects from one market into others.
Systematic Risk
Risk that affects the entire market or economy; it cannot be avoided and is inherent in the overall market. Also known as nondiversifiable or market risk.
Systematic Risk
Risk that affects the entire market or economy; it cannot be avoided and is inherent in the overall market. Systematic risk is also known as nondiversifiable or market risk.
The __________ was established to protect investors from losses if their brokerage firms fail.
SIPC
The __________ system enables exchange members to send orders directly to a specialist over computer lines.
SUPERDOT
The ____ requires full disclosure of relevant information relating to the issue of new securities.
Securities Act of 1933
Derivative Securities
Securities providing payoffs that depend on the values of other assets.
Closed-End Fund
Shares may not be redeemed, but instead are traded at prices that can differ from NAV. Shares are traded on organized exchanges.
Treasury Bills
Short-term government securities issued at a discount from face value and returning the face amount at maturity.
Repurchase Agreements (Repos)
Short-term sales of government securities with an agreement to repurchase the securities at a higher price.
Commercial Paper
Short-term unsecured debt issued by large corporations.
Security Selection
Skill in selecting individual securities within an asset class.
__________ is a false statement regarding specialists.
Specialists can not trade for their own accounts
Risk Objectives
Specifications for portfolio risk that reflect the risk tolerance of the client. Can be stated in absolute or relative terms.
investors would prefer a ________ sloping CAL because that means _____ expected return for any level of risk
Steeper, higher
__________ often accompany short sales, and are used to limit potential losses from the short position.
Stop-buy orders
Beta (Formula)
Systematic risk that is based on the covariance of an asset's or portfolio's return with the return of the overall market https://o.quizlet.com/VrVDPHM2rkx-YuWiWl7gvA_m.png
provide a perfectly risk free asset in the nominal term only
T Bills
Rf
T bills
Municipal Bonds
Tax-exempt bonds issued by state and local governments.
__________ is called the Big Board.
The New York Stock Exchange
Liquidity
The ability to purchase or sell an asset quickly and easily at a price close to fair market value. The ability to meet short-term obligations using assets that are the most readily converted into cash.
Risk Tolerance
The amount of risk an investor is willing and able to bear to achieve an investment goal.
Homogeneity of Expectations
The assumption that all investors have the same economic expectations and thus have the same expectations of prices, cash flows, and other investment characteristics.
Arithmetic Mean Return
The average of the returns on a unit of investment at the beginning of each holding period. Similar to the concept of calculating simple interest.
Tactical Asset Allocation
The decision to deliberately deviate from the strategic asset allocation in an attempt to add value based on forecasts of the near-term relative performance of asset classes.
Jensen's Alpha
The difference between the actual portfolio return and the calculated risk adjusted return. A measure of the portfolios performance relative to the market portfolio.
Risk Budgeting
The establishment of objectives for individuals, groups, or divisions of an organization that takes into account the allocation of an acceptable level of risk.
Indifference curve
The graph of risk-return combinations that an investor would be willing to accept to maintain a given level of utility
Markowitz Efficient Frontier
The graph of the set of portfolios offering the maximum expected return for their level of risk (standard deviation of return).
Money Weighted Return
The internal rate of return on a portfolio, taking account of all cash flows.
Global minimum-variance portfolio
The portfolio on the minimum-variance frontier with the smallest variance of return
Minimum variance portfolio
The portfolio with the minimum variance for each given level of expected return.
Portfolio Planning
The process of creating a plan for building a portfolio that is expected to satisfy a client's investment objectives.
Turnover
The ratio of the trading activity of a portfolio to the assets of the portfolio. Measures the fraction of the portfolio that is "replaced" each year. A small turnover is desired because it means the investor is paying less in commissions to the broker.
Gross Return
The return earned by asset manager prior to deductions for management expenses, custodial fees, taxes, or any other related expenses to the management and administration of an investment.
Holding Period Return
The returned earned from holding an asset for a single specified period of time. The period may be 1 day, 1 month, 5 years, or any specified period. A synonym for Total Return.
Call Option
The right to buy an asset at a specified price on of before a specified expiration date.
Put Option
The right to sell an asset at a specified exercise price on or before a specified expiration date.
Strategic Asset Allocation
The set of exposures to IPS-permissible asset classes that is expected to achieve the client's long-term objectives given the client's investment constraints.
Rebalancing Policy
The set of rules that guide the process of restoring a portfolio's asset class weights to those specified in the strategic asset allocation.
Kurtosis
The statistical measure that indicates the peakedness of a distribution.
Two-fund separation theorem
The theory that all investors regardless of taste, risk preferences, and initial wealth will hold a combination of two portfolios or funds: a risk-free asset and an optimal portfolio of risky assets.
Net Asset Value
The value of each share. =(Mkt value of assets - liabilities)/(Shares outstanding)
Soft Dollars
The value of research services that brokerage houses provide for free in exchange for the investment manager's business. Based on a credit system with a brokerage firm. Not included in the fund's expenses. SEC allows this as long as the proceeds are used for research that may ultimately benefit the shareholder.
__________ is a false statement about the function of investment bankers.
They are commercial banks that accept deposits from savers and lend them out to companies
Certificate of Deposits
Time deposit with a bank that cannot be withdrawn upon demand. The depositor receives interest and principal only at the end of the CD's fixed term. Highly marketable. Denominations larger than 100,000 are usually negotiable in that they can be sold to another investor if the owner has to cash in the CF before the mat. issured by the FDIC for up to 250,000 in case of bank insolvency
__________ do not take place in the secondary market.
Transactions of new issues of stocks
__________ is a false statement regarding best-efforts.
Under the best-effort agreement the investment banker buys the stock issued from the company and resells them to the public
Nonsystematic Risk
Unique risk that is local or limited to a particular asset or industry that need not affect assets outside of that asset class
Specialists on the stock exchanges may do all of the following except __________.
Use their privileged information to make investments on behalf of clients of brokerage firms with which they do business
measure of downside risk. loss that will be suffered given an extreme adverse price change. worse case scenario
VAR - value at risk
what calculation use a typical probability of 5%
VaR
Hedge Funds
Vehicles that allow private investors to pool assets to be invested by a fund manager. Typically only open to wealthy or institutional investors. Exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.
bankers' acceptances
a customer orders its bank to pay a sum of money at a future date
A prospectus is __________.
a description of a firm and the security it is issuing
prospectus
a description of the firm and the security it is issuing
auction market
a market where all traders meet at one place to buy or sell an asset
bid price
a slightly lower price that security dealers would pay to buy a T-bill from you. If you are willing to pay 23 dollars for a particular share, this is the bid price
high-frequency trading
a subset of algorithmic trading that relies on computer programs to make very rapid trading decisions
specialist
a trader who makes a market in the shares of one or more firms and who maintains a "fair and orderly market" by dealing personally in the market
__________ may be an objective of a stock mutual fund.
a.Growth
The SIPC was established by the _____.
a.Insider Trading Act of 1931
The cost of buying and selling a stock include __________.
a.broker's commissions
Restrictions on trading involving insider information apply to __________.
a.corporate officers and directors
AIMR Standards of Professional Conduct require that members ____.
a.place their clients interests before their own
Trading on insider information is _____.
a.prohibited by federal law
Which of the following are sources of competition for the New York Stock Exchange?
a.regional exchanges
A fund that invests in real estate or loans secured by real estate is __________.
an REIT
Instinet is _______.
an electronic communications network
risk premium
an expected return in excess of that on risk-free securities
over the counter (otc) market
an informal network of brokers and dealers who negotiate sales of securities
limit buy (sell) order
an order specifying a price at which an investor is willing to buy or sell a security
The _________ price is the price at which a dealer is willing to sell a security.
ask
portfolio choice among broad investment classes
asset allocation
S+P
average of 500 firms markt value-weighted index
Why are money market instruments usually out of access to small investors?
because they trade in large denominations
The _________ price is the price at which a dealer is willing to purchase a security.
bid
The difference between the price at which a dealer is willing to buy, and the price at which a dealer is willing to sell, is called the __________.
bid-ask spread
Eurobond
bond denominated in a currency other than that of the country in which it is issued.
The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called _________.
book building
Annualized Rate of Return (Formula)
c: number of periods in a year,https://o.quizlet.com/D4SxaPSTKHA2V9Vaq6.PUw_m.png
the _______ is the CAL that result from using a passive investment strategy that treats a market index portfolio such as SP500
capital market line
Federal Agency Debt
channels credit to a sector of the economy Congress believes is not receiving adequate funds. Assumed government would assist if default Ex. Ginnie Mae, Fannie Mae, Freddie Mac
The market collapse of 1987 prompted __________ as a suggestion for regulatory reform.
circuit breakers to halt trading
Federal funds
commercial banks overnight borrowing of funds
entire portfolio including risky and risk free assets
complete portfolio
electronic communication networks (ECNs)
computer networks that allow direct trading without the need for market makers
69. If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below are possible? Consider each situation independently and assume the risk free rate is 5%. a. b. c. D.
d. market 30%
provide price continuity in the stocks in which they specialize
dealers trading with their customers at the officially published price even when a better one is available
margin
descrbies securities purchased with money borrowed in part from a broker. net worth of the investors account
TED spread
difference between Libor and T-bill spread
The fourth market refers to __________.
direct trading between investors in exchange-listed securities without benefit of a broker
Euro dollars
dollar denominated dollars at foreign bank or foreign branches of American banks usually for large sums and time deposits of less than 6 months
internal rate of return (IRR) of an investment
dollar weighted average return
dark pools
electronic trading networks where participants can anonymously buy or sell large blocks of securities
rate of return in excess of the risk free rate
excess return
mean value of the distribution of HPR
expected return
In a __________ underwriting arrangement, the underwriter assumes the full risk that shares cannot be sold to the public at the stipulated offering price.
firm commitment
initial public offering (ipo)
first sale of stock by a formerly private company
2 types of municipal bonds
general obligation bonds- backed by the full faith and credit revenue bonds- issued to finance a project whose revenues then back up the bond.
the single per period return that gives the same cumulative performance as the sequence of actual return. Aslo called the time weighted average return
geometric average
According to Loughran and Ritter, initial public offerings tend to exhibit __________ performance initially, and __________ performance over the long term.
good; bad
who only can issue default free bonds (treasury bonds)
governments
Spring Street Brewing Company was the first company to _____.
have an internet IPO
M-Squared (M2 Formula)
https://o.quizlet.com/.8o5sJHUvmKozxhNp7t2QQ_m.png
Expected return of a Portfolio (Formula)
https://o.quizlet.com/2muyVEIRMahYIk4XOzVF0Q_m.png
Capital Market Line Return (Formula)
https://o.quizlet.com/34j4XapS2q.7U3MbjNNKzg_m.png
Treynor Ratio (Focus on Systematic Risk)
https://o.quizlet.com/3Sa4qRXut-UUEN3sXi-EqA_m.png
Portfolio Beta and Expected Return (Formula)
https://o.quizlet.com/7maPv6U.cXBu2dmLJkH0lQ_m.png
Sharpe Ratio (Focus on Total Risk)
https://o.quizlet.com/Rmr4YnAj.Md2UaT9yK0YXw_m.png
Information ratio (Formula)
https://o.quizlet.com/SyX4U4rpaYhzzGJJOxUYaw_m.png
Market Model (Formula)
https://o.quizlet.com/Y5hB4b2wTPTQh84CEYo82w_m.png
Risk of a Portfolio (Formula)
https://o.quizlet.com/eTPK7dnniR9iOq16X0hgyw_m.png
Capital Asset Pricing Model (Formula)
https://o.quizlet.com/n0Y-71p4ym77Fw1Na5kkig_m.png
Risk of a Leveraged Portfolio (Formula)
https://o.quizlet.com/r1-Xniw0YTYeNqH.4ujn0Q_m.png
Jensen's Alpha (Formula)
https://o.quizlet.com/tq4n3GhDkA1aUpZ68Y5MKQ_m.png
Expected Return of Leveraged Portfolio (Formula)
https://o.quizlet.com/wY-rBp7igtGkrWuf1VazLg_m.png
Purchases of new issues of stock take place __________.
in the primary market
NASDAQ
index of 3000 firms equally weighted index- places equal dollars in each stock
rate at which prices are rising, measured as the rate of increase of the CPI
inflation rate
The bulk of most initial public offerings (IPOs) of equity securities go to ____________.
institutional investors
Underwriting is one of the services provided by ____.
investment bankers
passive strategy
investment policy that avoids security analysis
A recent challenge to traditional intermediary role of brokerage firms has come from __________.
issuing firms offering securities trading in their own shares on the internet
industrial development bond
kind of revenue bond that is issued to finance commercial enterprises- like construction of factory that can be operated by private firm.
measure of the fatness of the tails of a probability distribution. indicates probability of extreme outcome
kurtosis
blocks
large transactions in which at least 10,000 shares of stock are bought or sold
LIBOR market
lending rate at which large banks in London are willing to lend to other banks.
too many observation in the tail
leptokurtosis
You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a __________.
limit-sell order
probability distribution
list of possible outcomes with associated probabilities
The largest and most liquid companies trading over-the-counter are ______.
listed on the NASDAQ National Market System
inside information
major owners, or other individuals with privileged access to information about the firm,nonpublic knowledge about a corporation possessed by corporate officers
secondary market
market for already-existing securities
primary market
market for new issues of securities
dealer markets
markets in which traders specializing in particular assets buy and sell for their own accounts
atihmetic average
mean
ranking portoflios by their sharpe measures
mean variance analysis
value at risk (VaR)
measure of downside risk; loss that will be suffered given an extreme, adverse, price change
skew
measure of the asymmetry of a probability distribution
kurtosis
measure of the fatness of the tails of probability distribution. indicates likelihood of extreme outcomes.
middle observation
median
bond market indicators
merrill lunch barclays salomon smith barney
The Nasdaq Stock Market is an example of
more than one of the above
interest rate in terms of nominal dollars
nominal interest rate
familiar bellshaped plot is symetric with identical values for all three standard measure of results: the mean, the median and the mode.
normal distribution
If the Dow Jones Industrial Average falls by 10% by 11 am, trading will be halted for _____.
one hour
price indexed government bond
only risk free asset in real term
mortgage backed security
ownership claim in a pool of mortgages or an obligation that is secured by such a pool
An ECN is _______.
part of the fourth market
investment policy that avoids security analysis
passive strategy
capital allocation line
plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risky portfolio
asset allocation
portfolio choice among broad investment classes
Dow Jones
price weighted average- measures the return on a portfolio that holds one share of each stock 30 companies
ask price
price you would pay for a security if you bought from a securities dealer. If you want to sell 100 shares at 25 dollars per share, this is the ask price
private placement
primary offerings in which shares are sold directly to a small group of institutional or wealthy investors
TIPS
principal is adjusted in proportion to increases in the CPI. constant stream of income
list of possible outcomes with associated probabilities
probability distribution
scenario analysis
process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realized in each case
Specialists are obligated to _____________.
provide price continuity in the stocks in which they specialize
underwriters
purchase securities from the issuing company and resell them to the public
how to decide between taxed and tax exempt bonds equation?
r(1-t) = rm or r= rm / (1-t)
equivalent tax yield
r/ (a-tax rate)
Nominal Return (Formula)
rF = Risk Free Rate pi= Inflation Rate RP= Risk Premium,https://o.quizlet.com/gERqb7mkB0gM.5V-ji.2Mg_m.png
mean-variance analysis
ranking portfolios by their Sharpe measures
excess return
rate of return in excess of the risk-free rate
holding-period return
rate of return over a given investment period
excess of the interest rate over the inflation rate. the growth rate of pruchasing power derived from an investment
real interest rate
risk aversion
reluctance to accept risk
a risky investment portfolio (risky asset) is characterised by its
reward to volatility ratio
his ratio is the slope of the Capital alocation line
reward to volatility ration (sharpe ratio)
sharpe measure
reward-to-volitility, ratio of portfolio risk premium to standard deviation
shifting funds from the risky portfolio to the risk free asset and diversifying the risky portfolio are 2 ways to reduce
risk
investor preferred choice among the protfolio on the CAL will depend on ______
risk aversion
reluctance to accept risk
risk avertion
rate of return that can be earned with certainty
risk free rate
expected return in excess of that on risk free securities
risk premium
_______ investors will weight their portfolio toward ____________
risk tolerant, risky asset
devising a list of possible economic outcomes or scenarios and specify both the likelihood (probability) of each scenario and the HPR the asset will realize in each scenario
scenario analysis
Transactions that do not involve the original issue of securities take place in __________.
secondary markets
stock exchanges
secondary markets where already-issued securities are bought and sold by members
Portfolio risk premium (Erp - rf)/ standard deviation of portfolio excess return
sharp ratio
reward to volatiliy measure
sharpe measure
ratio of portfolio risk premium to standar deviation
sharpe ratio (reward to volatility ratio
T-bills
short term government securities that are sold at a discount the return is the face value can be purchased on primary and secondary markets issued at initial maturities of 4, 13, 26, 52 min of 100
Repos
short term sales of government securities with an agreement to repurchase securities at a higher price. Securities serve as collateral. Usually an overnight loan.
commercial paper
short term unsecured debt issued by large corporations. Issued by these companies instead of borrowing from banks. Issued in denominations of 100,000. Maturities up to 70 days Trades in secondary markets and are quite liquid
maturities of bonds
short term- less than 1 years intermediate- 1-10 years long- more than 10
Borrowing a security from your broker in order to sell it, with the intention of repurchasing it later when the price is lower, is called ____________.
short-selling
measure of the asymetry of a probability distribution
skew
long tailed disctribution
skewness
square root of the variance
standard deviation
municipal bonds
tax exempt bonds issued by state and local governments maturities up to 30 years
Initial margin requirements on stocks are set by __________.
the Federal Reserve
capital market line
the capital allocation line using the market index portfolio as the risky asset
nasdaq stock market
the computer-linked price quotation and trade execution system
bid-ask spread
the difference between the bid and asked prices
complete portfolio
the entire portfolio including risky and risk-free assets
real interest rate
the excess of the internet rate over the inflation rate. the growth rate of purchasing power derived from an investment
variance
the expected value of the squared deviation from the mean
nominal interest rate
the interest rate in terms of nominal (not adjusted for purchasing power) dollars
dollar-weighted average return
the internal rate of return on an investment
expected return
the mean value of the distribution of HPR
The bid-ask spread exists because of ________________.
the need for dealers to cover expenses and make a modest profit
A red herring becomes a prospectus when _____.
the preliminary registration statement is approved by the SEC
bid price
the price at which a dealer of other trader is willing to purchase a security
ask price
the price at which a dealer or other trader will sell a security
inflation rate
the rate at which prices are rising, measured as the rate of increase of the CPI
risk-free rate
the rate of return that can be earned with certainty
short sale
the sale of shares not owned by the investor but borrowed through a broker and later purchases to replace the loan
geometric average
the single per-period return that gives the same cumulative performance as the sequence of actual returns
standard deviation
the square root of the variance
arithmetic average
the sum of returns in each period divided by the number of periods
latency
the time it takes to accept, process, and deliver a trading order
algorithmic trading
the use of computer programs to make rapid trading decisions
Many exchange-listed securities are also traded in the over-the-counter market. Trading of this sort is said to take place in the ____________.
third market
stop order
trade is not to be executed unless stock hits a price limit
Registered traders __________________.
trade on their own account only
Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize within a few months.
under priced
Under firm commitment underwriting the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.
underwriter
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?
unlimited
dispersion around mean
variance
expected value f the squared deviation from the mean
variance
Brokerage firms can change margin-loan practices _____.
without notice
