505 fnan

What is the formula for the market capitalization rate using the constant-growth dividend discount model? Define P0 as the current price, D1 as the dividend in a year, and g as the growth rate.

( D1 / P0 )+ g

If the intrinsic value is ______ the market price, the stock is considered ______

-above; undervalued -below; overvalued

If there are only three factors, the intercept of a regression of that three-factor asset pricing model should be equal to ________.

0

Information ratio

Alpha divided by the nonsystematic risk of the portfolio

Sharpe ratio

Average excess return divided by standard deviation of excess returns

Treynor measure

Average excess return divided by systemic risk (β)

Why does the dividend discount model not include capital gains in its formula?

Capital gains are based on future dividends.

Bargaining Power of Suppliers

Labor unions engage in collective bargaining to increase the wages paid to workers.

y2

Zero because there should be no risk premium for nonsystematic risk

y0

Zero because there should be no risk premium in the absence of risk

Research to predict stock value that focuses on such determinants as earnings and dividends prospects, expectations for future interest rates, and risk evaluation of the firm is referred to as _______ analysis.

fundamental

Research to predict stock values that focuses on such determinants as earnings and dividends prospects, expectations for future interest rates, and risk evaluation of the firm is referred to as __________ analysis.

fundamental

A rapidly ______ GDP indicates and ______ economy with ample opportunity for a firm to _____ sales.

growing; expanding; increase

The ________ _________of the share is the present value of the dividend to be received at the end of the first year, D1, and the expected sales price, P1.

intrinstic value

Dedication is not as widely used as immunization because ______.

it imposes a severe constraint on bond selection

The difference between the predicted change in a bond's price using duration with and without accounting for convexity will be larger when the interest rate change is ______ and the bond is ______ convex.

large; more

The following issues that remain ongoing regarding market efficiency include: the_________ issue, the ______ _______ issue, and the _______ ______ issue

magnitude;selection bias;lucky event

In an efficient capital market, stock prices should follow a(n) _________ walk.

random

When the estimated SML is "too flat", the γ1 coefficient is too ________ .

small

An innovation in testing the CAPM was to use ______ returns in place of ______ returns.

stratified portfolio; single security

Limitations on insider trading should lead to which form of market efficiency not holding?

strong form

If a pension manager's portfolio only holds bond indexes, the manager will reduce the risk of _______

underperforming the indexes

The percentage change in profits for a 1% change in sales is defined as the degree of ______ _______ .

operating leverage

Suppose we are attributing performance of a managed portfolio to asset allocation, sector selection, and security selection. If the portfolio outperforms the bogey by sector selection, it ______.

overweights well-performing sectors and underweights poorly performing sectors

Securities that first pass through the agencies Fannie Mae or Freddie Mac are referred to as _______ _______

pass-through

An investment strategy that does not attempt to identify mispriced securities or otherwise "beat" the market is referred to as

passive

The _______ skew of the timer's distribution is a manifestation of the fact that the extreme values are all positive.

positive

The value of a firm equals the sum of its no-growth value and the ______ ______ of ________ ________.

present ;value; growth; opportunities

The two sources of risk faced by fixed-income investors that cancel out when portfolio duration is chosen appropriately are _____ risk and ______ rate risk.

price, reinvestment

The ______ ______ ______ swap is pursued not in response to perceived mispricing, but as a means of increasing return by holding higher-yield bonds

pure yield pickup

The ratio of purchasing powers of two countries' currencies is called the ________ exchange rate.

real

As interest rates and asset durations change, a manager must ______ the portfolio to realign its duration with the duration of the obligation.

rebalance

The cost of purchasing all of the assets of a firm less its liabilities is referred to as its ________ cost (or its reproduction cost).

replacement

In technical analysis, price levels above which it is difficult for stock prices to rise are referred to as _______ levels.

resistance

The tendency of poorly-performing stocks and well-performing stocks in one period to do the opposite in following periods is referred to as the ________ effect

reversal

The active strategy with shifting means appears _____ than it really is and ____ the estimate of the Sharpe measure downward.

riskier; biases

An investment strategy which entails shifting the portfolio into industries that are forecast to outperform others based on macroeconomic forecasts is referred to as _______ _______

sector rotation

The benchmark for acceptable performance is the _______ _______ of the market index because the investor can easily opt for a passive strategy by investing in an indexed equity mutual fund.

sharpe ratio

An event that affects the demand for goods and services in the economy is referred to as a demand _________.

shock

A broad market index demonstrates only weak serial correlations on ________ horizons, for example a month or so.

short

A portfolio that has a higher Treynor measure than the market will have a T-line with a larger ______ than the ______ Market Line

slope; Security

The finding of differences in the returns of the highest and lowest deciles of firms by size is referred to as the ________ -_________ (or size) effect

small firm

If consumers have confidence in their future income levels, they tend to be more willing to _______. Similarly, businesses will _____ production and inventory levels if they anticipate _____ demand for their products.

spend; increase; higher

Industry Life Cycle

start-up, consolidation, maturity, relative decline

If all investors attempted to follow a passive investment strategy, ______.

stock prices would fail to reflect new information

rt

stock return

The __________ -form version of the efficient market hypothesis states that stock prices reflect all information relevant to the firm.

strong

The systematic measurement of the exposures of managed portfolios by the regression of fund returns on indexes representing a range of asset classes is referred to as _______ ________

style analysis

In technical analysis, price levels below which it is difficult for stock prices to fall are referred to as ___________ levels.

support

Bias in the average returns of a sample induced by excluding past returns that left the sample because they happened to be unsuccessful is referred to as ______ bias

survivorship

The search for recurrent and predictable patterns in stock prices is referred to as ___________ analysis.

technical

better indicator

the CAR, which is the sum of all abnormal returns over the time period of interest the CAR, which is the sum of all abnormal returns over the time period of interest

The only manipulation-proof performance measure is _____

the Morningstar risk-adjusted return

The dollar-weighted average return on an investment is ______

the discount rate that makes the net present value of the investment equal to zero

When we attribute the performance of a managed portfolio, the contribution of asset allocation to superior performance equals the sum over all markets of the excess weight in each market times ________

the return of the market index

The efficient market hypothesis has never been widely accepted on Wall Street because it implies that ______

the search for undervalued securities is wasted effort

Since each return has an equal weight in the geometric average, it is also called the _______-_______ average return.

time- weighted

The value of an imperfect timer is the value of the perfect-timing call option ______ the measure of timing ability.

times

The ratio of a firm's market value to its replacement cost is _______ _______

tobin's q

Early tests of the CAPM found that the intercept of the SML was ______ and its slope was ______.

too high; too flat

True or false: A concern of the multifactor CAPM and APT theories is that they provide little guidance concerning which sources of risk out to result in risk premiums

true

The purpose of fundamental analysis is to identify stocks that are mispriced relative to some measure of _______ or ________ value that can be derived from observable financial data.

true; intrinsic

A behavioral explanation for why "value firms" outperform "glamour" firms is that analysts tend to ______ the value of firms with ______ recent performance.

underestimate; bad overestimate; good

The ________ ________ is the percentage of the total labor force yet to find work and measures the extent to which the economy is operating at full capacity.

unemployment rate

CG

unexpected changes in risk premiums measured by the difference between the returns on corporate Baa-rated bonds and long-term government bonds

GB

unexpected changes in the term premium measured by the difference between the returns on long-and short-term government bonds.

UI

unexpected inflation, defined as the difference between actual and expected inflation

An explanation of the equity premium puzzle offered by Fama and French is that recent realized excess rates of return were ______.

unexpectedly high

Holding the coupon rate constant, a bond's duration _______ increases with its time to maturity.

usually

The ability of easily observed variables to predict broad market returns may not be a violation of market efficiency because it may reflect ______.

variation in the market risk premium

The change in a bond's price predicted by the modified duration formula from an interest rate change is most accurate when the change is interest rates is

very small

In the calculation of Macaulay's duration, the weight wt associated with the cash flow made at time t (denoted CFt) is which of the following? Define y as the bond's yield to maturity.

w t =( CFt/(1+y)t)/Bondprice

The __________-form hypothesis asserts that stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices, trading volume, or short interest.

weak

The three different versions of the EMH forms of the hypothesis are _________ ,_________ , and _________ forms.

weak; semistrong; strong

If you were a perfect market timer, ______.

your return would be truly risk-free

Which is the formula to predict the percentage change in the price of a bond when convexity is taken into account? Define D* as modified duration and y as the yield to maturity.

− D* Δy + ½ × Convexity × (Δy)2

formula for effective duration is:

−(ΔP/PΔ)/r

formula for the duration of a perpetuity

(1+y)/y

Which statements about immunizing a bond portfolio are correct?

-A bond portfolio will not remain immunized if the manger does not buy and sell securities to rebalance the portfolio. -Immunization does not involve attempts to identify undervalued bonds.

Evaluating the performance of a fund manager presents which difficulties?

-Average portfolio return is not straightforward to measure. -Risk levels may change along with portfolio composition. -The proper measure of risk may not be obvious.

Which types of information are reflected in stock prices according to the semistrong-form efficient market hypothesis?

-Balance sheet composition -Short interest -Earnings forecasts -Trading volume -Past prices -Management quality

Which of the following statements illustrate why convexity is generally considered a desirable trait?

-Bonds with greater curvature gain more in price when yields fall than they lose when yields rise. -Bonds that are more convex enjoy greater price increases and smaller decreases when interest rates fluctuate by larger amounts.

Which are the systematic factors in the Fama-French three-factor model?

-Book-to-market ratio -Market index -Firm size

Which three of the following are components of performance commonly used in performance attribution?

-Broad asset market allocation choices across equity, fixed-income, and money markets -Security choice within each sector -Industry (sector) choice within each market

Which statements are true about consumer and producer sentiment?

-Consumers' and producers' optimism or pessimism is an important determinant of economic performance. -If consumers have confidence in their future income levels, they will be more willing to spend on big-ticket items. -Businesses will increase production and inventory levels if they anticipate higher demand.

Which of the following have been found to have statistically significant explanatory power within macro factor models?

-Corporate bond risk premiums -Industrial production -Unanticipated inflation

Which of the following risk factors can augment the market risk factor of the CAPM?

-Factors that hedge against price uncertainty -Factors that hedge assets not found in the market proxy -Factors that hedge future investment opportunities

Which statements related to sector rotation are correct?

-Following a peak, defensive industries would be expected to do well relative to others. -In an expansion, cyclical industries will be most profitable. -Its practitioners will be successful only if they anticipate the next stage of the business cycle better than others.

Statements that are true about the bond duration vs. bond maturity chart

-For the zero-coupon bond, duration increases year-for-year with maturity. -The bond trading at par has a 15% coupon, and its duration increases with maturity. -The bond trading at a premium has a 15% coupon, and its duration increases with maturity.

Which are methods or tools of fundamental analysis

-Free cash flow model -Dividend discount model -P/E ratio

Which of the following are difficulties with the early testing approaches of the CAPM?

-High return volatility -Sampling errors of the first-pass beta estimates -Low precision of estimates

Which statements are true about market efficiency and its implications?

-If there were no search for mispriced securities, securities would be mispriced. -Even minor mispricings can be very profitable

Which statements are correct about survivorship bias in the estimation of the equity premium puzzle?

-Ignoring the evidence from stock markets that did not survive for the full sample period will impart an upward bias in estimates of expected returns. -The equity premium puzzle emerged from long-term averages of U.S. stock returns.

Which are examples of negative supply shocks?

-Increases in the price of oil -Freezes, floods, or droughts that might destroy large quantities of agricultural crops

Which types of information are reflected in stock prices according to the strong-form efficient market hypothesis?

-Information available only to company insiders -Balance sheet composition -Short interest -Trading volume -Past prices -Earnings forecasts

With respect to the second-pass regression estimating the SML, which of the following are the result of beta measurement error?

-Intercept biased upward -Slope biased downward

Which of the following are the sources of potential value only used in active bond management?

-Interest rate forecasting -Identifying mispriced bonds

Which factors are taken into account in determining the portfolio choice decision for individual investors when markets are efficient?

-Investor risk preferences -Tax rates -The beta of a security -Firm-specific risk

Which statements are true about the use of comparison universes to evaluate managers?

-It can be misleading because managers' levels of risk may vary. -It can be misleading when managers focus on different assets within an asset class.

Which statements are true about the book value of an asset on a firm's balance sheet?

-It is based on historical value. -It is adjusted for depreciation.

Which of the following statements are true about the unemployment rate?

-It is the fraction of the total labor force seeking work but that have not yet found work. -It is a measure of the extent to which the economy is operating at full capacity.

For what reasons is duration a key concept in fixed-income portfolio management?

-It turns out to be an essential tool in immunizing portfolios from interest rate risk. -It is a simple summary statistic of the effective average maturity of the portfolio. -It is used to determine the interest rate sensitivity of a portfolio.

Consider the following data. Portfolio P has average return of 28%, beta of 2, and standard deviation of 16%. The market has average return of 14%, beta of 1, and standard deviation of 4%. If the risk-free rate is 4%, for which measures was Portfolio P better?

-Jensen's alpha -Treynor measure

Which assets are not included but should be when a market index proxy is used for the market portfolio in testing the CAPM?

-Labor income -Private business income

Which statements are correct about market timing?

-Market timing ability can be tested by adding a squared term to the usual linear index model. -Market timers shift beta based on their expectation of the performance of the market index. -Market timers shift beta and mean return, moving into and out of the market.

Which statements are true of a stock's price under the constant-growth dividend discount model?

-Price is proportional to the dividend. -The expected return is equal to the market capitalization rate. -The stock price increases with the expected growth rate of dividends.

Which statements are generally true about the P/E ratio and stock risk?

-Riskier firms have higher required rates of return. -Riskier stocks will have lower P/E multiples.

Which statements are correct regarding momentum factors in multifactor models?

-Studies have found that what appeared to be alpha could be explained as sensitivity to a momentum factor. -Addition of a momentum factor to the Fama-French three-factor model is common.

A test of the hypothesis that the multifactor CAPM and APT are elegant theories of how exposure to multiple systematic risk factors should influence expected returns requires which of the following stages?

-Test of the explanatory power and risk premiums of the hedge portfolios. -Specification of risk factors. -Identification of portfolios that hedge these fundamental risk factors.

Which statements about anomalies are correct?

-Tests of risk-adjusted returns are joint tests of the efficient market hypothesis and the risk adjustment procedure. -The correct method of risk adjustment in assessing returns is usually open to debate. -The finding of an anomaly may simply reflect incorrect adjustment for risk.

statements that are true about the percentage change in bond price vs. change in yield to maturity graph

-The duration approximation is linear. -When the interest rate decreases, the bond's price changes more than predicted by the duration approximation.

Which statements are true according to the basic CAPM?

-The firm-specific risk of a security does not affect its expected return. -Securities only vary in their expected returns because of differences in their levels of systematic risk. -A security's expected rate of return should rise in direct proportion to its beta.

Which statements are correct about a manager's performance as depicted in the figure? (Click to enlarge.)

-The manager would have a higher return from the asset class than the bogey in the absence of security selection. -The manager's return from the asset class is rPiwPi.

Which measures of liquidity have been used in empirical analyses?

-The price impact per dollar of transactions -Evidence of price reversals following large trades -The component of price impact that is due to information issues

Based on the figure, which statements about the relationship between the S&P 500 price and earnings are correct?

-The price-earnings multiple during the dot-com boom of the late 1990s exceeded 25. -As a general rule the price-earnings multiple has tended to be in the range of 12 to 25. -Stock prices tend to rise along with earnings.

Which of the following statements regarding duration is true?

-The property of duration corresponds to Malkiel's third relationship. -holding the coupon rate constant, a bond's duration generally increases with its time to maturity

Which macroeconomic factors are commonly considered in fundamental analysis?

-The prospects of the broader economy -Business cycles -The state of the international economy

Which statements are true about the empirics of consumption-based asset pricing models?

-The use of consumption data directly is limited by the lack of variation over time. -The use of consumption-tracking portfolios improves the quality of estimation. -Studies suggest that the explanatory power of the Fama-French factors for average returns may reflect differences in consumption risk.

Which statements are part of Roll's critique of empirical tests of the CAPM?

-The use of different proxies for the market portfolio can lead to different conclusions about the CAPM. -The CAPM is not testable unless the true market portfolio is observable, and it is not. -Whether a proxy for the market portfolio such as the S&P 500 is mean-variance efficient does not prove the efficiency of the true market portfolio.

Which statements are consistent with the figure depicting the CAR surrounding merger announcements? (Click to enlarge.)

-There is a large and positive abnormal return on the announcement date. -Immediately after the announcement date the CAR no longer increases or decreases significantly.

Which are reasons that it is difficult to test the CAPM?

-There may be multiple sources of systematic risk. -It is based on an unobservable market portfolio that encompasses all assets in the economy. -Characteristics of security markets such as liquidity and transactions costs can affect expected returns.

Which statements about NAICS codes are correct?

-They are assigned to firms for statistical analysis. -Firms with the same four-digit NAICS codes are commonly taken to be in the same industry. -Their first two digits denote broad industry classification.

Which statements are true of passive investment strategies?

-They often involve ownership of index funds. -Believers in efficient markets typically advocate them.

If the domestic currency ______ in real terms, domestic products become ______ expensive relative to foreign products and sales for domestic producers would be expected to ______.

-appreciates; more; fall -depreciates; less; rise

Which of the following statements are true regarding post-earnings-announcment price drift?

-cumulative abnormal returns continue to rise after earnings information becomes public -negative-surprise firms continue to suffer negative abnormal returns

A(n) ______ in interest rates is expected to ______ demand for commonly-financed consumer purchases such as housing and automobiles

-decrease; increase -increase; decrease

Which of the following statements regarding Vanguard's 500 Index Fund are true?

-fees can be kept to a minimum -typical charge for an actively managed equity fund is almost 1% of assets -holds stocks in direct proportion to weight in the S&P's 500 stock price index

Which of the following statements regarding high-tax-bracket investors are true?

-find it advantageous to buy tax-exempt municipal bonds -might tilt their portfolios in the direction of capital gains opposed to interest income -are attracted to investments with sensitive to tax brackets like real estate ventures

Economic series that tend to rise or fall ______ the rest of the economy are ______ economic indicators.

-in tandem with; coincident -somewhat after; lagging -in advance of; leading

If a pension manager's portfolio is immunized, the manager will reduce the risk of ______.

-net losses from interest rate changes -faster increase in the value of liabilities than assets

A ______ is the transition from the end of a(n) ______ to the start of a(n) ______.

-peak; expansion; contraction -trough, contraction; expansion

If investors could generate abnormal returns consistently by using _______ of a stock, it would be evidence against the weak form of the efficient market hypothesis.

-technical analysis -charts of past prices -the relative strength

The proportion of the firm's earnings that is reinvested in the business and not paid out as dividends is called ______.

-the earnings retention ratio -the plowback ratio

Order the steps used in early testing of the CAPM.

1. Collect 2. Calculate 3. Estimate bet & 4.estimate increase 5.test

Steps for calculating the duration of a bond

1. Determine the size and timing of all cash flows (CF) from the bond 2. Determine the present value of each cash flow (PV of CF) 3. Calculate the weight w of each cash flow 4. Multiply the cash flow weight by the number of periods until it occurs (t*w) 5. Sum the product of the times and weights to generate the weighted average

In testing the CAPM with a sample of 100 securities, there will be ______ first-pass regression(s) and ______ estimated beta(s).

100;100

A zero-coupon bond has 11 years until maturity. If the yield to maturity is 10%, Macaulay's duration of this bond is _______ years and modified duration is _______ years.

11, 10

In testing the CAPM with a sample of 100 securities, there will be ______ second-pass regression(s) and ______ estimated market risk premium(s).

1; 1

Ms. Johnson invested $10,000 in a 10-year zero coupon bond and $20,000 in a 3-year semiannual coupon bond that has a duration of 2.5 years. Her portfolio is immunized from interest rate risk if her investment horizon is ______ years.

5

The relationship among industry structure, competitive strategy, and profitability are addressed by Michael Porter's ______ determinants of competition.

5

et

Abnormal return

Rivalry between Existing Competitors

An industry produces a homogeneous good.

a

Average rate of return the stock would realize in a period with a zero market return

Jensen's alpha

Average return above the CAPM prediction given the portfolio's beta

the same as; greater for Bond L than Bond H

Bond H and Bond L are zero-coupon bonds that have 10-years remaining until maturity, but Bond H has a higher yield to maturity than Bond L. Bond H's duration is ______ Bond L's duration. When the yields of both bonds increase by 50 basis points, the percentage drop in bond price will be ______.

Which is Macaulay's duration formula? Define y as the yield to maturity and wt = CFt/(1+y)tBondprice.

D = ∑t=1Tt*wt

Suppose a firm will pay dividend D1 in one year, D2 in two years, and can be sold for P2 in two years. Further suppose the market capitalization rate is k and the risk-free rate is r. What is the formula for the value of the firm?

D1/ (1+k) + (D2+P2) / (1+k)^2

If a stock pays a dividend of D1 in one year and the dividend grows at a constant rate g forever, the intrinsic value of the stock is given by which formula(s)?

D1/1+k + D1(1+g)/(1+k)^2 + D1(1+g)^2/(1+k)^3 + ... D1/k−g

_______is matching cash flows from a fixed-income portfolio with those of an obligation on a multi-period basis.

Dedication

The contribution of an asset class is the contribution from asset allocation given by ______ plus the contribution from security selection given by ______.

Excess weight in asset class × Benchmark return; Weight in asset class × Excess return

True or false: An event study would qualify the relationship between dividend changes and stock returns

False

True or false: An event study would qualify the relationship between dividend changes and stock returns.

False

True or false: Some analysts believe the market value of a firm can remain above its replacement costs for sustained periods of time.

False

True or false: For a horizon equal to the portfolio's duration, price risk and reinvestment risk are precisely equal.

False Reason: are precisely offsetting

Low corresponding sales sensitivity level in their business cycle

Food, Medical services, Tobacco

Agencies that act as pass through agencies include:

Freddie Mac Fannie Mae

What is another name for the constant-growth DDM equation?

Gordon model, after Myron J. Gordon

Which of the following are not a possible variable that might proxy for systematic factors?

IG

SML

Is a better representation of performance relative to the theoretically-prescribed passive portfolio

High corresponding sales sensitivity level in their business cycle

Machine tools, Steel, Auto

Which is Tobin's q?

Market Value / Replacement Cost

rmt

Market return

The ________ ________-_______ _______ can be interpreted as the risk-free equivalent excess return of the portfolio for an investor with risk aversion measured by γ.

Morningstar Risk - Adjusted Rating

The numerical values to identify industries are ______ codes.

NAICs

Which behavioral finance issues have been suggested as an explanation of the equity premium puzzle?

Narrow framing and loss aversion

If P1 is the proportion of the correct forecasts of bull markets and P2 is the proportion for bear markets, then what is the correct measure of timing ability?

P1 + P2 − 1

Threat of Entry

Proprietary knowledge or patent protection exists

If a company has a plowback ratio of b and a fixed return on equity, what is its growth rate of dividends?

ROE x b

b

Sensitivity to the market return

For an investor with preferences defined by U = E(rP) − ½ A σ2P, the optimal entire risky portfolio maximizes which measure?

Sharpe ratio

Which of the following factors have joined momentum as additions to the Fama-French three-factor model?

Stock Issues: Growth in share outstanding Volatility

Bond A is a 10-year zero-coupon bond with yield to maturity of 10%. Bond B is a 15-year semi-annual coupon bond with yield to maturity of 10% and duration of 10 years. If the yields of both bonds increase to 10.25%, what can we reasonably predict?

The bonds will have a similar percentage change in price.

Bargaining Power of Buyers

The government sets low prices for its purchases.

Pressure from Substitute Products

The industry faces competition from firms in related industries.

y1

The market risk premium

Which of the following is not a fundamental concerns about the validity of CAPM tests?

The two-stage procedure employed by researchers is not straightforward, making this approach invalid.

What is true of estimating the betas of security characteristic lines?

They are the result of the first-pass regression.

What is the appropriate performance metric when evaluating potential components of the full risky portfolio?

Treynor measure

The semistrong-form efficient market hypothesis states that all publicly available information regarding the prospects of a firm must be reflected already in the stock price.

True

True or false: Economists generally believe excessive government borrowing will "crowd out" private borrowing and investing by forcing up interest rates and choking off business investment.

True

True or false: Efficient allocation depends on the quality of financial professionals and the ability of financial markets to identify and direct capital to the best stewards.

True

True or false: Even a minor mispricing allows a stockmarket analyst to earn their salary.

True

True or false: Even moderate levels of statistical noise make performance evaluation extremely difficult in practice.

True

True or false: Style analysis has become a very popular in the investment management industry and has spawned quite a few variations on Sharpe's methodology.

True

True or false: The momentum effect is observed where good or bad recent stock performance of particular stocks continue over time

True

True or false: The pattern of returns on the days preceding a public announcement date can yield some interesting evidence regarding efficient markets and information leakage.

True

Style Analysis

Uses multiple asset classes for comparison;Imposes extra constraints on the regression coefficients

Perfect market timing is equivalent to holding ______.

a free call option on the market index

If two bonds have the same present value of cash flows but differ in their convexity, the one with greater convexity would be expected to have ______ the one with lower convexity.

a higher price than

Macro factor models suggest a negative or "wrong" sign on the market proxy variable, which suggests ______ market-risk premium.

a negative

Active management is only expected to earn ______ returns if the analyst's information or insight is superior to that of the market.

abnormal

The return on a stock beyond what would be predicted by market movements alone is referred to as the________ return

abnormal

What appears as ______ in a single-factor CAPM can be ______ in a multifactor CAPM.

alpha; an extra-market source of risk

Holding interest rates constant, for bonds selling at par or at a premium to par, duration ______ increases with time to maturity.

always

poor indicator

an abnormal return on the announcement date regarding the total impact of the information release

Patterns of returns that seem to contradict the efficient market hypothesis are referred to as _______

anomalies

In testing the CAPM, the use of an inappropriate proxy for the true market portfolio is referred to as ________ error.

benchmark

Early tests of the CAPM were based on whether the excess return-____________ relationship holds.

beta

The performance attribution procedure explains the difference in returns between a managed portfolio and a selected benchmark portfolio which is called the _________

bogey

The accounting measure describing the net worth of common equity according to a firm's balance sheet is _______ value.

book

Young customers face meaningful _______ ________ that are important when placed in the context of life cycle and are often overlooked.

borrowing constraints

Bond index funds are ______.

both exchange-traded and mutual funds

The amount by which government spending exceeds government revenues is the _______ _______

budge deficit

The economy's recurring pattern of expansions and recessions is referred to as the _______ ________

business cycle

If an investor follows the principle of , _____ _____ _____ the portfolio is automatically immunized from interest rate risk because the cash flow from the bond and the obligation exactly offset each other.

cash flow matching

EI

changes in expected inflation measured by changes in short-term (T-bill) interest rates

The collection of money managers of similar investment style used for assessing relative performance of a portfolio manager is the _________ ________.

comparison universe

In an efficient capital market, _________ among many well-backed, highly paid, aggressive analysts ensures that stocks prices reflect all available information.

competition

A _________ investment strategy refers to investing in recent losers and avoiding recent winners.

contraian

The curvature of the price-yield relationship of a bond is its

convexity

If the value of labor income is not perfectly ______ with the market-index portfolio, then the possibility of _____ returns to labor will represent a source of _____ not fully captured by the index.

correlated; negative; risk

The total abnormal return for a time period of interest is referred to as the ________ abnormal return.

cumulative

Suppose the yield to maturity of a 10-year zero-coupon bond is 2% currently. If the yield increases to 2.25%, the modified duration formula predicts that the bond price will ______.

decrease 2.45%

Industries with little sensitivity to the state of the economy are referred to as ________ industries.

defensive

According to which theory is the value of a firm equal to D1/ (1+k) + (D2+P2) / (1+k)^2 + D3/(1+k)3 + ...? Define Dt as the dividend in year t and k as the market capitalization rate.

dividend discount model

The percentage of earnings returned to shareholders as dividends is called the ______ ______ _______

dividend payout ratio

In cases when cash flows are not known, as because of embedded optionality, the sensitivity of a bond to interest rate changes is described by ______ duration

effective

The notion that stocks already reflect all available information is referred to as the _______ ________ ________.

efficient market hypothesis

As mutual funds are barred from short positions, the regression coefficients of a style analysis are constrained to be ________.

either zero or positive

The finding that the historical risk premium implies implausibly high levels of risk aversion is referred to as the ________ _________ _________

equity premium puzzle

A technique of empirical financial research that enables a researcher to assess the impact of something on a firm's stock price is referred to as a(n) _________ study

event

The price of a unit of one country's currency in terms of another country's currency is given by the _______ ________

exchange rate

In the constant-growth DDM, the _____ capital gains rate on the stock will _____ the ______ ____ of dividends.

expected; equal; growth rate

The ________ variable in the case of each factor listed in Table 13.4 is a characteristic of each stock, not its slope against the return on the factor.

explanatory

The finding that growth stocks underperform value stocks surrounding earnings announcements is considered support of the behavioral theory of ______.

extrapolation error

labor income or private business

factors that hedge assets missing from market index

housing, energy or general inflation

factors that hedge consumption against uncertainty in prices of important consumption categories

interest rates, market volatility, or the market risk premium

factors that hedge future investment opportunities

As the coupon rate of a bond increases, its sensitivity to interest rate changes ______.

falls

The goal for a fundamental analyst seeking to generate high risk-adjusted returns is to identify ______.

firms that are better than everyone else's estimate

In testing the CAPM, the time series regression to estimate the betas of securities or portfolios is referred to as the _______ -________ regression.

first pass

The idea that investors evaluate every risk they face in isolation is referred to as narrow _________ (or narrow bracketing).

framing

The identification of stocks that are mispriced relative to some measure of "true" value that can be derived from observable financial data is the purpose of _______ analysis.

fundamental

The ________ ________ is the constant annual return over the 20 years that would provide the same total cumulative return over the entire investment period.

geometric average

The market value of goods and services produced over time including the income of foreign corporations and foreign residents working in the United States, but excluding the income of US residents and corporations overseas, is the US ______ ______ ______ .

gross domestic product

Which of the following are predictors of stock market returns?

growth accruals and earnings quality volatility profitability

IP

growth rate in industrial production

Which of the following coefficients are the betas (also called loadings) of the stock on the three factors?

hi si bi

The equity premium puzzle describes the phenomenon that historical excess returns on risk assets are too ______ to be consistent with investors' attitudes towards risk.

high

Portfolios of low price-earnings (P/E) ratio stocks have ______ returns than high P/E portfolios _____ if they are adjusted for portfolio beta.

higher; even

Cyclical industries typically have ______ betas, and defensive industries typically have ______ betas.

higher; lower

Ms. Olson is managing a bond portfolio and her investment horizon is 3 years. If she tries to predict bond yields at the end of the 3 year period, calculate the future bond price based on the prediction, and also consider coupon income in order to obtain a forecast of the total return during her holding period, she is doing _____ analysis.

horizon

An analyst who selects a particular holding period and predicts the yield curve at the the end of that period is doing what form of interest rate forecasting?

horizon analysis

The term for matching the durations of assets and liabilities so as to make net worth unaffected by interest rate movements is _____

immunization

_______ can be an inappropriate goal in an _________ environment.

immunization, inflationary

When the coupon rate of a bond decreases, its duration ______.

increases

A mutual fund holding shares in proportion to their representation in the S&P 500 is an example of a(n) _________ fund.

index

If a firm's dividend were to grow faster than its market capitalization rate forever, its value would be ______.

infinite

The rate at which the general level of prices for goods and services is rising is the ______ rate

inflation

At the heart of many macroeconomic policy disputes is the perceived trade-off between ______ and ______

inflation; unemployment

____________ is said to be the most precious commodity on Wall Street, and competition of it is intense?

information

The number of dollars earned per dollar invested per period is the ________ rate.

interest

Many banks have a natural mismatch between the maturities of assets and liabilities; liabilities are primarily short-term deposits and assets are mostly long-term loans. This characteristic can make banks suffer serious decreases in net worth when ______.

interest rates increase unexpectedly

The _______ ______ swap is pursued when an investor believes that the yield spread between two sectors of the bond market is temporarily out of line.

intermarket spread

The present value of a firm's expected future net cash flows discounted by the required rate of return is the firm's ______ value.

intrinsic

Security P is a perpetuity, and Security Z is a zero coupon bond that has 15 years remaining until maturity. Both securities have a yield of 5%. The duration of Security P ______.

is longer than the duration of Security Z

When we evaluate the performance of a fund manager, the historical average return would be invalid as a performance measure because ______.

it does not adjust for risk

When we compare a fund with its benchmark index, the interpretation becomes more intuitive if we use M2 rather than the Sharpe ratio because ________

it shows the difference in return when portfolio variance is the same as market variance

The stock market has historically tended to be a ______ indicator.

leading

Suppose you invested $2,000 in a mutual fund two years ago, added $1,000 a year later, and redeemed all your shares today. If the fund returns for the first and the second year were 10% and 8% respectively, the dollar-weighted average return on your investment is ______.

less than the time-weighted average return

Placing a value on perfect timing enables us to assign value to ________-_______-_______ timers.

less- than-perfect

The progression of stages through which firms typically pass as they mature is referred to as the industry ______ ______

life cycle

The net amount that could be realized by selling the assets of a firm after paying its debt is the firm's ________ value.

liquidation

Broad market indexes demonstrate a strong or stronger momentum at _________ horizons, multiyear period

long

The _________ - _________ forward-looking view generates much higher values for systematic (consumption-based) risk and makes historical equity premium easier to justify

long-run

If two firms have the same expected earnings, the riskier stock will sell at a _______ price and _________ PE ratio and because of its _______ risk, the ________ PE stock also will have _______ expected returns

low;low;high;low;high

The difficulty of differentiating managers who have outperformed by chance or by skill is referred to as the _____ _____ issue in evaluating market efficiency

lucky event

An equivalent representation of Sharpe's ratio, proposed by Graham and Harvey, and later popularized by Leah Modigliani is dubbed the __________ measure.

m2

The _________ is the environment in which all firms operate and the ability to forecast can translate into specular investment performance.

macroeconomy

The difficulty in assessing small but meaningful managerial outperformance is referred to as the _________ issue in evaluating market efficiency.

magnitude

When its assumptions are satisfied and a stock is selling for its intrinsic value, the constant-growth dividend discount formula can be inverted to infer the ______ ______ rate for the stock.

market capitalization

A common term for the market-consensus value of the appropriate discount rate for a firm's cash flows is the ________ _________ _________

market capitalization rate

The price to earnings ratio can be thought of as the sum of the reciprocal of the ______ and the ______ relative to current earnings.

market capitalization rate; PVGO

_________ ________ involves shifting funds between a market-index portfolio and a safe asset, depending on whether the index is expected to outperform the safe asset.

market timing

The ICAPM and CCAPM begin with the idea that instead of measuring systematic risk based on the covariance of returns with the ________ return, we are better off using the covariance of returns with "aggregate" or economywide _________

market; consumption

If the ______ value of a firm drops below its ______ value, the firm becomes attractive as a takeover target.

market; liquidation

According to Roll's critique there is a single testable hypothesis associated with the CAPM: that the _______ portfolio is ________ -_________ efficient.

market; mean-variance

The ICAPM and CCAPM begin with the idea that instead of measuring systematic risk based on the covariance of returns with the ________ return, we are better off using the covariance of returns with "aggregate" or economywide ________

market;consumption

The percentage change in a bond's price from a change in interest rates is best approximated by the negative of the product of the change in the bond's yield to maturity and ______.

modified duration

Augmenting the original Fama-French model with a _________ factor led to a common four-factor model used to evaluate abnormal performance of a stock portfolio.

momentum

The tendency of poorly-performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods is referred to as the _________ effect

momentum

An active strategy interferes with portfolio evaluation by making the portfolio apparently ______ volatile and ______ the estimate of the Sharpe ratio.

more; lowering

In the region of _________ convexity, the price-yield curve exhibits an unattractive asymmetry.

negative

When the price-yield curve lies below its tangency line, as may be the case for a callable bond, the curve is said to have _______ convexity.

negative

Because small firms tend to be neglected by large institutional traders, their higher returns may be a form of compensation for risk associated with limited information which is referred to as the _______ firm effect

neglected

A rationale for the neglected-firm effect shows that ______ firms might be expected to earn higher _________ returns as compensation for risk associated with limited information

neglected; equilibrium

In an efficient capital market, only ______ or ______ information will make stock prices move.

new; unexpected