FIN 492 Final Review

A firm with an "economic moat" is one for which potential competitors would have little difficulty taking market share from the firm by replicating its products or services.

False

A resistance level is the price range at which the technician would expect an increase in the demand of stock and a price reversal.

False

An increase in the required rate of return k will tend to cause an increase in the P/E ratio

False

At the most fundamental level, the time value of money exists because bankers and other lenders are greedy.

False

Even prior to the work of Markowitz in the late 1950's, there was already widespread use of statistical measures of risk and return among portfolio managers

False

Even when fees and costs are considered, most mutual fund managers outperform the aggregate market.

False

For a two stock portfolio containing Stocks i and j, the correlation coefficient of returns (rij) is equal to the covariance (covij) of returns multiplied by the product of the two stocks' standard deviations.

False

Fundamentalists (those who support fundamental analysis) contend that past price movements will indicate future price movements.

False

In terms of an individual's life cycle, the spending phase typically occurs when investors are relatively young.

False

Increasing the correlation among assets in a portfolio results in an decrease in the standard deviation of the portfolio.

False

Individual security selection is far more important than the asset allocation decision.

False

Strategic asset allocation frequently adjusts the asset class mix in the portfolio to take advantage of changing market conditions.

False

Tests have shown that if small filters are used in simulating trading rules, these trading rules have produced above average returns after transactions costs are factored in.

False

The coefficient of variation is a measure of "co-movement" which indicates the average level of correlation among the various components in an investment portfolio.

False

The cyclical indicator approach to market analysis is based on the belief that the economy expands and contracts in a random manner.

False

The geometric mean of a series of returns is always larger than the arithmetic mean, unless the rates of return are the same for each of the individual time periods being considered,

False

The holding period return (HPR) is equal to the holding period yield (HPY) multiplied by the number of compounding periods during a calendar year.

False

The potential rate of return is the only important consideration when establishing investment objectives

False

The standard deviation of returns for a portfolio of risky assets is a simple weighted average of the standard deviations for the individual investments.

False

The typical investor's goals are unlikely to change during his/her lifetime.

False

The weak form of the efficient market hypothesis (EMH) contends that stock prices fully reflect all public and private information.

False

The weak-form efficient market hypothesis assumes all publicly available information is reflected in current stock prices.

False

Completeness funds are portfolios that are designed to generate returns which follow those of a comprehensive, global stock index such as MSCI-Dow Jones Global stock index.

Falses

Which of the following is not one of the four general categories of technical trading rules?

Follow through reversal triggers

A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives.

True

A corporation's earnings growth and dividend yield will be impacted by GDP growth, so analysts are generally concerned with the likely future state of the economy.

True

A cyclical company's sales and earnings are heavily influenced by the aggregate level of business activity.

True

A growth investor focuses on the current and future economic "story" of a company, with less regard for share valuation.

True

A low-risk strategy, such as capital preservation is usually an inappropriate investment objective for a typical 25-year-old investor.

True

A portfolio is "efficient" if no other asset or portfolio can provide a higher expected return with the same (or lower) risk, or a lower level of risk with the same (or higher) expected return

True

A portfolio manager who uses tactical asset allocation is attempting to create alpha.

True

An efficient capital market is one in which prices fully reflect all available information and rapidly adjust to new information.

True

An investment is the current commitment of dollars for a period of time to derive future payments that will compensate the investor for the time funds are committed, the expected rate of inflation, and the uncertainty of future payments.

True

An investment policy statement specifies the types of risks the investor is willing to take and his or her investment goals and constraints.

True

Analysts have a difficult time trying to estimate which tax rates will be in place in the future, because tax rates result out of the political process and the tax code is therefore not necessarily logical.

True

As outlined in the textbook, the third step of the portfolio management process is to implement the plan by constructing the portfolio.

True

As the number of risky assets in a portfolio increases, the total risk of the portfolio decreases

True

Asset allocation is the process of deciding how to distribute an investor's wealth among different asset classes for investment purposes.

True

Because an individual company's stock may be temporarily either overvalued or undervalued, growth companies do not necessarily have growth stocks.

True

Because numerous investors believe in and use technical analysis, large investment firms provide extensive support for technical analysis, and a large proportion of the discussion related to securities market in the media is based on a technical view of the market.

True

Because technicians are suspicious of financial statements, they consider it advantageous not to depend on them.

True

Behavioral finance considers how various psychological traits affect how individuals or groups act as investors, analysts, and portfolio managers.

True

Capital market theory expanded the concepts introduced by Markowitzian portfolio theory by introducing the notion that investors could borrow or lend at the risk-free rate in addition to forming efficient portfolios of risk assets

True

Consumer expectations are considered relevant as the economy approaches cyclical turning points.

True

Demographics are an example of a non-cyclical factors which can potentially cause significant changes to an economy.

True

Even though some of the assumptions required for the formal development of the "capital market theory" are unrealistic, the theory itself is nonetheless applicable as a reference in real world portfolio management.

True

Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.

True

For technical trading rules to consistently generate superior returns, the market would have to be inefficient.

True

Fusion investing is the integration of two elements of investment valuation - fundamental value and investor sentiment.

True

If the factors determining the nominal risk free rate were to change, then the required rate of return on all types of investments would be equally impacted.

True

In the context of portfolio theory, the "efficient frontier" is the set of all portfolios which are deemed "efficient" with respect to risk and return.

True

In the general understanding, a risk-free asset is one for which the return is completely certain, so the standard deviation of the such an asset's returns would be equal to zero.

True

In virtually every past year, the clear majority of active portfolio managers have underperformed relative to their appropriate benchmarks.

True

Individual real estate assets have historically had much lower standard deviations than, and either low positive or negative correlations with, other asset classes in a portfolio context.

True

Insured asset allocation is a strategy to limit investment losses by shifting funds between an existing equity portfolio and a risk-free security.

True

It is essential that both the client and the portfolio manager agree on an appropriate benchmark portfolio which reflects the risk preferences and appropriate return requirements of the client.

True

It is generally assumed that investors are risk averse, which means that if everything else is the same, the investor will select the investment that offers less risk.

True

Leading indicators of the business cycle include economic series that reach peaks or troughs before the peaks and troughs of the overall economy.

True

Liquidity risk is low for investments which can be quickly sold in the secondary market for a price which reflects the investment's full value.

True

Long-term, high-priority financial goals include some form of financial independence, such as the ability to retire at a certain age.

True

Most experts recommend a cash reserve equal to at least six month's worth of living expenses.

True

One way to distinguish between the strategies adopted by various portfolio managers is to decompose the total actual return that the portfolio manager attempts to produce into a passive and an active component.

True

Present value of free cash flow to equity (FCFE) resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.

True

Results from studies on the effects of unexpected world events have consistently indicated that the price change is so rapid that it takes place between the close of one day and the opening of the next day.

True

Results of initial public offering (IPOs) studies tend to support the semi-strong EMH because it appears that prices adjusted rapidly after initial underpricing.

True

Studies of corporate insiders did not support the strong-form hypothesis.

True

Technical analysts believe that security prices do not adjust rapidly.

True

The "random walk hypothesis" contends that changes in stock prices occur randomly, following no discernible pattern.

True

The CML's man contribution is the relationship it specifies between the risk and return of a well-diversified portfolio.

True

The Markowitz model of portfolio behavior assumes that investors base decisions solely on expected return and risk.

True

The authors of the text prefer forward valuation ratios as opposed to historical valuation variables in relative valuation methods.

True

The capital market line (CML) is the tangent line between the risk-free rate of return and the efficient frontier.

True

The correlation coefficient and the covariance are measures of the extent to which two random variables move together.

True

The correlations between the assets in an investment portfolio are extremely relevant because the diversification effect in the portfolio depends on the relationships between the individual financial assets.

True

The distinguishing characteristic of the Shiller P/E Ratio (CAPE Multiple) is that it is based on the inflation adjusted average earnings of the company over a ten year period instead of just a single year's earnings.

True

The economy and the stock market have a strong, consistent relationship, but the stock market generally turns (changes direction) before the economy does.

True

The expected return used in investment analysis is a probability weighted average of possible future rates of return.

True

The goal of active equity management is to earn a return that exceeds the return of a passive benchmark portfolio, net of transaction costs, on a risk-adjusted basis.

True

The integrated asset allocation strategy separately examines capital market conditions and the investor's objectives and constraints.

True

The price-to-sales ratio is considered the predominant firm valuation multiple for many of the so called "unicorn" digital economy companies, because many of these companies have not generated positive earnings until well after their IPOs.

True

The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.

True

The primary contribution of capital market theory is that it suggests the equilibrium rate of return of an investment portfolio can be modeled as a linear function of the risk-free rate and a risk premium which depends on the individual portfolio's risk.

True

The rate of exchange between certain future dollars and certain current dollars is known as the pure rate of interest (or, pure time value of money)

True

The returns from the overall market (or an individual stock) can be thought of as a combination of three factors: earnings growth, multiple expansion (or contraction), and dividend yield.

True

The risk premium is the amount by which the required rate of return exceeds the nominal risk free rate whenever investors perceive that there is uncertainty about the expected rate of return.

True

The term "Seeking Alpha" immediately suggests a active investment management approach.

True

The textbook suggests that life insurance coverage should be a component of any financial plan.

True

The theoretical market portfolio consists of all risky assets - not just equities available in the investor's home country market

True

The three basic techniques for constructing a passive index are: full replication, sampling, and quadratic optimalization.

True

The variance of expected returns is one of the common measures of the risk of expected returns.

True

The weak form of the efficient market hypothesis implies that technical trading rules should have little value.

True

Tracking error can be defined as the extend to which return fluctuations in the managed portfolio are not correlated with return fluctuations in the benchmark.

True

Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index

True

Under standard capital market theory, an individual investor chooses his or her portfolio somewhere along the efficient frontier based on his or her personal utility function which reflects his or her individual attitude towards risk.

True

Value stocks are those that appear to be undervalued for reasons other than earnings growth potential.

True

While the correlation coefficient can only have values which range from -1.0 to +1.0, the covariance can have any value from.

True

With a differentiation strategy, a firm seeks to identify itself as unique in its industry in an area that is important to buyers.

True

With respect to fixed income securities, an increase in the credit spread is seen as an indication that the majority of market participants are expecting weakening economic activity in the future.

True

With respect to typical patterns of net worth over an individual's life time, the gifting phase is similar to, and may be concurrent with, the spending phase.

True

Without access to superior analytical advice, you should run your portfolio like and index fund or an ETF.

True