Investments test 2

According to the semistrong-form of the efficient market hypothesis, ____________. stock prices do not rapidly adjust to new information future changes in stock prices cannot be predicted from any information that is publicly available corporate insiders should have no better investment performance than other investors even if allowed to trade freely arbitrage between futures and cash markets should not produce extraordinary profits

future changes in stock prices cannot be predicted from any information that is publicly available

The __________ reward-to-variability ratio is found on the __________ capital market line. lowest; steepest highest; flattest highest; steepest lowest; flattest

highest; steepest

A security's beta coefficient will be negative if __________. its returns are negatively correlated with market-index returns its returns are positively correlated with market-index returns its stock price has historically been very stable market demand for the firm's shares is very low

its returns are negatively correlated with market-index returns

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie __________ the current investment opportunity set. left and above left and below right and above right and below

left and above

The efficient frontier represents a set of portfolios that: maximize expected return for a given level of risk. minimize expected return for a given level of risk. maximize risk for a given level of return. None of the options are correct.

maximize expected return for a given level of risk.

Diversification is most effective when security returns are __________. high negatively correlated positively correlated uncorrelated

negatively correlated

According to the capital asset pricing model, a fairly priced security will plot __________. above the security market line on the security market line below the security market line at no relation to the security market line

on the security market line

An investor's degree of risk aversion will determine their __________. optimal risky portfolio risk-free rate optimal mix of the risk-free asset and risky asset capital allocation line

optimal mix of the risk-free asset and risky asset

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 __________. fairly priced overpriced underpriced None of these answers are correct

overpriced

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM __________. places less emphasis on market risk recognizes multiple unsystematic risk factors recognizes only one systematic risk factor recognizes multiple systematic risk factors

recognizes only one systematic risk factor

If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the __________. stock's standard deviation variance of the market stock's beta covariance with the market index

stock's standard deviation

You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the __________ form of the EMH. semistrong strong weak perfect

weak

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 25%, while stock B has a standard deviation of return of 19%. Stock A comprises 70% of the portfolio, while stock B comprises 30% of the portfolio. If the variance of return on the portfolio is 0.045, the correlation coefficient between the returns on A and B is __________. 0.558 0.3900 .1670 .106

0.558

The part of a stock's return that is systematic is a function of which of the following variables? 1. Volatility in excess returns of the stock market 2. The sensitivity of the stock's returns to changes in the stock market 3. The variance in the stock's returns that is unrelated to the overall stock market 1 only 1 and 2 only 2 and 3 only 1, 2, and 3

1 and 2 only

Among the important characteristics of market efficiency is (are) that: 1. There are no arbitrage opportunities. 2. Security prices react quickly to new information. 3. Active trading strategies will not consistently outperform passive strategies. 1 only 2 only 1 and 3 only 1, 2, and 3

1, 2, and 3

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 17%? 0.50 .71 .01 1.2

1.2

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is __________. 23.0% 19.76% 18.45% 17.67%

19.76%

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser 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 adviser was the better stock picker? Advisor A was better because he generated a larger alpha. Advisor B was better because she generated a larger alpha. Advisor A was better because he generated a higher return. Advisor B was better because she achieved a good return with a lower beta.

Advisor A was better because he generated a larger alpha.

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? Weak-form efficiency Semistrong-form efficiency Strong-form efficiency Technical analysis

Strong-form efficiency

Proponents of the EMH typically advocate __________. a conservative investment strategy a liberal investment strategy a passive investment strategy an aggressive investment strategy

a passive investment strategy

The semistrong-form of the EMH states that __________ must be reflected in the current stock price. all security price and volume data all publicly available information all information, including inside information all costless information

all publicly available information

Asset A has an expected return of 15% and a reward-to-variability ratio of 0.4. Asset B has an expected return of 20% and a reward-to-variability ratio of 0.3. A risk-averse investor would prefer a portfolio using the risk-free asset and __________. asset A asset B no risky asset The answer cannot be determined from the data given.

asset A

Arbitrage is based on the idea that __________. assets with identical risks must have the same expected rate of return securities with similar risk should sell at different prices the expected returns from equally risky assets are different markets are perfectly efficient

assets with identical risks must have the same expected rate of return

In the context of the capital asset pricing model, the systematic measure of risk is best captured by __________. unique risk beta the standard deviation of returns the variance of returns

beta

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is __________. directly related to the risk aversion of the particular investor inversely related to the risk aversion of the particular investor directly related to the beta of the stock inversely related to the alpha of the stock

directly related to the beta of the stock