4050 Final

Sarbanes-Oxley Act

- requires corporations to have more independent directors. - requires the firm's CFO to personally vouch for the firm's accounting statements. - prohibits auditing firms from providing other services to clients.

Differences between hedge funds and mutual funds are that

-hedge funds are only subject to minimal SEC regulation. B. hedge funds are typically open only to wealthy or institutional investors. C. hedge fund managers can pursue strategies not available to mutual funds, such as short selling, heavy use of derivatives, and leverage. D. hedge funds are commonly structured as private partnerships.

___________ a relationship between expected return and risk.

Both CAPM and APT stipulate

Which of the following portfolio construction methods starts with security analysis?

Bottom-up you start from the bottom aka the actual securities

The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the

Federal funds rate

When borrowing and lending at a risk-free rate are allowed, which capital allocation line (CAL) should the investor choose to combine with the efficient frontier?

I) The one with the highest reward-to-variability ratio. II) The one that will maximize his utility. III) The one with the steepest slope.

Which of the following are mechanisms that have evolved to mitigate potential agency problems?

I) Using the firm's stock options for compensation III) Boards of directors forcing out underperforming management IV) Security analysts monitoring the firm closely V) Takeover threats

In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor?

It is the locus of portfolios that offer the same utility according to returns and standard deviations.

Single men trade far more often than women. This is due to greater ________ among men.

Overconfidence

Which of the following is not a source of systematic risk?

Personnel changes.

Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the S&P 500 should choose

SPY

what is false regarding open-end mutual funds?

The fund offers a guaranteed rate of return (no mutual fund does this!)

Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?

The multifactor APT

Which of the following portfolio construction methods starts with asset allocation?

Top-down you start from the top aka asset classes

The largest component of the bond market is _______ debt.

Treasury followed by federal agency and then corporate

________ is a risk measure that indicates vulnerability to extreme negative returns.

Value at risk B. Lower partial standard deviation C. Expected shortfall

An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.

Zero

Studies of positive earnings surprises have shown that there is

a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.

The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called

arbitrage

The premise of behavioral finance is that

conventional financial theory ignores how real people make decisions and that people make a difference

Basu (1977, 1983) found that firms with low P/E ratios

earned higher average returns than firms with high P/E ratios.

financial assets permit all of the following except

elimination of risk DO allow consumption timing, allocation of risk, separation of ownership and control

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always

equal to zero.

In a multifactor APT model, the coefficients on the macro factors are often called

factor sensitivities and factor betas.

Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had average monthly returns of _______, while the stocks of firms within the lowest decile of book-to-market ratios had average monthly returns of ________.

greater than 1%; less than 1%

Researchers have found that most of the small firm effect occurs

in January.

Some economists believe that the anomalies literature is consistent with investors'

inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions.

Proponents of the EMH typically advocate

investing in an index fund and a passive investment strategy.

The expected return of a portfolio of risky securities

is a weighted average of the securities' returns.

Which of the following orders instructs the broker to buy at or below a specified price?

limit-buy order

The presence of risk means that

more than one outcome is possible.

open ended vs close ended funds

open end: redeem and issue shares at their net asset value, investors can "cash out" their shares closed end: do not redeem or issue shares, must sell to other investors (may trade on exchanges)

Treasury Inflation-Protected Securities (TIPS)

provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

The APT differs from the CAPM because the APT

recognizes multiple systematic risk factors

In words, the covariance considers the probability of each scenario happening and the interaction between

securities' returns relative to their mean returns.

In an efficient market,

security prices react quickly to new information, security prices are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently.

If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders.

semistrong

You sold JCP stock short at $80 per share. Your losses could be minimized by placing a

stop-buy order

The anomalies literature

suggests that several strategies would have provided superior returns.

Nondiversifiable risk is also referred to as

systematic risk, market risk.

Market risk is also referred to as

systematic risk, nondiversifiable risk.

Banz (1981) found that, on average, the risk-adjusted returns of large firms

were lower than the risk-adjusted returns of small firms.