Exam #1: What is Finance?, Financial Market, Risk and Return 1 + 2

Which one of the followings is not related to Holding Period Return (HPR)?

Holding period return is the average rate of return of a set of values calculated using the products of the terms.

What refers to the propensity for people to allocate money for specific purposes?

Mental accounting

Which one of the followings is not related to Geometric Return or Mean?

The geometric mean is the sum of a series of numbers divided by the count of that series of numbers.

Which of the following is not the most important aspects of personal finance include:

Selling insurance to protect against risk and to ensure one's material standing is secure

If you have private information, under which informational form can you make excess returns?

Semi strong form

Investors commonly use standard deviation to predict future returns, but standard deviation assumes a normal distribution. As few return distributions come close to normal, ________ is a better measure on which to base performance predictions.

Skewness

Unsystematic risk is unique to a specific company or industry. Also known as "nonsystematic risk," "specific risk," "_____________ risk" or "residual risk," in the context of an investment portfolio, unsystematic risk can be reduced through _______________.

diversifiable, diversification

Which one of the followings is not related to risk premium?

A risk premium is the return in excess of the market return an investment is expected to yield.

Is Finance an Art or a Science?​

Both

A perfect positive correlation means that the correlation coefficient is exactly _. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect ________ correlation means that two assets move in opposite directions, while a ____ correlation implies no relationship at all.

1, negative, zero

Mutual funds provide ______ management of capital pooled by shareholders. The fund manager connects with shareholders through purchasing stock in companies he anticipates may outperform the market. By doing so, the manager provides shareholders with assets, companies with _______ and the market with _________.

active, capital, liquidity

The standard deviation is a statistic that measures the __________ of a dataset relative to its mean and is calculated as the square root of the variance. It is calculated as the square root of variance by determining the _________ between each data point relative to the mean. If the data points are further from the mean, there is a higher deviation within the data set; thus, the more spread out the data, the ______ the standard deviation.

dispersion, variation, higher

The geometric mean is an important tool for calculating portfolio performance for many reasons, but one of the most significant is it takes into account the _______ __ ___________.

effects of compounding

The primary role of financial markets is to __________ the flow of funds from individuals and businesses that have _______ funds to individuals, businesses, and governments that need funds in excess of their incomes​.

facilitate, surplus

Eugene F. Fama, the 2013 Nobel Prize winner, defined a market to be "informationally efficient" if prices always incorporate all available information. The Efficient Market Hypothesis (EMH) states that it is __________ for investors to either purchase undervalued stocks or sell stocks for inflated prices. According to the theory, stocks always trade at their ____ value on stock exchanges, making it useless to try to __________ the market via expert stock selection or market timing.

impossible, fair, outperform

Finance is a term broadly describing the study and system of money, investments, and other financial instruments. Some people prefer to divide finance into three distinct categories:

public finance, corporate finance, and personal finance

Covariance evaluates how the mean values of ___ variables move together. In finance, covariances are calculated to help _________ security holdings.

two, diversify

Portfolio return refers to the gain or loss realized by an investment portfolio containing only one investment.

False

The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of beta (systematic risk).

False

The beta calculation is used to help investors understand whether a stock moves in the same direction as another stock, and how volatile or risky it is compared to that stock.

False

Which one of the financial markets is the most liquid market in the world?

Forex Market

Systematic risk is the risk of losing investments due to factors, such as political risk and macroeconomic risk, that affect the performance of the overall market. Systematic risk, also known as:

"undiversifiable risk," "volatility" or "market risk"

What is a measure of an investment's systematic risk relative to the overall market?

Beta

Which of the following is not one of the advantages of proprietorship?

Ease of raising capital: stocks and bonds

Businesses obtain financing through a variety of means. What are those?

Equity Investment and Credit Arrangements

A high standard deviation indicates a high degree of risk. The greater the amount of risk an investor is willing to take, the greater the potential return. Investors do not need to be compensated for taking on additional risk.

False

A lower standard deviation is necessarily preferable.

False

Financial services firms—such as broker-dealers, advisory firms and asset managers, as well as their professional representatives—do not need to register with the SEC to conduct business.

False

Which one of the following does not belong to the money market instruments?

Stocks

A real rate of return is adjusted for changes in prices due to inflation or other external factors.

True

The market risk premium is the return expected from the market above the risk-free rate.

True

The over-the-counter (OTC) market is an example of a secondary market.

True

Which informational form takes all information contained in past price movements is reflected in current market prices?

Weak form

Startups may receive capital from _____ ________ or _______ ___________ in exchange for a percentage of ownership. If a company thrives and goes public, it will issue shares on a stock exchange; such ______ ______ _________ (IPO) bring a great influx of cash into a firm. Established companies may sell additional shares or issue corporate bonds to raise money. Businesses may purchase dividend-paying stocks, blue-chip bonds, or interest-bearing bank certificates of deposits (CD); they may also buy _____ _________ in an effort to boost revenue.

angel investors, venture capitalists , initial public offerings, other companies

To assess a company based on environmental, social, and governance (ESG) criteria, investors look at a broad range of behaviors. Environmental criteria may include a company's energy use, waste, pollution, natural resource conservation, and treatment of animals. Social criteria look at the company's ________ relationships. With regard to __________ , investors may want to know that a company uses accurate and transparent accounting methods, and that stockholders are given an opportunity to vote on important issues.

business, governance

A nominal return is the net profit or loss of an investment expressed in nominal terms. It can be calculated by figuring the ______ in value of the investment over a stated time period plus any _____________ minus any outlays.

change, distributions

Personal financial planning generally involves analyzing an _________'s or a _______ 's current financial position, predicting short-term, and long-term needs, and executing a plan to fulfill those needs within individual financial constraints. Personal finance is a very personal activity that depends largely on one's earnings, living requirements, and individual _____ and desires.

individual, family, goals

The CAPM uses the principles of Modern Portfolio Theory to determine if a security is fairly valued. It relies on assumptions about:

investor behaviors, risk and return distributions, and market fundamentals.

Today the SEC brings numerous civil enforcement actions against firms and individuals that violate securities laws every year. It is involved in every major case of financial __________, either directly or in conjunction with the Justice Department. Typical offenses prosecuted by the SEC include accounting fraud, the dissemination of misleading or false information, and _______ _______.

misconduct, insider trading

The federal government helps prevent market failure by _________ the allocation of resources, distribution of income, and stabilization of the economy. Regular funding for these programs is secured mostly through __________. ____________ from banks, insurance companies, and other governments and earning dividends from its companies also help finance the federal government.

oversee, taxation, Borrowing