Fin Quizzes Ch 21, 22, 11, & 12
Which of the following rates of inflation is appropriate to consider for a long-term investor? A) 13% - the rate of inflation in 1979-80, the most recent high inflation period B) 7.5% - the rate of inflation in the 1970's C) 3% - the average inflation over the past 80 years D) Zero - inflation has been very low in recent years
3% - the average inflation over the past 80 years
Which of the following is not a change in investor's circumstance that may require a review of portfolio policies? A change in liquidity requirements A changes in interest rates A change in tax circumstances A change in wealth
A changes in interest rates
Which of the following is not one of the features required for an efficient market? Investors react quickly to information A few large investors dominate the market Information is costless Information is generated randomly
A few large investors dominate the market
Which fund would be the best choice for an investor? A fund lying at the far right-end of the CML A fund lying on the CML at the investor's desired risk level A fund lying above the CML at the investor's desired risk level A fund lying below the CML at the investor's desired risk level
A fund lying above the CML at the investor's desired risk level
Which of the following is not an appropriate investment objective for the individual situation cited? A) A middle-aged parent needs to accumulate funds for college and retirement, so she seeks safer, less lucrative investments B) A person approaching retirement finds he has little or no retirement assets, so he shifts into riskier investments to build up retirement assets C) A young, single person can assume relatively large risks D) A retired person needs to stretch limited funds for a long life, so she needs very safe investments
A person approaching retirement finds he has little or no retirement assets, so he shifts into riskier investments to build up retirement assets
What is the most important factor affecting the price movement of common stocks? The country where the company has its headquarters The Federal Reserve's position towards interest rates Industry factors Aggregate market movements
Aggregate market movements
Investors attempt to find and exploit information in the stock market, and by doing so, these investors help improve market efficiency. This paradox best aligns with what statement? Academic studies confirm markets are relatively efficient As investors seek to profit from information, price movements reveal this information to others It is becoming more and more difficult to beat the market Institutional investors who can consistently profit in today's market, like those who manage hedge funds, are smarter and/or harder working than individual investors
As investors seek to profit from information, price movements reveal this information to others
Which of the following decisions comes first and is the most important for successful investing? Portfolio formation Security selection Asset allocation Portfolio performance assessment
Asset allocation
Which of the following is not part of the process of ongoing portfolio management? A) Assume additional risk to compensate for any previous investment losses incurred B) Rebalance the portfolio as necessary C) Measure portfolio performance D) Determine capital markets expectations for the economy, industries and sectors
Assume additional risk to compensate for any previous investment losses incurred
Which of the following is the best definition of Behavioral Finance? Behavioral Finance studies how finance behaves Behavioral Finance shows investor biases and emotions exist and affect stock prices Behavioral Finance studies how financial market participants act socially, underscoring the importance of networking Behavioral Finance studies what "rational" behavior means for investors
Behavioral Finance shows investor biases and emotions exist and affect stock prices
Which of the following procedures would be considered "passive?" Buying an index fund Market timing Sector rotation Technical analysis
Buying an index fund
What are the two basic approaches to portfolio rebalancing? Buy and hold and constant mix Strategic and tactical Quarterly and annually Calendar and percent-of-portfolio
Calendar and percent-of-portfolio
Which of the following is the best description of the objective of portfolio management? A) Avoiding any risk B) Choosing an appropriate balance of risk and reward C) Minimizing risk D) Maximizing return
Choosing an appropriate balance of risk and reward
Which of the following is not an aspect of portfolio performance measurement? How much money did the investor get? Was the return on the portfolio, after expenses, adequate? What return could have been earned, if a similar risk investment was chosen instead? How much risk did the investor take in holding the portfolio?
How much money did the investor get?
Which of the following is not a reason provided for the outperformance of index funds relative to actively managed funds? Index funds have professional, experienced managers Index funds have lower expenses than active funds Index funds often have tax advantages Active funds pay heavy trading and management expenses
Index funds have professional, experienced managers
What is the most important determinant of stock prices in markets that are said to be efficient? The high technology system that connects buyers and sellers Information about past events and beliefs about future events The "irrational" behavior of some market participants The number of large participants relative to smaller participants
Information about past events and beliefs about future events
Which of the following describes how investors can reduce the possible conflict of interest pertaining to securities analysts employed by major investment banks? Investors may follow analysts with the most "sell" recommendations Investors may follow the advice of those analysts whose firms also have lucrative investment banking contracts with the company under review Investors may want to use information prepared by analysts not associated with major investment banks Investors could follow the "buy," "sell," or "neutral" recommendation without considering the underlying reasons
Investors may want to use information prepared by analysts not associated with major investment banks
Which of the following is not an appropriate measure of risk? Total risk, as measured by standard deviation Systematic risk, as measured by beta Jensen's alpha Coefficient of determination, R2
Jensen's alpha
Which of the following is a reason that sell-side analysts are unlikely to rate companies "sell?" The brokerage firm that employs the analyst gets little commission when customers sell down-rated companies Many analysts think "sell" recommendations restrict their access to management The brokerage firm that employs the analyst also owns the company being analyzed "Sell" recommendations are less believable than "buy" recommendations
Many analysts think "sell" recommendations restrict their access to management
Sam made several additions to his mutual fund throughout the year and now wants to calculate the fund's annual return. Which of the following measures should he use? None of these calculations is correct Simple percentage return (Ve - Vb) / Vb Money-weighted return; finding the fund's IRR Time-weighted return; geometrically linking the sub-period returns
Money-weighted return; finding the fund's IRR
The use of technical analysis to outperform the market is consistent with which form of the Efficient Markets Hypothesis? None Strong-form Weak-form Semistrong-form
None
Which of the following is most consistent with the life-cycle theory? Older investors become less risk averse Young, single investors are most risk averse Middle age investors are most risk averse Older investors become more risk averse
Older investors become more risk averse
If an investor buys shares in an index fund such as the Vanguard 500 Index fund, what strategy is he or she following? Fundamental analysis International diversification Passive investment Active investment
Passive investment
Research suggests company insiders can earn abnormal returns on their stock transactions. What does this research mean for the Efficient Market Hypothesis (EMH)? Profitable insider trading contradicts the weak form of the EMH Profitable insider trading contradicts the semi-strong form of the EMH Profitable insider trading contradicts the strong form of the EMH Insider trading has nothing to do with the EMH
Profitable insider trading contradicts the strong form of the EMH
If we are to assess performance carefully, we must do so on what kind of basis? Diversified Quarterly Risk-adjusted Attribution-weighted
Risk-adjusted
Which form of the Efficient Markets Hypothesis implies that using published financial statement data does not consistently lead to abnormal returns? Strong-form Weak-form None Semistrong-form
Semistrong-form
Which is a difference between the Sharpe and Treynor measures? Sharpe and Treynor express the same concept in a different format Sharpe divides by standard deviation, whereas Treynor divides by beta Sharpe assumes the portfolio is fully diversified, Treynor does not make this assumption Sharpe divides by beta, whereas Treynor divides by standard deviation
Sharpe divides by standard deviation, whereas Treynor divides by beta
Which of the following is a possible explanation for the size effect? Small cap stocks may be difficult to buy or sell (i.e. be illiquid) and less followed by analysts Some researchers have shown that small cap stocks often out-perform large cap stocks Small cap stocks are mainly in hi-tech industries About 25% of the Small Cap effect occurs in January
Small cap stocks may be difficult to buy or sell (i.e. be illiquid) and less followed by analysts
Which of the following is not included in the implementation of investing strategies? Portfolio optimization Security selection Tax considerations Asset allocation
Tax considerations
Which of the following is a possible disadvantage of rebalancing a portfolio? The risk-adjusted expected return of specific assets may change The asset allocation may move away from the plan Taxable accounts pay capital gains tax when holdings are sold Some assets will grow in value faster than others
Taxable accounts pay capital gains tax when holdings are sold
Sam invested in a mutual fund that invests in small companies. Which of the following indexes is most appropriate for Sam to use as a benchmark? The NASDAQ 100 Composite Index The Standard & Poor 500 Index The Dow Jones Average The Russell 2000 Index
The Russell 2000 Index
If the market is efficient, why do many investors follow active investment strategies? The active investor wants to build a well-diversified portfolio The active investor is interested in taking on less risk The active investor believes that the benefits of active management exceed the costs The active investor wants to reduce taxes
The active investor believes that the benefits of active management exceed the costs
Which company feature is not associated with the stock being an attractive investment? The company is based in the United States The company is trading at a discount to its peers The company is an innovative leader in its industry The company has a proven track record
The company is based in the United States
Which of the following is not an appropriate yardstick against which to measure the performance of a specific portfolio? A benchmark such as a published index A universe of similarly managed portfolios Major, well-known index funds The desires of the investor
The desires of the investor
What is measured in the numerator of the Sharpe ratio? The excess return of the portfolio The total return of the portfolio The risk-adjusted return of the portfolio The standard deviation of the portfolio
The excess return of the portfolio
What is the main advantage of a buy-and-hold strategy? The investor saves on commissions and other costs of active trading The investor re-adjusts her holdings as values change portfolio weights The investor uses the professional management of a mutual fund The investor often picks the best stocks
The investor saves on commissions and other costs of active trading
Which of the following is not a factor to consider in determining asset allocation? The investor's time horizon The investor's investment strategy The investor's risk tolerance The investor's return requirements
The investor's investment strategy
Research suggests that low P/E stocks outperform high P/E stocks. Why is this finding an anomaly? Low P/E stocks are temporarily out of favor, but may have strong prospects It appears to be a successful investing strategy Low P/E stocks are often weak companies The low P/E effect contradicts the semi-strong form of the EMH
The low P/E effect contradicts the semi-strong form of the EMH
Which of the following observations is most consistent with EMH? The low P/E effect The random walk The January effect The success of the Value Line Investment Survey
The random walk
According to Jensen's measure, which variable measures how well a fund manager has performed? ap Rpt RFt bp
ap
