Finance
Which of the following statements correctly present recommendations based on behavioral finance?
Don't hesitate to sell a losing stock, be humble and open minded
Which of the following statements about rating agencies is true?
During the financial crisis of 2007-2009 it became clear that rating agencies severely underestimated the risks of some issues
A semi−annual coupon rate of 7% means that the bond will pay $70 interest every 6 months.
False
If a company's revenues and earnings are highly predictable, it's stock price will also be highly predictable
False
If half of or all actively managed mutual funds out perform the market indexes in any given year, the efficient market hypothesis cannot be valid
False
Investors skilled in exploiting behavioral errors and market anomalies can consistently outperform the market by a wide margin
False
Loss aversion is the behavior of excessively conservative investors
False
Research in psychology indicates that most people have very little faith in their ability to perform complex tasks
False
There is strong evidence that investors who trade frequently outperform the market
False
Which one of the following statements is correct?
Low P/E stocks tend to outperform high P/E stocks on a risk adjusted basis
Rhonda purchased a 12%, zero-coupon bond with a 20-year maturity and a $15,000par value 20 years ago. The bond matures tomorrow. How much will Rhonda receive in total from this investment, assuming all payments are made on these bonds as expected?
Rhonda will receive the $15,000 which represents the principal and accrued interest on the bond during its lifetime.
The practice of bundling mortgages of other types of loans into pools and selling pieces of the pool as bond like instruments to investors known as
SECURITIZATION
Which of the following accurately reflect appropriate investment guidelines?
Sell losing stocks unless you are willing to buy them at the current price, take corrective action when so indicated
Most bonds pay interest
Semiannually
A debenture is secured only by the issuer's promise to repay the debt
True
Although bond prices can move substantially up or down, the income stream is stable and predictable
True
A bond's rating will be affected by bond features as well as by the financial stability of the issuer.
True
In a efficient market, the only way to earn higher returns is t invest in riskier securities
True
Self - attribution is the trait of believing one's successful choices are the result of skill and hard work whereas failures are due to bad luck or the fault of others
True
Stocks of small companies have a historical tendency to outperform large cap stocks in the month of January
True
The process of buying an underpriced security and selling an equivalent overpriced security until the prices converge is known as arbitrage
True
The risk premium component of a bond's market interest rate is related to the characteristics of the particular bond and its issuer.
True
When a bond is called, the investor faces the prospect of reinvesting the funds at a lower rate.
True
The rapid decline in value and near collapse of mortgage backed security market in 2007-2008 was initiated by
a decline in real estate values
An efficient market reflects
all information including predictions about future information
The tendency of naive investors to buy high and sell low can be explained by the behavioral tendency known as
anchored
Which of the following characteristics are referred to as representativeness?
basing conclusions on small samples, underestimating the effects of random chance
The stock price of PHRM declined by 30% when the FDA did not approve a promising new therapy the company was developing. Patrick holds on to the stock and constantly searches the internet looking for favorable stories about the company while ignoring a cascade of negative reports. This is an example of
belief perseverance
Which of the following types of risk affect bonds?
call risk business risk purchasing power risk liquidity risk
There is evidence to support the contention that company insiders
can profit in a manner that counters the strong form of the efficient market hypothesis
In a severe recession, the major source of risk faced by investors who purchase junk bonds is
default risk
Which type of risk is based on the financial integrity of a bond issuer?
default risk
Which of the following are advantages of owning bonds?
diversification properties current income lower risk than stocks
Collateralized mortgage obligations are relatively low-risk investments
false
Subordinated debentures
have a lower claim on assets than simple debentures
Bob expects to retire in a few years and his primary goal is to avoid major losses in his 401-K account. Which of the following bond characteristics should he be seeking?
high ratings short maturities
People tend to
ignore information that contradicts their current beliefs
Under normal economic conditions, the major source of risk faced by investors who purchase investment grade bonds is
interest rate risk
Which one of the following variables has the greatest effect on bond prices?
interest rates
Bond investors will experience capital gains when
market interest rates are falling.
One market anomaly that offers some evidence in support of charting or other forms of technical analysis is
momentum
Heather has the equivalent of one year's income in an insured savings account. Her 401−K fund offers a choice of a government bond fund, an S&P 500 Index fund, and a balanced fund that holds roughly equal amounts of stocks and bonds. If she decided to allocate 1/3 of her retirement investments to each fund, she may be a victim of
narrow framing
The strong form of the efficient market hypothesis contends that
no one can consistently earn abnormal profts
In an efficient market prices appear to move randomly because
only new information affects stock prices
Which of the following are common but dysfunctional investor behaviors?
over-investing in companies with familiar names, dividing their funds equally among available choices, even if several of the choices serve the same purpose, overestimating one's ability to pick successful investments
Four "decision traps" identified by behavioral finance are
overconfidence, representativeness, loss aversion, narrow framing
Which of the following would invalidate the weak form of the efficent market hypothesis
patterns in price behavior that consistently predict future price movements
According to the semi - strong form of the efficient market hypothesis, which of the following might lead to extraordinary profits?
possessing private information not available to other investors
Believers inefficient markets tend to explain away market anomalies as
random occurrences that create an illusion of casualty, errors resulting from inaccurate measures of risk
when the economy is moving toward a recession, the yield on riskier bonds will tend to
rise
Under which bond provision is the issue prior to maturity
sinking fund feature
Even after adjusting for risk, ---- firms have, over long periods of time, earned higher returns than ---- firms
small; large
Bonds are rated by
standard and poors moody's fitch's
Efficient market proponents tend to explain market anomalies as
temporary phenomena, statistical accidents, inaccurate risk measurements
When a bond's rating changes from AA to A and investors did not anticipate the change
the coupon rate will stay the same and the price will fall
Followers of the random walk hypothesis believe that
the price movements of stocks are unpredictable, and therefore security analysis will not help to predict future market behavior
Which of the following statemnts are correct in respect to high yield bonds?
they are junk bonds with highly unpredictable rates of return the issuing corporation usually has an excessive amount of debt the possess a high level of default and market risk they are often subordinated debentures
Which of the following are true concerning bond ratings?
they have a greater impact on the price and yield of jumk bonds that on investment grade bonds they provide investors with a convenient way to assess the relative risk of various bond issues they have a significant effect on a bonds price and yield
I fyou want to reduce the price volatility of your bond portfolio, you should shorten the time to maturity of your portfolio
true
Municipal bonds are most attractive to residents of states with high income tax rates
true
the various CMO tranches can have significantly different degrees of prepayment risk
true
A note is generally defined as debt with a initial term to maturity of
two to ten years