Investments Exam 2 MC
What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 11%? A) 11% B) More than 11% C) Cannot be determined without the risk-free rate
11%
Why must you use a large number of stocks to test an asset pricing model? A) The asset pricing model may only apply to a few stocks B) A few stocks may have alphas strictly due to chance C) Alpha increases with the number of stocks tested D) Alpha is the sum of excess returns across multiple stocks
A few stocks may have alphas strictly due to chance.
A stock's alpha measures the stock's ___________ A) Expected return B) Abnormal return C) Excess return D) Residual return
Abnormal return
Which of the following is NOT an implication of the CAPM? A) All investors hold the market portfolio B) All investors' portfolios lie on the same capital allocation line C) All investors hold the optimal tangency portfolio D) All investors have the same complete portfolio
All investors have the same complete portfolio
Which of the following is NOT an assumption of the CAPM? A) There are no taxes/transaction costs B) All securities are tradeable by anyone C) All investors have the same info D) All investors have the same risk aversion
All investors have the same risk aversion
Under the CAPM, all investors: A) Choose the same point on the capital market line B) Choose to invest in the stock market C) Choose the same tangency portfolio D) Choose to hold the same complete portfolio
Choose the same tangency portfolio
Nearly half of all professionally managed funds are able to outperform the S&P 500 in a typical year A) Consistent B) Violation
Consistent
Stock prices tend to be predictably more volatile in January than in other months A) Consistent B) Violation
Consistent
The __________ is equal to the square root of the systematic variance divided by the total variance A) Covariance B) Correlation Coefficient C) Standard Deviation D) Reward-to-Variability Ratio
Correlation Coefficient
According to the CAPM, the risk premium an investor expects to receive on any stock/portfolio is __________ A) Directly related to the risk aversion of the particular investor B) Inversely related to the risk aversion of the particular investor C) Directly related to the beta of the stock D) Inversely related to the alpha of the stock
Directly related to the beta of the stock
Stock prices that are stable over time ___________ A) Indicate that prices are useful indicators of true economic value B) Indicate that the market isn't incorporating new information into current stock prices C) Ensure that an economy allocates its resources efficiently D) Indicates that returns follow a random-walk process
Indicate that the market isn't incorporating new information into current stock prices
Which of the following info wouldn't be used in fundamental analysis? A) Analyst recommendations B) Insider information C) Dividend forecasts D) Earnings announcements
Insider information
Suppose security A has a Sharpe ratio of 0.3 and an expected return of 7%, while security B has a Sharpe ratio of 0.5 and an expected return of 4%. The risk-free rate is 1%. Both assets are traded in highly liquid markets. Which of the following captures investors' response? A) Investors will sell security A & buy security B B) Investors will only buy security A C) Investors will sell security B & buy security A D) Investors will only buy security B E) What investors do will depend on what's in their portfolio
Investors will sell security A & buy security B
A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager ___________ A) Must have had superior stock selection B) Must have had superior asset allocation ability C) Must have had superior timing ability D) May or may not have outperformed the S&P 500 on a risk-adjusted basis
May or may not have outperformed the S&P 500 on a risk-adjusted basis
The possibility of arbitrage arises when _________ A) There is no consensus among investors regarding the future direction of the market, & thus trades are made arbitrarily B) Mispricing among securities creates opportunities for diskless profits C) 2 identically risk securities carry the same expected returns D) Investors don't diversify
Mispricing among securities creates opportunities for diskless profits
A stock w/a beta > 1 has A) Equal risk w/the market B) More risk than the market C) No risk w/the market D) Less risk than the market
More risk than the market
According to the capital asset pricing model, a security w/a ____________ A) Positive alpha is considered overpriced B) Positive alpha is considered underpriced C) Negative alpha is considered a good buy D) Zero alpha is considered a good buy
Positive alpha is considered underpriced
__________ is the measure of the dispersion of actual realized returns around the security characteristic line A) Market risk premium B) R-square C) Systematic variance D) Beta
R-square
When running a CAPM regression for stock ABC, you should: A) Regress stock ABC's excess returns on the market excess returns B) Regress stock ABC's excess returns on the market raw returns C) Regress stock ABC's raw returns on the market excess returns D) Regress stock ABC's raw returns on the market raw returns
Regress stock ABC's excess returns on the market excess returns
The measure of unsystematic risk can be found from an index model as ____________ A) Residual standard deviation B) R-square C) Degrees of freedom D) Sum of squares of the regression
Residual standard deviation
If you believe in the _________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that's available to only insiders A) Semistrong B) Strong C) Weak D) Perfect
Semistrong
Stock A has a market beta of 0.5 & a correlation w/market of 0.6. Stock B has a market beta of 0.6 & a correlation w/market of 0.6. Which stock is riskier from an investor's perspective? A) This cannot be determined from the info given B) Stock B C) Stock A D) Both stocks have the same risk
Stock B
The M^2 measure is a variant of ____________ A) The Sharpe measure B) The Treynor measure C) Jensen's alpha D) The appraisal ratio
The Sharpe measure
Suppose Stock ABC has an alpha of -0.5% & a beta of 1.3. Suppose your current portfolio has an alpha of 0.25% & a beta of 1. If you choose to short-sell the stock, which of the following statements is NOT true? A) The alpha of your portfolio will increase B) The systematic risk of your portfolio will decrease C) The beta of your portfolio will decrease D) The beta of your portfolio will increase
The beta of your portfolio will increase
The key difference between the conditional & unconditional CAPM is: A) The conditional CAPM depends on market conditions B) The unconditional CAPM assumes market volatility is constant over time C) The conditional CAPM assumes the beta isn't useful in calculating expected returns D) The unconditional CAPM assumes the firm's underlying risk doesn't change over time
The unconditional CAPM assumes the firm's underlying risk doesn't change over time
The correlation coefficient between 2 assets equals ___________ A) Their covariance divided by the product of their variances B) The product of their variances divided by their covariance C) The sum of their expected returns divided by their covariance D) Their covariance divided by the product of their standard deviations
Their covariance divided by the product of their standard deviations
Money managers that outperform the market (on a risk-adjusted basis) in one year are likely to outperform in the following year A) Consistent B) Violation
Violation
The tendency when the _______ performing stocks in one period are the best performers in the next & the current _________ performers are lagging the market later is called the reversal effect A) Worst; best B) Worst; worst C) Best; worst D) Best; best
Worst; best
According to the capital asset pricing model, fairly priced securities have ____________ A) Negative betas B) Positive alphas C) Positive betas D) Zero alphas
Zero alphas
The CAPM _____________ A) Predicts the relationship between risk & expected return of an asset B) Provides a benchmark rate of return for evaluating possible investments C) Helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace D) All of the options
All of the options
According to the capital asset pricing model, in equilibrium _________ A) All securities' returns must lie below the capital market line B) All securities' returns must lie on the security market line C) The slope of the security market line must be less than the market risk premium D) Any security with a beta of 1 must have an excess return of zero
All securities' returns must lie on the security market line
According to the capital asset pricing model, a fairly priced security will plot ___________ A) Above the security market line B) Along the security market line C) Below the security market line D) At no relation to the security market line
Along the security market line
The slope of the security characteristic line is the A) Market risk premium B) Sharpe ratio C) Expected return D) Beta
Beta
You know that firm XYZ is very poorly run. On a scale of 1 (worst) to 10 (best), you would give it a score of 3. The market consensus evaluation is that the management score is only 2. Should you buy or sell the stock? A) Buy B) Sell
Buy
If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing ______ and _______ A) Expected returns to fall; risk premiums to fall B) Expected returns to rise; risk premiums to fall C) Expected returns to rise; risk premiums to rise D) Expected returns to fall; risk premiums to rise
Expected returns to fall; risk premiums to fall
When the market risk premium rises, stock prices will __________ A) Rise B) Fall C) Recover D) Have excess volatility
Fall
When the vaccine for Coronavirus was approved, the slope of the SML likely ________ & stock prices _________ A) Steepened; decline B) Steepened; rose C) Flattened; rose D) Flattened; declined
Flattened; rose
Among the important characteristics of market efficiency is (are) that: I: There are no arbitrage opportunities II: Security prices react quickly to new information III: Active trading strategies will not consistently outperform passive strategies A) I only B) II only C) I & III only D) I, II, & III
I, II, & III
Which of the following are assumptions of the simple CAPM model? I: Individual trades of investors don't affect a stock's price II: All investors plan for one identical holding period III: All investors analyze securities in the same way & share the same economic view of the world IV: All investors have the same level of risk aversion A) I, II, & IV only B) I, II, & III only C) II, III, & IV only D) I, II, III, & IV
I, II, & III only
Suppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH? A) Yes B) No
No
Your roommate is an active stock picker. As a result, her portfolio is not well-diversified. She claims that markets are inefficient & she can identify mispricings. Suspicious of her claim, you use the CAPM to test her portfolio's returns for alpha. You find a positive alpha of 0.5% with a p-value of 0.01. Does this alpha support the claim that markets are inefficient? A) Yes, bc positive alphas can only be attained through identifying mispriced stocks B) No, bc the 0.5% alpha is compensation for her risk exposure of having an under-diversified portfolio C) Yes, bc the p-value says that the 0.5% alpha only occurs by chance 1% of the time D) No, bc the 0.5% alpha is compensation for un-modeled systematic risk
No, bc the 0.5% alpha is compensation for un-modeled systematic risk
Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the WEAK FORM of the efficient market hypothesis? A) The average rate of return is significantly greater than zero B) The correlation between the return during a given week & the return during the following week is zero C) One could have made superior returns by buying stock after 10% rise in price & selling after a 10% fall D) One could have made higher-than-average capital gains by holding stocks with low dividend yields
One could have made superior returns by buying stock after 10% rise in price & selling after a 10% fall
According to the capital asset pricing model, a security with a ___________ A) Negative alpha is considered a good buy B) Positive alpha is considered overpriced C) Positive alpha is considered underpriced D) Zero alpha is considered a good buy
Positive alpha is considered underpriced
If markets are semi-strong form efficient, which of the following is TRUE? A) Prices don't change over time B) Prices appear to be random C) Prices can be predicted by trading on publicly available info D) Prices can be predicted by past patterns in the stock prices
Prices appear to be random
The MakeMoney mutual fund reported a Fama-French 3-factor alpha of 0.4% each year for the past 10 years. Despite the fund's annual management fee of 0.5%, your roommate argues that you should invest in this fund given it's strong track record of beating the market. You decide against investing in the fund. Select the statement that fails to justify your decision A) The alpha will vary depending on the model used to measure it B) The alpha is due to the SMB and HML risk factors that are not included in the CAPM C) The cost of identifying the mispricing exceeds the value obtained from the mispricing D) The MakeMoney fund may just have been lucky for the past 10 years
The alpha is due to the SMB and HML risk factors that are not included in the CAPM
One of the main problems with the arbitrage pricing theory is ______________ A) Its use of several factors instead of a single market index to explain the risk-return relationship B) The intro. of nonsystematic-risk as a key factor in the risk-return relationship C) That the APT requires an even larger number of unrealistic assumptions than the CAPM D) The model fails to identify key macroeconomic variables in the risk-return relationship
The model fails to identify key macroeconomic variables in the risk-return relationship
Select the answer that most appropriately describes the relationship between expected returns & stock prices A) Price equals the present value of future cash flows. Therefore, prices are unrelated to expected returns B) When risk decreases, expected returns decrease, which causes prices to decrease C) When risk increases, expected returns increase, which causes prices to decrease D) When risk decreases, expected returns increase, which causes prices to decrease E) When risk increases, expected returns decrease, which cause prices to decrease
When risk increases, expected returns increase, which causes prices to decrease
Which of the following is evidence supporting the semi-strong form version of the efficient market hypothesis? A) A firm's stock always has a positive return in the month prior to it's annual year-end earnings release B) A firm's stock price drops after the CEO announces she intends to sell some of her stock C) A target firm's stock price increases several days prior to the announcement of it being acquired D) A mutual fund manager consistently outperforms the market by researching individual stocks
A firm's stock price drops after the CEO announces she intends to sell some of her stock
In comparing multiple assets, which of the following isn't a risk-adjusted measure of performance? A) Treynor ratio B) Comparison group C) CAPM alpha D) Beta E) M^2
Beta
In the context of the capital asset pricing model, the systematic measure of risk is captured by _____ A) Unique risk B) Beta C) The standard deviation of returns D) The variance of returns
Beta
Which of the following statements are TRUE if the efficient market hypothesis holds? A) It implies that future events can be forecast with perfect accuracy B) It implies that prices reflect all available information C) It implies that security prices change for no discernible reason D) It implies that prices do not fluctuate
It implies that prices reflect all available information
Most tests of semistrong efficiency are ___________ A) Designed to test wether inside information can be used to generate abnormal returns B) Based on technical trading rules C) Unable to generate any evidence of market anomalies D) Joint tests of market efficiency & the risk-adjustment measure
Joint tests of market efficiency & the risk-adjustment measure
You are using the M^2 measure to compare an active portfolio, the MakeMoney fund, to a benchmark portfolio, a passive market index fund. If the M&2 is negative, then the capital allocation line formed by the MakeMoney fund will be ________________ steep than the capital market line and you should invest in the ___________________ fund: A) Less; MakeMoney B) More; Market index C) More; MakeMoney D) Less; Market index
Less; Market index
You just inherited a large sum of money. You have decided to invest it all in a single well-diversified fund. When comparing different funds to invest in, which one of the following measures is most appropriate? A) Sharpe ratio B) M-square C) Alpha D) Treynor ratio E) Reward-to-volatility ratio
M-square
The joint hypothesis problem implies A) Markets are inefficient B) Market efficiency must be relative to an asset pricing model C) Mispricings must be driven by missing risk D) All asset pricing models are incorrect
Market efficiency must be relative to an asset pricing model
The slope of the security market line is the A) Beta B) Market risk premium C) Sharpe ratio D) Expected return
Market risk premium
Fundamental analysis is likely to yield best results for _________ A) NYSE stocks B) Neglected stocks C) Stocks that are frequently in the news D) Fast-growing companies
Neglected stocks
If the efficient market hypothesis holds, which of the following statements is FALSE? A) Security prices won't change when new info becomes known B) Security prices will exhibit a random walk C) Security prices won't be predictable D) The expected return-risk relationship must hold
Security prices won't change when new info becomes known
Which of the following is the least likely to be included in the portfolio of an active mutual fund? A) Stocks w/low market capitalization (i.e., small stocks) B) Stocks w/low trading volume C) Stocks w/headquarters near the mutual fund manager's office D) Stocks regularly discussed in the Wall Street Journal
Stocks regularly discussed in the Wall Street Journal
The broadest information set is included in the ____________ A) Weak-form efficiency argument B) Semistrong-form efficiency argument C) Strong-form efficiency argument D) Technical analysis trading method
Strong-form efficiency argument
Investors are compensated for exposure to _________ risk bc __________ risk can be diversified away A) Non-systematic; systematic B) Systematic; idiosyncratic C) Non-diversifiable; systematic D) Idiosyncratic; diversifiable
Systematic; idiosyncratic
In regard to the CAPM & Fama-French-3-factor (FF3F) models, select the statement that's NOT true A) The FF3F alpha will usually be smaller than the CAPM bc the additional risk factors explain more of the variation in returns B) The market beta will be larger in the FF3F model because the HML and SMB risk factors isolate the market risk C) The additional risk factors of HML and SMB capture some of the shortcomings of the CAPM model D) The FF3F R-square will usually be larger than the CAPM because the additional risk factors explain more of the variation in returns
The FF3F alpha will usually be smaller than the CAPM bc the additional risk factors explain more of the variation in returns
In a world where the CAPM holds, which one of the following is NOT a true statement regarding the capital market line? A) The capital market line always has a positive slope B) The capital market line is also called the security market line C) The capital market line is the best-attainable capital allocation line D) The capital market line is the line from the risk-free rate through the market portfolio
The capital market line is also called the security market line
What is the difference between the conditional and unconditional CAPM models? A) The conditional CAPM assumes the risk of the company is the same over time while the unconditional CAPM assumes the risk of the company varies over time B) The unconditional CAPM assumes monthly frequency, while the conditional CAPM assumes daily frequency C) The unconditional CAPM assumes the risk of the company is the same over time while the conditional CAPM assumes the risk of the company varies over time D) The conditional CAPM assumes monthly frequency, while the unconditional CAPM assumes daily frequency
The unconditional CAPM assumes the risk of the company is the same over time while the conditional CAPM assumes the risk of the company varies over time
Consider the Sharpe & Treynor performance measures. When a pension fund is large & well diversified in total & it has many managers, the _________ measure is better for evaluating individual mangers while the _________ measure is better for evaluating the manager of a small fund w/only 1 manager responsible for all investments, which may not be fully diversified A) Sharpe; Sharpe B) Sharpe; Treynor C) Treynor; Sharpe D) Treynor; Treynor
Treynor; Sharpe
Stock prices of companies that announce increased earnings in January tend to outperform the market in February A) Consistent B) Violation
Violation
Stocks that perform well in one week perform poorly in the following week A) Consistent B) Violation
Violation
