Investments Test 2

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach?

Passive investment

Duration is a concept that is useful in assessing a bond's _________.

Price Volatility

In a 1953 study of stock prices, Maurice Kendall found that ________

There were no predictable patterns in stock prices

Which of the following statistics cannot be negative?Covariance Variance E(r) Correlation Coefficient

Variance

When the market breaks through the moving average line from below, a technical analyst would probably suggest it is a good time to ___

buy the stock

the only way for behavioral patterns to persist in prices is if _______

sufficient limits to arbitrage activity are present

When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time.

survivorship bias

Choosing stocks by searching for predictable patterns in stock prices is called ________.

technical analysis

trading activity and average returns in brokerage accounts tends to be _______

negatively correlated

a debenture is ______

unsecured

a convertible bond has a par value of $1000 but its current market price is 975. The current price of the issuing company's stock is $28 and the conversion ratio is 35 shares. The bond's market conversion value is ________

$980

the standard deviation of return on investment A is .10 while the SD of return on investment B is .05 If the covariance of returns A and B is .0030, the correlation coefficient between the returns A and B is ______

.6

Problems with behavioral finance include:

1.) The behavioralists tell us nothing about how to exploit any irrationality 2.) The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes under reaction 2.) Like Technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait

The market portfolio has a beta of _________.

1.0

You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?

1.048

An investor can design a risky portfolio based on two stocks, A and B. Stock A has a standard deviation of return of 20%. Stock B has a standard deviation of return of 15%. The standard deviation of return on the minimum variance portfolio is ________

12%

A pension fund must pay out $1M next year, $2M the following year and then $3 million the year after that. If the discount rate is 8% what is the duration of this set of payments?

2.29 years

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B.

20%

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

21.6

the strong form of the efficient market hypothesis states that _______ must be reflected in the current stock prices

All information including inside information

Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration.

Always be higher than

Bonds rated _____ or better by Standard & Poor's are considered investment grade.

BBB

Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity.

More; Lower

Suppose that Country X is currently experiencing a 6% annual growth in GDP. Country Y is experiencing a 2% annual growth in GDP. a.) We expect the stock Market Index in country X to have future returns greater than those in country Y b.) we expect the stock market index in country X to have future returns less than those in country Y c.) This Doesn't give us enough information about future returns since GDP estimates are already impounded in the price d.) none of the above

C. This Doesn't give us enough information about future returns since GDP estimates are already impounded in the price.

Tariffs on trade a.) reduces the volume of international trade b.) results in consumers paying higher prices c.) decreases industry competition d.) can cause trade wars e.) all the above

E.) all the above

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________.

Eurobonds

Tests of mutual fund performance indicate that funds with ___ tend to have poorer performance

Higher expense and turnover ratios

When all investors analyze securities in the same way and share the same economic view of the world, we say they have ____________________.

Homogenous expectations

The primary difference between Treasury notes and bonds is ______

Maturity at Issue

The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________.

Momentum effect

conventional finance theory assumes investors are _____ and behavioral finance assumes investors are _____

Rational, irrational

_______ are examples of synthetically created zero coupon bonds

STRIPS

The Put/Call ratio is a _____ indicator

Sentiment

A measure of the riskiness of an asset held in isolation is ____________.

Standard Deviation

Investors require a risk premium as compensation for bearing ______________.

Systematic Risk

Inflation-indexed treasury securities are commonly called _______

TIPS

the term "complete portfolio" refers to a portfolio consisting of _________ a.) the risk free asset combined with at least one risky asset b.) the market portfolio combined with the minimum variance portfolio c.) securities from domestic markets combined with securities from foreign markets d.) common stocks combined with bonds

a.) the risk free asset combined with at least one risky asset

_________ is the return on a stock beyond what would be predicted from market movements alone

an abnormal return

Arbitrage is based on the idea that _________.

assets with identical risks must have the same expected rate of return

A support level is __________________. a) a level beyond which the market is unlikely to rise b) a level below which the market is unlikely to fall c) an equilibrium price level justified by characteristics such as earnings and cash flows d) the peak of a market wave or cycle

b.)

Which one of the following statements is correct? a.) invoice price = flat price - accrued interest b.) invoice price = flat price + accrued interest c.) flat price = invoice price+accrued interest d.) invoice price = settlement price-accrued interest

b.) invoice price = flat price + accrued interest

diversification is most effective when security returns are_____ a.) high b.) negatively correlated c.) positively correlated d.) uncorrelated

b.) negatively correlated

suppose that a stock portfolio and a bond portfolio have a zero correlation. this means that a.) the returns on the stock and bond portfolio tend to move inversely b.) the returns on the stock and bond portfolio tend to vary independently of each other c.) the returns on the stock and bond portfolio tend to move together d.) the covariance of the stock/bond portfolio will be positive

b.) the returns on the stock and bond portfolio tend to vary independently of each other

Oil cartels such as opec can be expected a.) to be very effective in manipulating the long term price of crude oil b.) to not be very effective in manipulating the long term price of crude oil c.) to have members in agreement on oil quotas d.) to support oil fracking

b.) to not be very effective in manipulating the long term price of crude oil

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. a.) up, right b.) up, left c.) down, right d.) down, left

b.) up, left

The variance of a portfolio of risky securities is a.) the sum of the security's covariances b.) the sum of the security's variances c.) the weighted sum of the security's covariances d.) the weighted sum of the security's variances

c.) the weighted sum of the security's covariances

The ________ is equal to the square root of the systematic variance divided by the total variance

correlation coefficient

Risk that can be eliminated through diversification is called ______ risk. a.) unique b.) firm-specific c.) diversifiable d.) all the above

d.) all the above

which of the following is not a concept related to explaining abnormal excess stock returns? a.) January Effect B.) neglected firm effect c.) P/E effect d.) Preferred stock effect

d.) preferred stock effect

When the market risk premium rises, stock prices will ________.

fall

Technical analysis concentrates on __________

finding repeating trends and patterns in prices

Technical analysis focuses on ________

finding repeating trends and patterns in prices

The risk that can be diversified away is __________.

firm specific risk

Sinking funds are commonly viewed as protecting the _______ of the bond.

holder

Rational risk-averse investors will always prefer portfolios _____________.

located on the capital market line to those located on the efficient frontier

The primary objective of fundamental analysis is to identify

mispriced stocks

according to the capital asset pricing model, a security with _______ alpha is considered underpriced

positive

If a market is strong form efficient it is also _____ and _____ form efficient

semi, weak

When discussing bonds, convexity relates to the ________

shape of the bond price curve with respect to interest rates

Most people would readily agree that the stock market is not _________.

strong form efficient

An Important characteristic of market equilibrium is __________

the absence of arbitrage opportunities

Gold prices are more likely to rise when

the dollar is weak and there is an international crisis