Exam 2 - Homework Questions Flashcards
Suppose that the returns on the stock fund presented in Spreadsheet 6.1 were –40%, –14%, 17%, and 33% in the four scenarios. (LO 6-2)
Would you expect the mean return and variance of the stock fund to be more than, less than, or equal to the values computed in Spreadsheet 6.2? Why?
Without doing any math, the severe recession is worse and the boom is better.
Thus, there appears to be a higher variance, yet the mean is probably the same
since the spread is equally large on both the high and low side. The mean return,
however, should be higher since there is higher probability given to the higher
returns
What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 15%? (LO 7-2)
15%. Its expected return is exactly the same as the market return when beta is 1.0.
- Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of 0.6. Which of the following statements is most accurate?
A. The equilibrium expected rate of return is higher for Kaskin than for Quinn.
Statement a is most accurate.
- Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of 0.6. Which of the following statements is most accurate?
B. The stock of Kaskin has higher volatility than Quinn.
The flaw in statement b is that beta represents only the systematic risk. If the firm-specific risk is low enough, the stock of Kaskin, Inc. could still have less total risk than that of Quinn, Inc.
- Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of 0.6. Which of the following statements is most accurate?
The stock of Quinn has more systematic risk than that of Kaskin.
Statement c is incorrect. Lower beta means the stock carries less systematic risk.
[true or false]The SML provides a benchmark for evaluating expected investment performance.
True
[true or false] The SML leads all investors to invest in the same portfolio of risky assets.
b is incorrect because the SML doesn’t require all investors to invest in the market portfolio but provides a benchmark to evaluate investment performance for both portfolios and individual assets.
[true or false]The SML is a graphic representation of the relationship between expected return and beta.
True
[true or false] Properly valued assets plot exactly on the SML.
True
A successful firm like Microsoft has consistently generated large profits for years. Is this a violation of the EMH? (LO 8-2)
No, this is not a violation of the EMH. Microsoft’s continuing large profits do not imply that stock market investors who purchased Microsoft shares after its success already was evident would have earned a high return on their investments.
At a cocktail party, your co-worker tells you that he has beaten the market for each of the last three years. Suppose you believe him. Does this shake your belief in efficient markets? (LO 8-2)
No. The notion of random walk naturally expects there to be some people who beat the market and some people who do not. The information provided, however, fails to consider the risk of the investment. Higher risk investments should have higher returns. As presented, it is possible to believe him without violating the EMH.
It implies that prices reflect all available information.
This is the definition of an efficient market.
In an efficient market, professional portfolio management can offer all of the following benefits except which of the following?
A. Low-cost diversification.
B. A targeted risk level.
C. Low-cost record keeping.
D. A superior risk-return trade-off.
D. A superior risk-return trade-off.
It is not possible to offer a higher risk-return trade off if markets are efficient.
Which version of the efficient market hypothesis (weak, semistrong, or strong-form) focuses on the most inclusive set of information?
Strong-form efficiency includes all information: historical, public, and private.
One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.
This is a filter rule, a classic technical trading rule, which would appear to contradict the weak form of the efficient market hypothesis.
