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MKTG > final > Flashcards

final Flashcards

1
Q

Another name for the dollar-weighted return is the __________.

A

internal rate of return

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2
Q

The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?

A

0.60

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3
Q

According to the CAPM, investors are compensated for all but which of the following?

A

residual risk

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4
Q

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 underreaction.
3. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait.

A

1, 2, and 3

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5
Q

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct?
1. Your nominal return on the T-bills is riskless.
2. Your real return on the T-bills is riskless.
3. Your nominal Sharpe ratio is zero.

A

1 and 3 only

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6
Q

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%.

A

45%

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7
Q

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier __________ and to the __________.

A

up; left

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8
Q

Arbitrage is based on the idea that __________.

A

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

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9
Q

If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return?

A

54.50%

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10
Q

Diversification can reduce or eliminate __________ risk.

A

nonsystematic

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11
Q

According to the capital asset pricing model, a fairly priced security will plot __________.

A

on the security market line

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12
Q

If investors are too slow to update their beliefs about a stock’s future performance when new evidence arises, they are exhibiting __________.

A

conservatism

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13
Q

Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill’s and Shelly’s stocks fall 15%. According to regret theory, __________.

A

Shelly will have more regret over the loss than Bill

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14
Q

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in __________.

A

mental accounting

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15
Q

The complete portfolio refers to the investment in __________.

A

the risk-free asset and the risky portfolio combined

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16
Q

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was __________.

A

11.00%

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17
Q

The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of −1.3%, and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock?

A

11.20%

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18
Q

If you believe in the __________-form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders.

A

strong

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19
Q

In a well-diversified portfolio, __________ risk is negligible.

A

unsystematic

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20
Q

The complete portfolio refers to the investment in __________

A

the risk-free asset and the risky portfolio combined

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21
Q

Which one of the following measures time-weighted returns and allows for compounding?

A

Geometric average return

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22
Q

During the 1927-2018 period which one of the following asset classes provided the lowest real return?

A

Long-term U.S. Treasury bonds

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23
Q

The normal distribution is completely described by its __________.

A

mean and standard deviation

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24
Q

Security A has a higher standard deviation of returns than security B. We would expect that:
1. Security A would have a risk premium equal to security B.
2. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B.
3. The Sharpe ratio of A will be higher than the Sharpe ratio of B.

A

2 only

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25
Q

The formula E(rp)-rf/stdp is used to calculate the __________.

A

sharpe ratio

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25
Q

Which of the following provides the best example of a systematic-risk event?

A

The Federal Reserve increases interest rates 50 basis points.

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25
Q

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

A

U.S. T-bill whose return was indexed to inflation

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26
Q

A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.

A

systematic risk

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27
Q

The risk that can be diversified away is __________.

A

firm-specific risk

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28
Q

The values of beta coefficients of securities are __________.

A

usually positive but are not restricted in any particular way

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29
Q

Risk that can be eliminated through diversification is called __________ risk.

A

All of these options are correct. (diversifiable, firm-specific, unique)

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30
Q

Firm-specific risk is also called __________ and __________.

A

unique risk; diversifiable risk

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31
Q

What is the beta for a portfolio with an expected return of 12.5%?

A

1.5

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31
Q

Which of the following are assumptions of the simple CAPM model?
1. Individual trades of investors do not affect a stock’s price.
2. All investors plan for one identical holding period.
3. All investors analyze securities in the same way and share the same economic view of the world.
4. All investors have the same level of risk aversion

A

1, 2, and 3 only

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32
Q

In the context of the capital asset pricing model, the systematic measure of risk is best captured by __________.

A

beta

33
Q

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of 0.25. In this situation, you would conclude that portfolios X and Y ________.

A

are in equilibrium

34
Q

The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of 0.4. The risk premium for exposure to the consumer price index is −6%, and the firm has a beta relative to the CPI of 0.8. If the risk-free rate is 3%, what is the expected return on this stock?

A

0.20%

34
Q

Evidence supporting semistrong-form market efficiency suggests that investors should __________.

A

use a passive trading strategy such as purchasing an index fund or an ETF

35
Q

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

A

homogenous expectations

36
Q

According to the semistrong-form of the efficient market hypothesis, ____________.

A

future changes in stock prices cannot be predicted from any information that is publicly available

37
Q

Which of the following statements is (are) correct?

A

If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

38
Q

The term random walk is used in investments to refer to __________.

A

stock price changes that are random and unpredictable

39
Q

The semistrong-form of the efficient market hypothesis implies that __________ generate abnormal returns and __________ generate abnormal returns.

A

technical analysis cannot; fundamental analysis cannot

39
Q

The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that __________.

A

either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

39
Q

The weak-form of the EMH states that __________ must be reflected in the current stock price.

A

all past information, including security price and volume data

40
Q

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?

A

overconfidence

41
Q

A possible limit on arbitrage activity that may allow behavioral biases to persist is __________.

A

fundamental risk

42
Q

Trading activity and average returns in brokerage accounts tend to be __________.

A

negatively correlated

43
Q

The rate of return on __________ is known at the beginning of the holding period, while the rate of return on __________ is not known until the end of the holding period.

A

Treasury bills; risky assets

44
Q

A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of __________.

A

0.42

45
Q

You have an APR of 7.5% with continuous compounding. The EAR is __________.

A

7.79%

46
Q

Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms

A

higher

47
Q

Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit after one year would be _________

A

$7,000

48
Q

Market risk is also called __________ and _________

A

systematic risk; nondiversifiable risk

49
Q

The part of a stock’s return that is systematic is a function of which of the following variables?
1. Volatility in excess returns of the stock market
2. The sensitivity of the stock’s returns to changes in the stock market
3. The variance in the stock’s returns that is unrelated to the overall stock market

A

1 and 2 only

50
Q

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?

A

20

51
Q

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.

A

20% more

52
Q

What is the alpha of a portfolio with a beta of 2 and actual return of 15%?

A

0%

53
Q

The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock?

A

19.50%

54
Q

In a single-factor market model the beta of a stock ________.

A

measures the stock’s contribution to the standard deviation of the market portfolio

55
Q

The variance of the return on the market portfolio is 0.04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is __________

A

2.5

56
Q

Proponents of the EMH typically advocate __________

A

a passive investment strategy

57
Q

The strong form of the EMH states that __________ must be reflected in the current stock price

A

all information, including inside information

58
Q

Value stocks may provide investors with better returns than growth stocks if:
1. Value stocks are out of favor with investors.
2. Prices of growth stocks include premiums for overly optimistic growth levels.
3. Value stocks are likely to generate positive-earnings surprises

A

1, 2, and 3

59
Q

Fundamental analysis is likely to yield best results for __________

A

neglected stocks

60
Q

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

A

technical analysis

61
Q

Even though indexing is growing in popularity, only about __________ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers _________

A

30%; overestimate their ability

62
Q

Conventional finance theory assumes investors are __________, and behavioral finance assumes some systematic __________

A

rational; irrationality

63
Q

A major problem with technical trading strategies is that __________

A

it is very difficult to identify a true trend before the fact

64
Q

In 1997, CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below pre-acquisition levels and took many years to recover. This may be an example of __________

A

overconfidence

65
Q

The excess return is the __________

A

rate of return in excess of the Treasury-bill rate

66
Q

If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the _________

A

dollar-weighted return

67
Q

You have the following rates of return for a risky portfolio for several recent years:
r2016 = 35.23%
r2017 = 18.67%
r2018 = −9.87%
r2019 = 23.45%
If you invested $1,000 at the beginning of 2013, your investment at the end of 2016 would be worth __________

A

$1,785.56

68
Q

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?

A

9.20%

69
Q

The market risk premium is best approximated by __________

A

the difference between the return on an index fund and the return on Treasury bills

70
Q

Decreasing the number of stocks in a portfolio from 50 to 10 would likely __________

A

increase the unsystematic risk of the portfolio

71
Q

A stock’s alpha measures the stock’s __________

A

abnormal return

72
Q

The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of −1.3%, and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock?

A

11.20%

73
Q

The measure of unsystematic risk can be found from an index model as _________

A

residual standard deviation

74
Q

The expected return on the market is the risk-free rate plus the _________

A

equilibrium risk premium

75
Q

One can profit from an arbitrage opportunity by:

A

taking a long position in the cheaper market and a short position in the expensive market.

76
Q

Which of the following would violate the efficient market hypothesis?

A

Investors earn abnormal returns months after a firm announces surprise earnings.

77
Q

In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?

A

diversification

78
Q

When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow __________ returns.

A

positive; positive

79
Q

The primary objective of fundamental analysis is to identify __________

A

mispriced stocks

80
Q

An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on this complete portfolio is higher than his existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund?

A

loss aversion

81
Q

High P/E firms tend to be poor investments. This illustrates which of the following information processing errors?

A

limited attention, underreaction, and overreaction

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