FINAL EXAM MC

Question 1

Efficient Market

Answer 1

• Information is widely and cheaply available to all investors
• Security prices are reflecting all relevant and ascertainable information

Question 2

Efficient Market Hypothesis

Answer 2

Prices react quickly and unambiguously to new information.

Question 3

Weak Form Efficiency

Answer 3

Security prices reflect all information found in past prices and volume

Question 4

Semi-Strong Form

Answer 4

Security prices reflect all publicly available information

Question 5

Strong Form

Answer 5

Security prices reflect all information, public and private.

Question 6

Why does technical analysis fail?

Answer 6

Investor behaviour tends to eliminate any profit opportunity associated with stock price patterns.

Question 7

Technical Analysis

Answer 7

Trading rules based on patterns of price and volume.

Question 8

Fundamental Analysis

Answer 8

Research the value of stocks using NPV and other cash flow measurements.

Question 9

Post-Earnings Announcement Drift:

Answer 9

Investors underreact to the earnings announcements.

Question 10

The New-Issue Puzzle

Answer 10

On average the investors who receive new issues receive an immediate capital gains, but those gains often turn into losses.

Question 11

Temporal Anomalies: January Effect

Answer 11

Stock prices generally soar in January.

Question 12

4 Factors of Behavioural Finance

Answer 12

• Overconfidence
• Representativeness
• Conservatism
• Anchoring

Question 13

Behavioural Biases

Answer 13

• Mental Accounting

- Regret Avoidance

Question 14

What type of betas do highly cyclical stocks have?

Answer 14

Higher Betas

Question 15

Operating Leverage

Answer 15

• Refers to the sensitivity of a firm relative to its fixed production costs
• Increases as fixed costs rise and variable costs fall
• Magnifies cyclical effects on beta

Question 16

Financial Leverage

Answer 16

Refers to the sensitivity of a firm relative to its debt level

Question 17

When do you use the industry beta?

Answer 17

When the firm’s operations are similar to those of other firms in the industry.

Question 18

When do you use the firm’s beta?

Answer 18

When the firm’s operations are fundamentally different from other firms in the industry.

Question 19

Stock Splits

Answer 19

Increase share liquidity and reduce adverse selection costs and increases the number of small and uninformed traders holding the stock

Question 20

What does beta measure?

Answer 20

• Security’s contribution to the market portfolio’s total risk
• Security’s responsiveness to changes int he market portfolio
• Security’s market risk or systematic risk

Question 21

Capital Market Line

Answer 21

• Traces the efficient set of holding formed with bot risky assets and the risk-free asset
• Measures risk using standard deviation

Question 22

Security Market Line

Answer 22

• Relates return to market risk (beta) not to total risk (standard deviation)
• All properly priced individual securities and portfolios should lie on the SML

Question 23

Concerns of CAPM

Answer 23

• Practical problems with estimating required returns

- CAPM is not testable

Question 24

Diversification

Answer 24

Substantially reduces the variability of returns without an equivalent reduction in expected returns.

Question 25

Systematic (Market) Risk

Answer 25

-Economy-wide random events that affect almost all assets to some degree

Question 26

Unsystematic (diversifiable) Risk

Answer 26

-Random events that affect single security or small groups of securities

Question 27

Limitations with P/E Ratio

Answer 27

• Uninformative when companies have negative or very low, earnings
• One year’s earnings can fall but a stock price is a function of many years
• Earnings volatility creates great volatility in P/E Ratios

Question 28

When does a firm experience earnings growth?

Answer 28

When net investment is positive.

Question 29

Concerns of Dividend Discount Model

Answer 29

Hard to Estimate:
-future dividends, growth rates, discount rates

What if firm’s don’t pay dividends

Model only works if r > g