Lesson 1

Question 1

MPT Assumptions

Answer 1

Investors are rational and risk averse.

Investors make decisions that maximize their expected wealth.

Investors are not biased.

Investors have consistent risk preferences.

Investors don’t consider trading costs (taxes, fees, bid-ask spread, etc).

Investors are price takers. Their trades have no impact on prices.

Investors can borrow and lend at the risk-free rate of interest.

Question 2

What is MPT

Answer 2

Modern Portfolio Theory

Question 3

What is EMH

Answer 3

Efficient Market Hypothesis

Question 4

EMH Assumptions

Answer 4

Financial markets are informationally efficient (prices reflect relevant information).

Investors form rational expectations regarding future price movements.

Security prices follow a random walk (price changes are random and unpredictable).

Changes in relevant information (which are random) will be instantaneously reflected in changes in price.

Price changes are virtually impossible to predict.

Question 5

Weak Form Efficient Market Hypothesis

Answer 5

Technical analysis is useless to beat markets. Investors can beat the market with fundamental analysis or insider trading

Question 6

Semi-Strong Form Efficient Market Hypothesis

Answer 6

Investors cannot use public information to beat the market, as that information is readily available. Investors can only beat the market with insider trading

Question 7

Strong Form Efficient Market Hypothesis

Answer 7

All attempts to beat the market are pointless

Question 8

1993 Securities Act

Answer 8

Regulates the offering and sale of securities to ensure more transparency in financial statements

Question 9

1933 Banking Act

Answer 9

Separates commercial from investment banking (Glass-Steagall Act)

Question 10

1934 Securities Exchange Act

Answer 10

Governs secondary market trading (established the Securities and Exchange Commission)

Question 11

1939 Trust Indenture Act

Answer 11

Requires the appointment of a suitable trustee for security issue

Question 12

1940 Investment Company Act

Answer 12

Forms the backbone of financial regulation and establishes the foundation for mutual funds and hedge funds

Question 13

1940 Investment Advisers Act

Answer 13

Regulates investment advisers. Requires registration with the SEC for firms or any individual advisers with assets under management exceeding $100 million

Question 14

1999 - Financial Services Modernization Act

Answer 14

Repeals part of Glass-Steagall Act of 1933 and removes barriers among securities firms, financial institutions, and insurance companies

Question 15

2002 Sarbanes-Oxley Act

Answer 15

Establishes expanded financial regulations in response to major accounting scandals of the late 1990s

Question 16

2010 Dodd Frank Act

Answer 16

Establishes new government agencies to reduce volatility in financial markets in response to the Great Recession

Question 17

ABC Rule of an Investment Adviser (IA Act of 1940)

Answer 17

Advice
Business
Compensation

Question 18

Not Investment Advisers per IA Act of 1940

Answer 18

Banks and bank holding companies

Lawyers, accountants, engineers, and teachers

Brokers and dealers

Publishers

Government security advisers

Other (Credit rating agencies, family offices, government and political subdivisions, and non-U.S. advisers)