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Securities Analysis > Midterm > Flashcards

Midterm Flashcards

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SIE Exam flashcards
1
Q

A security has an expected rate of return of 0.10 and a beta of 1.1. The market expected rate of return is 0.08 and the risk free rate is 0.05. The alpha of the stock is…

A

Expected rate of return
- ((risk free rate + beta X (mkt expected return - risk free rate))

= 10% - (5% + 1.1(8%-5%)

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2
Q

Assume that the risk free rate of interest is 4% and the expected rate of return on the market is 14%. A share of stock sells for $68 today. It will pay a dividend of $3 per share at year end. Beta is 1.2. What do investors expect the stock to sell for at the end of the year?

A

Expected rate of return = rf- (beta X ((return on mkt- rf))
.04 + (1.2 x(.14-.04) = 16%

($68 X 1.16) - 3 = 75.88

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3
Q

Suppose the expected rate of return is 18.1%. Suppose that the market expected values for 3 macro factors given in row 1 below, but that the actual values turn out to be given in row 2. Calculate the revised expectations for the rate of return on the stock once the surprises become known.
Expected: inflation 5%, industrial production 3%, oil 2%
Actual: inflation 4%, industrial production 6%, oil 0%

Beta inflation = 1.2
Beta ip = .5
Beta oil = .3

A

(1.2) X (4-5%) + .5 X (6-3%) + .3 X (0-2%) = -.3%

Er = 18.1 - .3 = 17.8%

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4
Q

An arbitrage opportunity exists if an investor can construct a…

A

Positive investment portfolio that will yield a sure profit

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5
Q

3 factors used by Fama French in their multifactor model.

A

1 return of market index

2 excess return of small stocks over large stocks

3 excess return of high book to market stocks over low book
To market stocks

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6
Q

Which of the following phenomena would be either consistent with or a violation of efficient market hypothesis:

Stock prices tend to be predictably more volatile in January than in other months.

A

Consistent

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7
Q

Which of the following phenomena would be either consistent with or a violation of efficient market hypothesis:

Stock prices of companies that announce increased earnings in January tend to outperform the market in February

A

Inconsistent

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8
Q

Which of the following phenomena would be either consistent with or a violation of efficient market hypothesis:

Stocks that perform well in one week perform poorly in the following week

A

Inconsistent

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9
Q

Investors are slow to update their beliefs when given new evidence

A

Conservatism bias

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10
Q

Investors are reluctant to bear losses caused by their unconventional decisions

A

Regret avoidance

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11
Q

Investors exhibit less risk tolerance in their retirement accounts versus their other stock accounts

A

Mental accounting

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12
Q

Investors are reluctant to sell stocks with paper losses

A

Disposition effect

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13
Q

Investors disregard sample size when forming views about the future from the past

A

Representativeness bias

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14
Q

3 limits of arbitrage

A

1 fundamental risk

2 implementation costs

3 model risk

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15
Q

Higher fixed costs and lower variable costs will do better in…

Worse in…

A

Better in boom

Worse in recession

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16
Q

Industrial production refers to…

A

Total manufacturing output in the economy

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17
Q

New orders for non defense capital goods are…

A

Leading indicators

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18
Q

According to Michael Porter, there are 5 determinants of competition. An example of pressure from substitute products is…

A

When availability limits the prices that can be charged to

Customers

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19
Q

If the financial market is in CAPM. Equilibrium, the risk premium on individual security will be proportional to…

A

Market risk premium and beta of security

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20
Q

The SCL of GOOG relates the realized excess return on the stock (y-variable) to the realized excess return on a market index such as S&P500 (X variable), and the y-intercept of the SCL is the… Of GOOG and the slope is…

A

Y intercept = alpha

Slope = beta

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21
Q

The equilibrium risk premium of the market portfolio is proportional both to the… Of the market and to the degree of risk aversion of the individual Investor

A

Proportional to risk of the market

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22
Q

According to the CAPM, investors require a risk premium as compensation for…

A

Market risk

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23
Q

Privately held business do not have readily available trading prices. To offset problems with diversification caused by private held business assets investors can…

A

Reduce the demand in their investment portfolios for traded securities

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24
Q

CAPM predicts that the y-intercept of SCL is…

A

0

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25
Q

If all investors use mean variance analysis, apply it to the same university of securities with an identical time horizon, use the same security analysis, and experience identical net returns from the same securities they will hold the…

A

Market portfolio

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26
Q

Recent research by financial economists has found that the reward for beta… Was less than predicted by the CAPM when they applied the model to the… World data

A

Beta risk

Reward was less when applied to real world data

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27
Q

APT allows violation of…

A

Relationship for individual securities

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28
Q

In APT, a factor portfolio is…

A

Well diversified portfolio constructed to have beta of 1 on
One factor

And beta of 0 on any other factor

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29
Q

Which of the following cannot be used as evidence against weak form of efficient market hypothesis?

A

January effect

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30
Q

If insider information cannot be used to generate abnormal returns, the financial market is…

A

Strong form efficient

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31
Q

The reversal effect and the book to market effect have been interpreted as the results of market’s…

A

Overreaction to past performance of firms

32
Q

If financial markets are weak form efficient, stock prices should already be…

A

Market trading data, such as price and volume data

33
Q

Which of the following best describes a drawback of implementing portfolio strategies based on analyst consensus recommendations?

A

Heavy trading activity and associated costs

34
Q

Financial economists have found some easily observed variables can be used to predict broad market returns. Which one of the following is not one of those variables?

A

Total debt ratio

35
Q

Which of the following is not a role of portfolio management in an efficient capital market?

A

Low cost diversification that offers high yield

36
Q

If insider info cannot be used to generate abnormal returns, the financial market is…

A

Strong form efficient

37
Q

If all investors attempted to follow a passive investment strategy, stock prices would…

A

Fail to reflect new information

38
Q

The reversal effect and the book to market effect have been interpreted as the results of market’s…

A

Overreaction to past performance of firms

39
Q

In an efficient capital market, competition among many well backed, highly paid, aggressive analysts ensures that…

A

Stock prices reflect all available information

40
Q

The efficient market hypothesis has never been widely accepted on Wall Street because it implies that…

A

The search for undervalued securities is wasted effort

41
Q

The asset might in fact double in value, but it might take longer than King’s two year time horizon, this is an example of…

A

Fundamental risk

42
Q

Forecasting errors are the result of placing too much emphasis on recent events while…

A

Ignoring historical events

43
Q

An investor decides to purchase shares of stock in a firm based solely on the fact that the firm bought the naming rights to a new professional stadium located right near the investor’s home. This irrational decision is most likely attributed to…

A

Faulty information process

44
Q

The confidence index assumes that confidence in the bond market will…

A

Continue in the equity market

45
Q

Framing

A

Decisions are affected by the manner in which the question is framed

46
Q

Mental accounting adds to regret avoidance because…

A

Investors focus on individual security returns rather than portfolio performance

47
Q

Risk aversion

A

Requiring more return for taking extra risk

48
Q

Aversion to losses drives decision making in…

A

Prospect theory

49
Q

The main reason investors should be aware of behavioral issues in portfolio management is to…

A

Avoid making information processing errors

50
Q

Link buys shares in any company in which a specific regression parameter is less than 1. The most likely reason Link might not earn a superior return is…

A

Model risk

51
Q

Modeling error can result in faulty predictions because the model does not…

A

Does not capture all risk inherent in an investment

52
Q

Memory bias

A

Investors give too much weight to recent experiences and it affects their ability to forecast without bias

53
Q

The CAPM predicts the relationship between the…

A

Systemic risk and equilibrium expected return on risky assets

54
Q

Risk premium is portfolio beta times the…

A

Market risk premium

55
Q

2 theoretical limitations of CAPM

A

Relies on theoretical portfolios of all assets

It applies to expected returns not realized returns

56
Q

CAPM assumes that investors are identical in every way except…

A

Wealth and risk aversion

57
Q

Momentum effect is the tendency for poorly performing stocks and well performing stocks in one period to…

A

Continue abnormal performance in following periods

58
Q

Momentum effect cannot be used to test the…

A

Semi strong form of efficient market hypothesis

59
Q

When evaluating the performance of equity mutual funds, using a single factor model with the S&P 500 index may not be adequate because many funds…

A

Invest in small stocks

60
Q

When evaluating the performance of equity mutual funds, the conventional benchmark today is a four factor model that includes…4

A

1 market
2 size
3 book to market
4 momentum

61
Q

In prospect theory investors react…

A

More strongly to loss than gains

62
Q

A supply shock is an event that influences…

A

Production capacity and costs

63
Q

The formulation of fiscal policy is so cumbersome it cannot be used to…

A

Finetune the economy

64
Q

Supply side policies great the issue of…

A

Productive capacity in the economy

65
Q

The environment in which all firms operate

A

The macroeconomy

66
Q

A demand shock is an event that affects the…

A

Demand for goods and services in the economy

67
Q

Increases in tax rates are a…

A

Negative demand shock

68
Q

Name 2 leading indicators

A

Average weakly hours of production workers

stock prices

69
Q

Name 2 current indicators

A

Manufacturing and trade sales

Personal income less transfer payments

70
Q

Name 2 lagging indicators

A

Average duration of unemployment

Ratio of trade inventories to sales

71
Q

Cyclical industries are producers of…

A

Durable goods

72
Q

Fiscal policy directly affects the…

A

Fluctuation of the economy

73
Q

High interest rates reduce the present value of future cash flows, thereby reducing the attractiveness of investment opportunities. For this reason…. Interest rates are key determinants of business investment expenditures

A

Real interest rates

74
Q

Investors are reluctant to bear losses caused by their unconventional decisions

A

Regret avoidance

75
Q

Investors are reluctant to sell stocks with paper losses

A

Disposition effect

76
Q

Investors disregard sample size when forming views about the future from the past

A

Representativeness bias

Securities Analysis (4 decks)

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