Portfolio Theory Part 4

Question 1

Firm Size (FF)

Answer 1

smaller firms have better geometric returns because there may be more risk associated with a small firm

Question 2

Book to market equity ratio

Answer 2

book value per share common / market value for share common

Question 3

Alpha

Answer 3

How you evaluate portfolio / portfolio manager performance

alpha = actual - expected

want alpha to be big and > 0 for many years

Make sure you are looking at the alpha for current portfolio manager

Question 4

Problem with constant hurdle rate

Answer 4

Can be biased and reject a good project depending on risk threshold similar to IRR

Question 5

Riskless discount rate

Answer 5

use hurdle rate / risk free rate

Question 6

Average risk discount rate

Answer 6

after tax WACC

Question 7

High risk discount rate

Answer 7

use a discount rate HIGHER than after tax WACC

Question 8

Capital market efficiency

Answer 8

assumes stock prices reflect relevant information and the information is widely available

information in theory should not lead to an edge if it is reflected in price

Question 9

Weak form efficency

Answer 9

asset / stock price contains information that can be inferred from historical value

Question 10

semi-strong form efficiency

Answer 10

current stock prices reflect all public information

Question 11

strong form efficiency

Answer 11

prices reflect: historic, public, AND insider information