Quiz 2 Flashcards
Formula for arithmetic average return
Rate(1) + Rate(2) … / Number rates
Formula for Geometric average return
((1+r1)(1+r2))^1/# periods ) - 1
Effective Annual Rate Formula
( 1 + APR/#periods ) ^ #periods - 1
If your paying back a loan, do you want to pay higher or lower EAR?
Lower EAR
In general, an asset with higher expected return has _____ risk
higher
Fisher Equation
R nom = (1+rr)(1+exp infl) - 1
According to the mean-variance criterion, portfolio A is better than portfolio B for a risk-averse investor whenever _____.
Expected return of A is higher than B, and A is less risky than B
Higher expected return, smaller st deviation
The slope of the capital allocation line is called the _____.
Sharpe Ratio
Systematic risk is also called
non-diversifiable and market risk
Unsystematic risk is also called
diversifiable risk and asset or firm specific risk
diversification only works if
assets are directly uncorrelated w/ a correlation coefficient less than 1
Diversification can eliminate _____ risk.
unsystematic or specific
Why can diversification not eliminate all risk?
Common factors affect most stocks in a similar fashion.
As different securities are added to a portfolio, systematic risk will _____.
not change, systematic risk is non-diversifiable
Systematic risk affects _____.
all firms
According to the CAPM, the optimal risky portfolio _____.
contains all assets in the economy, with weights of their market share
According to the CAPM, the risk premium on any asset is a function of the asset’s _____.
beta
The graphical representation of the CAPM is called the _____.
security market line
CAPM equation
E(r) = Rf + b( E(r mkt) - Rf)
Which stock has more total risk?
The stock with the higher standard deviation
Which stock has more systematic risk?
The stock with the higher beta
What is the security’s expected alpha in equilibrium according to the CAPM?
0, The CAPM predicts that all expected alphas must be 0 in equilibrium.
Which are assumptions of the APT?
There are enough securities to diversify away firm-specific risk.
Security returns can be described by a factor model.
There are no persistent arbitrage opportunities.
A well-diversified portfolio is a portfolio that includes a large enough number of _____ securities to make the _____ risk negligible.
different; nonsystematic
Risk free rate equation according to APT
(E(r a) * b(b) - E(r b) * b(a)) / b(a) - b(b)
What does a negative alpha mean?
The portfolio is overpriced. We should thus short-sell it.
What happens in an efficient market?
Prices adjust quickly in response to new information
Prices change only in response to new information
Prices refect all available information
How are all securities priced in an efficient market?
Fairly
Semistrong-form efficient
A market where prices reflect all available public information
strong-form efficient
market where prices reflect all information
weak-form efficient
market where prices reflect all past trading data
The book-to-market effect implies that shares of companies with _____ ratios tend to _____ the market.
high book-to-market; outperform
If markets are efficient, how useful is asset allocation and security selection?
Asset allocation is useful, security selection is not
Momentum effect
stocks that have performed relatively well and stocks that have performed relatively bad continue their abnormal presence in the future
Post earnings announcement drift
A market anomaly in which the stock price continues to rise for a period after some positive earnings information becomes public
