Review session + exam

Question 1

Rf = -x

Answer 1

borrow x for every 1$ you have

Question 2

Technical analysis

Answer 2

MKT participants in mass decide that its time to sell thats what going to happen

Question 3

Techincal vs fundamental analysis

Answer 3

Techincal is in an instant

Question 4

TAnalysis - Weak form

Answer 4

Academics say this isn’t going to work

Question 5

Accuracy of DCF in finding intrinsic value

Answer 5

Low

Question 6

CAPM: What can throw B off

Answer 6

Big change in debt
Big change in volatility of CF (divestitures)

Question 7

How to choose a MF

Answer 7

1. Assess client risk profile
2. Fees
3. Redemption/Back loads
4. Manager Tenure
5. Diversify
6. Turnover ratio

Question 8

How not to choose a MF

Answer 8

Past performance or performance stats

Question 9

Choosing MF: Assess client risk profile

Answer 9

Will point to market cap. and style
small cap, growth -> riskiest

Question 10

Choosing MF: Fees

Answer 10

The lower the better (no loads, 12b1, management fees)

Question 11

Choosing MF: Redemption/Back loads

Answer 11

Good for fund (stay invested), bad for new investors -> keep away from them

Question 12

Choosing MF: Manager Tenure

Answer 12

You want a manager with some experience 3 and 10 years. The longer they manage the worse they do.

Question 13

Choosing MF: Turnover rate

Answer 13

Low best, high is more expensive as it means more trading which is expensive

Question 14

Expense Ratio components

Answer 14

12b-1
Management fees
(without these 2 you get overhead)
Load?

Question 15

Best managers (according to Peter Lynch)

Answer 15

Initial performance random
Do best their first 3 years
Don’t improve afterwards (unless they randomly do)

Question 16

Bonds: eliminate reinvestment risk

Answer 16

Invest in 0 coupon

Question 17

Altman tells us

Answer 17

Which companies have higher bankruptcy risk or bond default risk on their debt

Question 18

Lower expected market returns in the MRP result in lower intrinsic values, all else equal

Answer 18

False. All else equal, a drop in the market rate lowers the risk premium, raising prices.

Question 19

B measures (I) and reflects (II)

Answer 19

(I) Systematic risk
(II) Business and financial risk

Question 20

A product/product line added to a firm’s core business

Answer 20

Does not affect its business risk

Question 21

2 implications that are important to investors resulting from The Best Mutual Fund Managers study

Answer 21

1. There is a negative relationship between tenure and performance. That is, managers are unlikely to improve performance with greater experience.
2. This suggests that, consistent with the EMH performance is random

Question 22

Overperforming markets for long periods of time

Answer 22

Impossible, maybe overperformed in SR and benefits so big that in aggregate it overperformed in LR (although in reality only in SR)

Question 23

Reducing stock risk in portfolio

Answer 23

By having stocks in the portfolio whose returns negatively correlate with each other

Question 24

What is the primary value of the CML

Answer 24

The CML enables one to choose a portfolio at any level of risk and return that dominates all others.