Topic Quiz 5 Flashcards
Which of the following statements are TRUE or FALSE?
A. Active Fund Managers will always outperform passive fund managers.
B. Studies have shown that insider trading is not particularly profitable.
C. Employees can earn abnormal risk adjusted returns in a strong form efficient market.
D. The CAPM does not consider how individuals make decision.
A. Active Fund Managers will always outperform passive fund managers. (FALSE)
B. Studies have shown that insider trading is not particularly profitable. (TRUE)
C. Employees can earn abnormal risk adjusted returns in a strong form efficient market. (FALSE)
D. The CAPM does not consider how individuals make decisions. (TRUE)
Which of the following are anomalies in the Fama-French Three Factor model?
A. Shares in a small companies generate the same returns as shares in high P/E companies.
B. Shares in low P/E companies generate the same returns as shares in higher P/E companies.
C. A large abnormal return cannot occur after an earnings announcement.
D. All of the above.
A. Shares in a small companies generate the same returns as shares in high P/E companies.
In an efficient market which of the following should occur?
A. The Grossman and Stiglitz paradox ensures that alphas will equal zero.
B. Trading by investors will drive security prices to a level where alpha will be zero.
C. Costly information will exist in a weak form efficient market.
D. Markets in developing countries are informationally more efficient than markets find developed countries.
B. Trading by investors will drive security prices to a level where alpha will be zero.
The anomalies in the Fama-French Three factor model are:
a. change in industrial production and change in expected inflation.
b. patterns of returns that contradict the efficient market hypothesis.
c. returns on market portfolio.
d. firm size and firm value.
d. firm size and firm value.
The ‘size’ anomaly is that shares of smaller companies typically earn higher average returns than shares in larger company. The ‘value’ anomaly is that value shares (higher book value to market value ratio) typically earn higher average returns than growth shares (lower book value to market value ratio).
Which of the following statements is incorrect?
a. Asset prices are unpredictable and follow a random walk in an efficient market.
b. In perfectly efficient markets the value effect and size effect should not exist.
c. The CAPM assumes all investors are rational arbitrageurs while the APT assumes there are utility maximisers in the market.
d. The CAPM cannot explain random deviations.
c. The CAPM assumes all investors are rational arbitrageurs while the APT assumes there are utility maximisers in the market. (INCORRECT)
The opposite is true. The CAPM assumes all investors are utility maximisers while the APT assumes there are rational arbitragers in the market.
The Grossman and Stiglitz Paradox indicates that:
a. investors will always collect information.
b. perfectly efficient markets are impossible when information is costly.
c. trading by investors will increase an asset’s alpha.
d. the alpha of an asset will always equal zero.
b. perfectly efficient markets are impossible when information is costly.
If abnormal profits can be made from trends in past prices than the market will be subject to:
a. weak form efficiency.
b. semi-strong form efficiency.
c. strong form efficiency.
d. reverse form efficiency.
a. weak form efficiency.
This form of efficiency assumes share prices reflect all historical market trading information so price movements cannot follow a trend.
Regret avoidance is:
Group of answer choices
a. when people are slow to change their beliefs.
b. when people do not want a bad outcome so only make conventional decisions.
c. when decisions are affected by how the choices are presented.
d. an information processing bias.
b. when people do not want a bad outcome so only make conventional decisions.
People regret when a bad outcome results from their decisions.
Are the CAPM and APT theoretical or statistical models?
CAPM and APT are theoretical models.
The single index model (SIM) and Fama and French three factor (FF3F) models are statistical models.
What is regret avoidance?
Fear of Regret (or Fear of Missing Out). People regret bad outcomes so only make conventional decisions.
Why does the Grossman and Stiglitz paradox argue that it is difficult for a financial market to be perfectly efficient?
The paradox argues that the cost of collecting information will stop people from trading when there is mispricing.
Do the CAPM and APT explain an investors decision making process?
No. They make assumptions about the actions of investors. For example, the CAPM assumes all investors are rational and maximise their utility.
What do you call the behavioural bias where investors place more weight on the most recent experiences?
Forecasting error.
When will behavioral biases disappear?
When there are no opportunities left to make a profit from arbitrage.
How can arbitragers use the security market line when choosing the assets they should buy or sell?
They will buy assets whose return lies above the security market line and sell assets whose return lies below the security market line.
