UNIT 2 finance hw questions (HW 14 and on)

In the context of the capital asset pricing model, the systematic measure of risk is best captured by __________blank.

Multiple Choice

• unique risk

• beta

• the standard deviation of returns

• the variance of returns

Beta

In a well-diversified portfolio, __________blank risk is negligible.

Multiple Choice

• nondiversifiable

• market

• systematic

• unsystematic

unsystematic

The capital asset pricing model was developed by __________blank.

Multiple Choice

• Kenneth French

• Stephen Ross

• William Sharpe

• Eugene Fama

William Sharpe

If all investors become more risk averse, the SML will __________blank and stock prices will __________blank.

Multiple Choice

• shift upward; rise

• shift downward; fall

• have the same intercept with a steeper slope; fall

• have the same intercept with a flatter slope; rise

have the same intercept with a steeper slope; fall

According to the capital asset pricing model, a security with a __________blank.

Multiple Choice

• negative alpha is considered a good buy

• positive alpha is considered overpriced

• positive alpha is considered underpriced

• zero alpha is considered a good buy

positive alpha is considered underpriced

Investors require a risk premium as compensation for bearing__________

multiple choice

• unsystematic risk

• alpha risk

• residual risk

• systematic risk

systematic risk

The graph of the relationship between expected return and beta in the CAPM context is called the __________blank.

Multiple Choice

• CML

• CAL

• SML

• SCL

SML

aka the security market line

In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line?

Multiple Choice

• The capital market line always has a positive slope.

• The capital market line is also called the security market line.

• The capital market line is the best-attainable capital allocation line.

• The capital market line is the line from the risk-free rate through the market portfolio.

The capital market line is also called the security market line.

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is __________blank.

Multiple Choice

• directly related to the risk aversion of the particular investor

• inversely related to the risk aversion of the particular investor

• directly related to the beta of the stock

• inversely related to the alpha of the stock

directly related to the beta of the stock

According to capital asset pricing theory, the key determinant of portfolio returns is __________blank.

Multiple Choice

• the degree of diversification

• the systematic risk of the portfolio

• the firm-specific risk of the portfolio

• economic factors

the systematic risk of the portfolio

Standard deviation of portfolio returns is a measure of __________blank.

Multiple Choice

• total risk

• relative systematic risk

• relative nonsystematic risk

• relative business risk

total risk

A stock has a beta of 1.3. The systematic risk of this stock is __________blank the stock market as a whole.

Multiple Choice

• higher than

• lower than

• equal to

• indeterminable compared to

higher than

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, the model is:

1. Perfectly significant in predicting future stock returns

2. An improvement over the CAPM regarding the abundance of significant alpha values in the CAPM

3. A good predictor of the firm's specific risk

Multiple Choice

• 1 only

• 2 only

• 1 and 3 only

• 1, 2, and 3

• 2 only

Which of the following variables do Fama and French claim do a better job explaining stock returns than beta?

1. Book-to-market ratio

2. Unexpected change in industrial production

3. Firm size

Multiple Choice

• 1 only

• 1 and 2 only

• 1 and 3 only

• 1, 2, and 3

• 1 and 3 only

Random price movements indicate __________blank.

Multiple Choice

• irrational markets

• that prices cannot equal fundamental values

• that technical analysis to uncover trends can be quite useful

• that markets are functioning efficiently

• that markets are functioning efficiently

When the market risk premium rises, stock prices will __________blank.

Multiple Choice

• rise

• fall

  Correct

• recover

• have excess volatility

fall

What is the difference in returns between the tenth smallest portfolio of stocks and the tenth largest portfolio, from 1926-2022, suggesting a small-firm effect ?

Multiple Choice

• 6.7%

• 2.5%

• − 2.5%

• 0.0%

6.7%

Evidence suggests that there may be __________blankmomentum and __________blank reversal patterns in stock price behavior.

Multiple Choice

• short-run; short-run

• long-run; long-run

• long-run; short-run

• short-run; long-run

• short-run; long-run

_________blank is the return on a stock beyond what would be predicted from market movements alone.

Multiple Choice

• A normal return

• A subliminal return

• An abnormal return

• An excess return

• An abnormal return

Choosing stocks by searching for predictable patterns in stock prices is called __________blank.

Multiple Choice

• fundamental analysis

• technical analysis

• index management

• random walk investing

• technical analysis

Proponents of the EMH think technical analysts __________blank.

Multiple Choice

• should focus on relative strength

• should focus on resistance levels

• should focus on support levels

• are wasting their clients’ time/money

• are wasting their clients’ time/money

"Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a __________blank.

Multiple Choice

• trading rule

• market anomaly

• fundamental approach

• passive trading strategy

• trading rule

When stock returns exhibit positive serial correlation, this means that __________blank returns tend to follow __________blank returns.

Multiple Choice

• positive; positive

• positive; negative

• negative; positive

• positive; zero

• positive; positive

The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that __________blank.

Multiple Choice

• high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor

• low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

• either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

• high book-to-market firms have more post-earnings drift

• either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

The term random walk is used in investments to refer to stock prices __________blank.

Multiple Choice

• changes that are random but predictable

• that respond slowly to both old and new information

• changes that are random and unpredictable

• changes that follow the pattern of past price changes

• changes that are random and unpredictable

Market anomaly refers to __________blank.

Multiple Choice

• an exogenous shock to the market that is sharp but not persistent

• a price or volume event that is inconsistent with historical price or volume trends

• a trading or pricing structure that interferes with efficient buying and selling of securities

• price behavior that differs from the behavior predicted by the efficient market hypothesis

• price behavior that differs from the behavior predicted by the efficient market hypothesis

Value stocks usually exhibit __________blank price-to-book ratios and __________blank price-to-earnings ratios.

Multiple Choice

• low; low

• low; high

• high; low

• high; high

• low; low

Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.

Multiple Choice

• low; low

• low; high

• high; low

• high; high

high; high

A technical analyst is most likely to be affiliated with which investment philosophy?

Multiple Choice

• Active management

• Buy and hold

• Passive investment

• Index funds

• Active management

The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the __________blank.

Multiple Choice

• fad effect

• martingale effect

• momentum effect

• reversal effect

momentum effect