Investments Ch 5-8 + 10 HW

Rank the following from highest average historical return to lowest average historical return from 1926-2008.
I. Small stocks
II. Long term bonds
III. Large stocks
IV. T-bills

a. I, II, III, IV

b. III, IV, II, I

c. I, III, II, IV

d. III, I, II, IV

c. I, III, II, IV

When calculating the variance of a portfolio's returns squaring the deviations from the mean results in ________.
I. preventing the sum of the deviations from always equaling zero
II. exaggerating the effects of large positive and negative deviations
III. a number in units of percentage of returns

a.I only

b. I and II only

c. I and III only

d. I, II and III

b. I and II only

The complete portfolio refers to the investment in _________.

 

a. the risk-free asset

b. the risky portfolio

c. the risk-free asset and the risky portfolio combined

d. the risky portfolio and the index

c. the risk-free asset and the risky portfolio combined

The reward-to-volatility ratio is interpreted graphically as _________.

a. the slope of the capital allocation line 

b. the second derivative of the capital allocation line 

c. the point at which the second derivative of the investor's indifference curve reaches zero 

d. the portfolio's excess return

a. the slope of the capital allocation line 

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______.

 

a. is normally risk neutral

b. requires a risk premium to take on the risk

c. knows he or she will not lose money

d. knows the outcomes at the beginning of the holding period

b. requires a risk premium to take on the risk

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ___.

 

a. they had to pay huge fines for obstruction of justice

b. their 401k accounts were held outside the company

c. their 401k accounts were not well diversified

d. none of the above

c. their 401k accounts were not well diversified

Harry Markowitz is best known for his Nobel prize winning work on _____________.

 

a. strategies for active securities trading

b. techniques used to identify efficient portfolios of risky assets

c. techniques used to measure the systematic risk of securities

d. techniques used in valuing securities options

b. techniques used to identify efficient portfolios of risky assets

The optimal risky portfolio can be identified by finding ____________.
I. the minimum variance point on the efficient frontier
II. the maximum return point on the efficient frontier the minimum variance point on the efficient frontier
III. the tangency point of the capital market line and the efficient frontier
IV. the line with the steepest slope that connects the risk free rate to the efficient frontier

a. I and II only 

b. II and III only 

c. III and IV only 

d. and IV only

c. III and IV only 

An investor's degree of risk aversion will determine his or her ______.

 

a. optimal risky portfolio 

b. risk-free rate 

c. optimal mix of the risk-free asset and risky asset 

d. capital allocation line

c. optimal mix of the risk-free asset and risky asset 

Which of the following statistics cannot be negative?

a. Covariance 

b. Variance 

c. E[r] 

d. Correlation coefficient

b. Variance 

The term "complete portfolio" refers to a portfolio consisting of _________________.

 

a. the risk-free asset combined with at least one risky asset 

b. the market portfolio combined with the minimum variance portfolio 

c. securities from domestic markets combined with securities from foreign markets 

d. common stocks combined with bonds

a. the risk-free asset combined with at least one risky asset 

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

 

a. unique risk 

b. beta 

c. standard deviation of returns 

d. variance of returns

b. beta 

The market portfolio has a beta of _________.

 

a. -1.0

b. 0 

c. 0.5 

d. 1.0

d. 1.0

The capital asset pricing model was developed by _________.

 

a. Kenneth French 

b. Stephen Ross 

c. William Sharpe 

d. Eugene Fama

c. William Sharpe 

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

 

a. negative alpha is considered a good buy 

b. positive alpha is considered overpriced 

c. positive alpha is considered underpriced 

d. zero alpha is considered a good buy

c. positive alpha is considered underpriced 

Investors require a risk premium as compensation for bearing ______________.

 

a. unsystematic risk 

b. alpha risk 

c. residual risk 

d. systematic risk

d. systematic risk

According to the capital asset pricing model, a fairly priced security will plot _________.

 

a. above the security market line

b. along the security market line 

c. below the security market line 

d. at no relation to the security market line

b. along the security market line 

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

 

a. CML 

b. CAL 

c. SML 

d. SCL

c. SML

According to the CAPM which of the following is not a true statement regarding the market portfolio.

 

a. All securities in the market portfolio are held in proportion to their market values 

b. It includes all risky assets in the world, including human capital 

c. It is always the minimum variance portfolio on the efficient frontier 

d. It lies on the efficient frontier

c. It is always the minimum variance portfolio on the efficient frontier 

Which of the following variables do Fama and French claim do a better job explaining stock returns than beta?
I. Book to market ratio
II. Unexpected change in industrial production
III. Firm size

 

a. I only 

b. I and II only 

c. I and III only 

d. I, II and III

c. I and III only 

The weak form of the EMH states that ________ must be reflected in the current stock price.

 

a. all past information including security price and volume data 

b. all publicly available information 

c. all information including inside information 

d. all costless information

a. all past information including security price and volume data 

The semi-strong form of the EMH states that ________ must be reflected in the current stock price.

 

a. all security price and volume data 

b. all publicly available information

c. all information including inside information 

d. all costless information

b. all publicly available information

The strong form of the EMH states that ________ must be reflected in the current stock price.

 

a. all security price and volume data 

b. all publicly available information 

c. all information including inside information 

d. all costless information

c. all information including inside information 

Random price movements indicate ________.

 

a. irrational markets 

b. that prices cannot equal fundamental values 

c. that technical analysis to uncover trends can be quite useful 

d. that markets are functioning efficiently

d. that markets are functioning efficiently

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

 

a. worst, best 

b. worst, worst 

c. best, worst 

d. best, best

a. worst, best 

Which of the following is not a method employed by followers of technical analysis?

 

a. Charting 

b. Relative strength analysis 

c. Earnings forecasting 

d. Trading around support and resistance levels

c. Earnings forecasting 

Which of the following is not a method employed by fundamental analysts?

 

a. Analyzing the Fed's next interest rate move 

b. Relative strength analysis 

c. Earnings forecasting 

d. Estimating the economic growth rate

b. Relative strength analysis 

In a recent study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher.

 

a. higher 

b. lower 

c. unaffected 

d. more skewed

a. higher 

Fama and French (1991) and Reinganum (1988) found that firms with __________ market/book ratios had higher stock returns.

 

a. high 

b. low 

c. medium 

d. paired

b. low 

According to recent research securities markets fully adjust to earnings announcements _______.

 

a. instantly 

b. in 1 day 

c. in 1 week 

d. gradually over time

d. gradually over time

Basu found that firms with high P/E ratios __________.

 

a. earned higher average returns than firms with low P/E ratios 

b. earned the same average returns as firms with low P/E ratios 

c. earned lower average returns than firms with low P/E ratios 

d. had higher dividend yields than firms with low P/E ratios

c. earned lower average returns than firms with low P/E ratios 

DeBondt and Thaler (1985) found that the poorest performing stocks in one time period experienced __________ performance in the following period and the best performing stocks in one time period experienced __________ performance in the following time period.

 

a. good, poor 

b. good, good 

c. poor, good 

d. poor, poor

a. good, poor 

Fundamental indexing refers to ________.

 

a. investing in index stocks in proportion to the stock's fundamental value 

b. investing in index stocks in proportion to the stock's market value 

c. investing an equal dollar amount in index stocks 

d. investing in an equal amount shares in each of the index stocks

a. investing in index stocks in proportion to the stock's fundamental value 

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

 

a. low, low 

b. low, high 

c. high, low 

d. high, high

a. low, low 

In a recent study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher.

 

a. higher 

b. lower 

c. unaffected 

d. more skewed

a. higher