Investments II Exam 3

In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds ______.

had negative alphas after fees were considered.

Among the important characteristics of market efficiency is (are) that:

I. There are no arbitrage opportunities.
II. Security prices react quickly to new information.
III. Active trading strategies will not consistently outperform passive strategies.

I, II, and III

Your investment portfolio has been doing well in the last few years, this has made you question whether stock markets are efficient. You plan to test the efficient market hypothesis. The strong evidence that you actually beat the market will be _________________.

finding a positive Apha

Most people would readily agree that the stock market is not _________.

 

strong-form efficient

If you believe in the ___________ form of the EMH, you believe that stock prices reflect all historical information but they do not immediately reflect all publicly available information.

weak

A high amount of short interest is typically considered as a ________ signal, and contrarians may consider it as a ________ signal.

 

bearish; bullish

Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, ________.

 

Shelly will have more regret over the loss than Bill

Contrarian investors consider a high put/call ratio a ________.

 

bullish signal

Despite its good fundamentals, a stock has declined 20% from the recent highs, a(n) ____________ investor will typically consider this a promising investment opportunity. 

contrarian

Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior.

 

short-run; long run

Problems with behavioral finance include:

I. The behavioralists tell us nothing about how to exploit any irrationality.
II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction.
III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait.

 

I, II, and III

The Black-Scholes hedge ratio for a long call option is equal to ________.

 

N(d₁)

What combination of variables is likely to lead to the lowest time value?

 

short time to expiration and low volatility

You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is ________ or the volatility you input into the model is too ________.

 

overvalued and should be written; low

The hedge ratio is often called the option's ________.

delta

A call option has an exercise price of $30 and a stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option?

Intrinsic value = 34 - 30 = 4

A hedge ratio of .70 implies that a hedged portfolio should consist of ________.

long .70 shares for each short call

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

 

low; low

Which of the following statements is (are) correct?

 

If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

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

 

trading rule

Most people would readily agree that the stock market is not ________.

 

strong-form efficient

"Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the ________ problem in deciding how efficient the markets are.

magnitude

When testing mutual fund performance over time, one must be careful of ________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time.

 

survivorship bias

Which of the following would violate the efficient market hypothesis?

 

Investors earn abnormal returns months after a firm announces surprise earnings.

The broadest information set is included in the ________.

 

strong-form efficiency argument

According to results by Seyhun, ________.

 

investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public

Models of financial markets that emphasize psychological factors affecting investor behavior are called ________.

 

behavioral finance

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?

Overconfidence

Statman, Fisher, and Anginer (2008) found that stocks ranked high in Fortune's Survey of Most Admired Companies tended to have lower average risk-adjusted returns than the least admired firms. This could be attributed to

affect

Behaviorists point out that even if market prices are ________, there may be ________.

 

distorted; limited arbitrage opportunities

Short interest is a ________ indicator.

sentiment

A possible limit on arbitrage activity that may allow behavioral biases to persist is ________.

 

fundamental risk

The tendency of investors to hold on to losing investments is called the ________.

 

disposition effect

If investors overweight recent performance in forecasting the future, they are exhibiting ________.

 

representativeness bias

The TRIN statistic is a ________ indicator.

sentiment

In order for a binomial option price to approach the Black Scholes price, ________.

 

the number of subintervals must increase substantially

Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration. If prices are at equilibrium, the value of this portfolio is ________.

 

S₀ - Xe^-rt

Perfect dynamic hedging requires ________.

 

continuous rebalancing

In the Black-Scholes model, as the stock's price increases, the value of N(d₁) will ________ for a call and ________ for a put option. Note that a Hedge ratios equal N(d₁) for Calls and [N(d₁)-1] for Puts.  

 

increase; increase

A higher-dividend payout policy will have a ________ impact on the value of a put and a ________ impact on the value of a call.

 

positive; negative

A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has ________ intrinsic value and ________ time value.

 

positive; positive

What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula?

 

continuous compounding

The value of a put option increases with all of the following except ________.

 

stock price