Final

Question 1

Semistrong EMT

Answer 1

All public info is included in price, no insider Info

Question 2

EMT would suggest what kind of strategy?

Answer 2

Passive Investing

Question 3

Random Walk

Answer 3

Zero expected Price change

Question 4

Sub-Martingale

Answer 4

Positive expected Price Change

Question 5

Strong EMT

Answer 5

All info included in price (including insider info)

Question 6

Positive Surprise Earnings show…

Answer 6

Abnormal positive results day of, positive drift after

Question 7

Conventional Theories

Answer 7

Assume investors are rational

Question 8

Behaviorial Finance

Answer 8

Investors may not be rational

Question 9

Forecasting Errors are important because

Answer 9

They overweigh recent info

Question 10

Conservatism Bias

Answer 10

Investors are too slow updating beliefs to new info

Question 11

Regret Aversion

Answer 11

Not as painful to have invested in blue chip that loses money than a start up that loses money

Question 12

Breadth

Answer 12

Extent to which market index movement is reflected in price movement of all stocks

Question 13

Current Bond Yield

Answer 13

Annual Interest / Current Market Price

Question 14

Treasury bills

Answer 14

Least risky investment

Question 15

To Earn High Bond Rating

Answer 15

Low Debt to Equity Ratio, High Quick ratio

Question 16

Accrued Interest

Answer 16

Paid by buyer, remitted to seller

Question 17

Conversion Ration

Answer 17

How many shares convertable conds can be exchanged for

Question 18

Term Structure of Interest rates

Answer 18

Relationship between securities interest rate and time to maturity

Question 19

Inverted Yield Curve

Answer 19

Long term interest rates are higher than short term interest rates

Question 20

Duration of a bond

Answer 20

Function of time to maturity, coupon rate, yield to maturity, and time to maturity (always lower than time to maturity)

Question 21

Interest Rate risk is higher when

Answer 21

Term to maturity is higher

Question 22

Immunization through duration matching is ineffective because

Answer 22

All of the Above

Question 23

Fed Reserve lowers discount rate

Answer 23

Eq of funds lent will increase, Eq of real interest rates decrease

Question 24

Holding Period return rate

Answer 24

(all money taken in - Price you bought at)/Price you bought at

Question 25

Risk averse investors reject fair games

Answer 25

True

Question 26

Risk neutral investors judge investments only by expected returns

Answer 26

True

Question 27

In a mean-std Dev graph, the indifference curve's slope is

Answer 27

positive

Question 28

Capital Allocation Line

Answer 28

investment opportunity set formed with a risky asset and a risk-free asset.

Question 29

Nondiversifiable risk is

Answer 29

Systemic risk, Market risk

Question 30

More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.

Answer 30

True

Question 31

nvestors choose the portfolio that maximizes their expected utility.

Answer 31

True

Question 32

Slope of Best CAL is

Answer 32

(expected return rate - risk free rate)/Std Dev

Question 33

Covariance Formula

Answer 33

(Correlation coefficent)(std dev 1)(std dev 2)

Question 34

Expected Return Formula

Answer 34

Risk Free Rate + Beta(Expected Market Return-Risk Free Rate)

Question 35

Capital Market Line

Answer 35

I) The CML is the line from the risk-free rate through the market portfolio. II) The CML is the best attainable capital allocation line. IV) The CML always has a positive slope.

Question 36

Security market Line

Answer 36

Represents expected return / Beta relationship

Question 37

According to CAPM, positive alpha securities are

Answer 37

Underpriced

Question 38

Boeing is

Answer 38

Overpriced

Question 39

CAT is

Answer 39

Fairly priced

Question 40

Dividend Growth rate given ROE

Answer 40

ROE x (1 - % of earnings paid in dividends

Question 41

Both CAPM and APT stipulate

Answer 41

relationship between expected return and risk

Question 42

Developing APT, Ross assumed uncertainty in asset returns was a result of

Answer 42

a common macroeconomic factor and firm-specific factors.

Question 43

Multifactor APT Formula

Answer 43

Expected Return 1 = Beta1(Risk Premium 1) + Beta2(Risk Premium 2) + Risk Free Rate

Question 44

The APT differs from the CAPM because the APT

Answer 44

recognizes multiple systematic risk factors.

Question 45

Advantages of APT are

Answer 45

that the model does not require a specific benchmark market portfolio.

Question 46

Price that a writer of a call option receives to sell the option is called the

Answer 46

Premium

Question 47

European put allows the holder to

Answer 47

sell the underlying asset at the striking price on the expiration date.

Question 48

The current market price of a share of AT&T stock is $50. If a put option on this stock has a strike price of $45, the put

Answer 48

is out of the money and sells for a lower price than if the market price of AT&T stock is $40.

Question 49

The maximum loss a buyer of a stock call option can suffer is equal to

Answer 49

The call premium

Question 50

You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position?

Answer 50

$65

Question 51

Options contracts are standardized in amounts of

Answer 51

100

Question 52

Before expiration, the time value of an in-the-money call option is always

Answer 52

Positive

Question 53

If the stock price decreases, the price of a put option on that stock __________ and that of a call option __________.

Answer 53

Increases, Decreases

Question 54

Other things equal, the price of a stock put option is negatively correlated with which of the following factors?

Answer 54

The stock price

Question 55

Hedge ratio for a call is always

Answer 55

Between zero and 1