gyu mcps before midterm 2 Flashcards
Which of the following is false?
a) The income yield of a security that has a $3 cash flow during a period, with a beginning price of $15, is 20 percent.
b) The arithmetic mean is always less than the geometric mean of a series of returns.
c) The geometric mean of 50 percent and −50 percent is −13.4 percent.
d) The greater the dispersion of a distribution, the greater the spread between the geometric mean and the arithmetic mean.
b) The arithmetic mean is always less than the geometric mean of a series of returns.
Which of the following is false?
a) The expected return of a portfolio is always the weighted average of the expected return of each asset in the portfolio.
b) Covariance measures the co-movement between the returns of individual securities.
c) The standard deviation of a portfolio is always the weighted average of the standard deviations of individual assets in the portfolio.
d) Standard deviation is easier to interpret than variance as a measure of risk.
c) The standard deviation of a portfolio is always the weighted average of the standard deviations of individual assets in the portfolio.
Which of the following is false?
a) The standard deviation of a portfolio that contains two individual securities is the weighted average of individual standard deviations only when the correlation coefficient is equal to +1.
b) It is impossible to eliminate all the risk for a two-security portfolio.
c) There are n(n − 1)/2 co-movement terms and n variance terms for an n-security portfolio.
d) The more securities added, the lower the marginal risk reduction per security added.
b) It is impossible to eliminate all the risk for a two-security portfolio.
Which of the following statements is correct?
a) The new efficient frontier is a curved line similar to the original efficient frontier.
b) All the portfolios along the new efficient frontier dominate those along the original efficient frontier including the tangency portfolio.
c) The weight of the risk-free asset is positive in calculating expected return when investors buy stocks on margin.
d) Investors who are more risk averse invest to the left of the tangent portfolio.
d) Investors who are more risk averse invest to the left of the tangent portfolio.
All of the following are differences between the CML and SML, except
a) the slope.
b) the risk measurement.
c) the y-intercept.
d) the application to the required return on individual securities.
c) the y-intercept.
Which of the following statements are true:
i) The excess return on an investment (over and above the risk free rate) is equal to its Beta (β) multiplied by the market risk premium according to the Capital Asset Pricing Model (CAPM).
ii) The security market line (SML) is a graph of the expected return of a security as a function of systematic risk (Beta).
iii) The equity (or market) risk premium can be estimated by calculating historical average excess returns of the market portfolio above the prevailing risk-free rate.
a) i only
b) i and ii
c) ii and iii
d) all of the statements
d) all of the statements
which of the following statements is false?
a) Systematic risk cannot be diversified away.
b) The market portfolio includes all risky assets including stocks, bonds, real estate, derivatives, and so on.
c) The market portfolio is observable.
d) The y-intercept of both the SML and the CML is RF
c) The market portfolio is observable
Systematic risk (beta)
a) is also called unique risk.
b) equals total risk divided by non-systematic risk.
c) estimates do not change through time.
d) measures of portfolios are more stable than those of individual assets
d) measures of portfolios are more stable than those of individual assets
what is the beta of the market?
one
If a security’s total risk (variance) increases, does that mean the beta must have increased?
Explain
No, the total risk has two components – systematic (or market) and unique (non-systematic)
If the total has increased, it doesn’t mean that the market risk (measured by beta) component has necessarily increased
What would motivate an investor to invest in a stock whose beta is negative, implying its expected return is less than the risk-free rate?
why?
A savvy investor recognizes that negative beta stocks can only occur if the security is negatively correlated with the overall market, which is uncommon
By investing in this stock, they would likely be able to reduce the overall risk of their portfolio
because beta is correlation of the market and security
Which of the following statements about an efficient market is false?
a) Prices fully and accurately reflect all available information.
b) Prices reflect information about a firm’s future plans.
c) Prices are always correct.
d) Price changes are independent of one another.
c) Prices are always correct.
Which of the following is not a component of market efficiency?
a) Allocational efficiency
b) Informational efficiency
c) Managerial efficiency
d) Operational efficiency
c) Managerial efficiency
Which of the following is useful in attempting to identify mispriced securities if the semi-strong form of EMH is assumed?
a) Past stock price changes
b) Earnings expectations
c) Past and current published trading volumes
d) Relevant insider information
d) Relevant insider information
Which of the following conclusions is false?
a) Evidence strongly supports the weak form of EMH.
b) Evidence strongly supports the semi-strong form of EMH, with more contradictory evidence than for the weak form.
c) Evidence strongly supports the strong form of EMH.
d) Evidence does not support the strong form of EMH.
c) Evidence strongly supports the strong form of EMH.
In an efficient market,
a) security prices react quickly to new information.
b) security analysts will not enable investors to realize superior returns consistently.
c) one cannot make money.
d) a and b are both correct
d) a and b are both correct
Which of the following statements about strong form EMH is false?
a) It encompasses both the weak and semi-strong EMH.
b) It is the most flexible form of market efficiency.
c) It states that prices reflect both public and private information.
d) It implies that no investor can take advantage of insider information.
b) It is the most flexible form of market efficiency.
Proponents of the efficient market hypothesis think technical analysts
a) should focus on relative strength.
b) should focus on resistance levels.
c) should focus on support levels.
d) are wasting their time.
d) are wasting their time.
According to proponents of the efficient market hypothesis, the best strategy for a small investor with a portfolio worth $25,000 is probably to
a) perform fundamental analysis.
b) invest in individual stocks.
c) invest in derivative securities.
d) invest in mutual funds.
d) invest in mutual funds.
Explain whether each of the following is an example of informational efficiency.
Every time my broker tells me to buy, the stock price subsequently goes down. Every time my broker tells me to sell, the stock price subsequently goes up.
Yes. All I have to do to consistently beat the market is do the opposite of what my broker advises
Explain whether each of the following is an example of informational efficiency.
I use a simple trading rule: if the stock has risen for the past three days—sell; if the stock has fallen for the past three days—buy. I usually make money
Yes. I’m trading based on past price behaviour. If the market is weak form efficient, I should not be able to consistently make money (on a risk-adjusted basis)
Explain whether each of the following is an example of informational efficiency.
I carefully examine the financial statements of the firm, the industry prospects, and general economic conditions. Because of my skill, I am able to complete this analysis within five minutes of the financial statement disclosure. I usually make money
No. The fact that a skillful analysis was completed before anyone else does not suggest that the market is semi-strong form inefficient. Rather, the money I make is a fair compensation for my skill and speed
Parker Investments Inc. has just completed an investigation of strong form efficiency in the Canadian stock market and has concluded that its evidence is statistically significant but not economically significant. Explain to your client how this is possible
Statistical significance simply asks whether or not the observations are likely under the null hypothesis proposed for the situation
Economic significance, in contrast, asks if the observed relationship is large enough that you can make money from it
Which type of analyst, buy side or sell side, is more likely to “sell” their recommendation to the public?
A sell-side analyst works for the investment banks and brokerage houses who are trying to “sell” the securities; consequently, they are most likely to offer their recommendations to the public
In contrast, the buy-side analyst works for an investor (usually a large institution) and will want to keep their recommendations private
