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507 просмотров23 страницыAll the possible mcqs that could appear in the final exam for finance.

Apr 10, 2014

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All the possible mcqs that could appear in the final exam for finance.

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507 просмотров23 страницыAll the possible mcqs that could appear in the final exam for finance.

© All Rights Reserved

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. They only care about the rate of return. B. They accept investments that are fair games. C. They only accept risky investments that offer risk premiums over the risk-free rate. D. They are willing to accept lower returns and high risk. E. They only care about the rate of return and accept investments that are fair games. Risk-averse investors only accept risky investments that offer risk premiums over the risk-free rate. 2. Which of the following statements is (are) true? I) Risk-averse investors reject investments that are fair games. II) Risk-neutral investors judge risky investments only by the expected returns. III) Risk-averse investors judge investments only by their riskiness. IV) Risk-loving investors will not engage in fair games. A. I only B. II only C. I and II only D. II and III only E. II, III, and IV only Risk-averse investors consider a risky investment only if the investment offers a risk premium. Riskneutral investors look only at expected returns when making an investment decision. 3. Which of the following statements is (are) false? I) Risk-averse investors reject investments that are fair games. II) Risk-neutral investors judge risky investments only by the expected returns. III) Risk-averse investors judge investments only by their riskiness. IV) Risk-loving investors will not engage in fair games. A. I only B. II only C. I and II only D. II and III only E. III, and IV only Risk-averse investors consider a risky investment only if the investment offers a risk premium. Riskneutral investors look only at expected returns when making an investment decision. 4. In the mean-standard deviation graph an indifference curve has a ________ slope. A. negative B. zero C. positive D. northeast E. cannot be determined The risk-return trade-off is one in which greater risk is taken if greater returns can be expected, resulting in a positive slope.

5. In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor? A. It is the locus of portfolios that have the same expected rates of return and different standard deviations. B. It is the locus of portfolios that have the same standard deviations and different rates of return. C. It is the locus of portfolios that offer the same utility according to returns and standard deviations. D. It connects portfolios that offer increasing utilities according to returns and standard deviations. E. It is irrelevant to making a decision of what portfolio would best suit the investor. Indifference curves plot trade-off alternatives that provide equal utility to the individual (in this case, the trade-offs are the risk-return characteristics of the portfolios). 6. In a return-standard deviation space, which of the following statements is (are) true for riskaverse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.) I) An investor's own indifference curves might intersect. II) Indifference curves have negative slopes. III) In a set of indifference curves, the highest offers the greatest utility. IV) Indifference curves of two investors might intersect. A. I and II only B. II and III only C. I and IV only D. III and IV only E. II and IV only An investor's indifference curves are parallel (thus they cannot intersect) and have positive slopes. The highest indifference curve (the one in the most northwestern position) offers the greatest utility. Indifference curves of investors with similar risk-return trade-offs might intersect. 7. Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, A. for the same risk, David requires a higher rate of return than Elias. B. for the same return, Elias tolerates higher risk than David. C. for the same risk, Elias requires a lower rate of return than David. D. for the same return, David tolerates higher risk than Elias. E. cannot be determined. The more risk averse the investor, the less risk that is tolerated for a given rate of return. 8. When an investment advisor attempts to determine an investor's risk tolerance, which factor would they be least likely to assess? A. The investor's prior investing experience B. The investor's degree of financial security C. The investor's tendency to make risky or conservative choices

D. The level of return the investor prefers E. The investor's feelings about loss Investment advisors would be least likely to assess the level of return the investor prefers. The investor's investing experience, financial security, feelings about loss, and disposition toward risky or conservative choices will impact risk tolerance.

Assume an investor with the following utility function: U = E(r) - 3/2(s2). 9. To maximize her expected utility, she would choose the asset with an expected rate of return of _______ and a standard deviation of ________, respectively. A. 12%; 20% B. 10%; 15% C. 10%; 10% D. 8%; 10% E. 10%; 12% U = 0.10 - 3/2(0.10) 2 = 8.5%; highest utility of choices. 10. To maximize her expected utility, which one of the following investment alternatives would she choose? A. A portfolio that pays 10 percent with a 60 percent probability or 5 percent with 40 percent probability. B. A portfolio that pays 10 percent with 40 percent probability or 5 percent with a 60 percent probability. C. A portfolio that pays 12 percent with 60 percent probability or 5 percent with 40 percent probability. D. A portfolio that pays 12 percent with 40 percent probability or 5 percent with 60 percent probability. E. A portfolio that pays 12 percent with 20 percent probability or 2 percent with 80 percent probability. U(c) = 9.02%; highest utility of possibilities. 1. Market risk is also referred to as A. systematic risk, diversifiable risk. B. systematic risk, nondiversifiable risk. C. unique risk, nondiversifiable risk. D. unique risk, diversifiable risk. E. firm-specific risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

2. Systematic risk is also referred to as A. market risk, nondiversifiable risk. B. market risk, diversifiable risk. C. unique risk, nondiversifiable risk. D. unique risk, diversifiable risk. E. firm-specific risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification. 3. Nondiversifiable risk is also referred to as A. systematic risk, unique risk. B. systematic risk, market risk. C. unique risk, market risk. D. unique risk, firm-specific risk. E. systematic risk, firm-specific risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification. 4. Diversifiable risk is also referred to as A. systematic risk, unique risk. B. systematic risk, market risk. C. unique risk, market risk. D. unique risk, firm-specific risk. E. systematic risk, firm-specific risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification. 5. Unique risk is also referred to as A. systematic risk, diversifiable risk. B. systematic risk, market risk. C. diversifiable risk, market risk. D. diversifiable risk, firm-specific risk. E. market risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification. 6. Firm-specific risk is also referred to as A. systematic risk, diversifiable risk. B. systematic risk, market risk. C. diversifiable risk, market risk.

D. diversifiable risk, unique risk. E. nondiversifiable, market risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification. 7. Non-systematic risk is also referred to as A. market risk, diversifiable risk. B. firm-specific risk, market risk. C. diversifiable risk, market risk. D. diversifiable risk, unique risk. E. nondiversifiable risk, unique risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification. 8. The risk that can be diversified away is A. firm-specific risk. B. beta. C. systematic risk. D. market risk. E. non-systematic risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification. 9. The risk that cannot be diversified away is A. firm-specific risk. B. unique. C. non-systematic risk. D. market risk. E. unique risk and non-systematic risk. Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification. 10. The variance of a portfolio of risky securities A. is a weighted sum of the securities' variances. B. is the sum of the securities' variances. C. is the weighted sum of the securities' variances and covariances. D. is the sum of the securities' covariances. E. is the weighted sum of the securities' covariances.

The variance of a portfolio of risky securities is a weighted sum taking into account both the variance of the individual securities and the covariances between securities. 11. The intercept in the regression equations calculated by beta books is equal to A. in the CAPM B. + rf(1 + ) C. + rf(1 - ) D. 1 - E. 1 The intercept that beta books call alpha is really, using the parameters of the CAPM, an estimate of a + rf (1 - b). The apparent justification for this procedure is that, on a monthly basis, rf(1 - b) is small and is apt to be swamped by the volatility of actual stock returns. 12. Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of ______________. A. the of the asset B. the of the asset C. the of the asset D. the of the asset E. the of the asset The slope of the regression line, , estimates the volatility of the stock versus the volatility of the market and the estimates the intercept. 13. Analysts may use regression analysis to estimate the index model for a stock. When doing so, the intercept of the regression line is an estimate of ______________. A. the of the asset B. the of the asset C. the of the asset D. the of the asset E. the of the asset The slope of the regression line, , estimates the volatility of the stock versus the volatility of the market and the estimates the intercept. 14. In a factor model, the return on a stock in a particular period will be related to _________. A. firm-specific events B. macroeconomic events C. the error term D. both firm-specific events and macroeconomic events E. neither firm-specific events nor macroeconomic events The return on a stock is related to both firm-specific and macroeconomic events. 15. Rosenberg and Guy found that __________ helped to predict a firm's beta. A. the firm's financial characteristics

B. the firm's industry group C. firm size D. both the firm's financial characteristics and the firm's industry group E. the firm's financial characteristics, the firm's industry group and firm size Rosenberg and Guy found that after controlling for the firm's financial characteristics, the firm's industry group was a significant predictor of the firm's beta. 16. If the index model is valid, _________ would be helpful in determining the covariance between assets GM and GE. A. GM B. GE C. M D. GM, GE, and M E. GE, and M If the index model is valid A, B, and C are determinants of the covariance between GE and GM. 17. If the index model is valid, _________ would be helpful in determining the covariance between assets HPQ and KMP. A. HPQ B. KMP C. M D. HPQ, KMP, and M E. HPQ, and KMP If the index model is valid A, B, and C are determinants of the covariance between HPQ and KMP. 18. If the index model is valid, _________ would be helpful in determining the covariance between assets K and L. A. k B. L C. M D. k, L, and M E. k, and L If the index model is valid A, B, and C are determinants of the covariance between K and L. 19. Rosenberg and Guy found that ___________ helped to predict firms' betas. A. debt/asset ratios B. market capitalization C. variance of earnings D. debt/asset ratios, market capitalization, and variance of earnings E. debt/asset ratios and variance of earnings only Rosenberg and Guy found that A, B, and C were determinants of firms' betas. 20. If a firm's beta was calculated as 0.6 in a regression equation, a commonly used adjustment technique would provide an adjusted beta of

A. less than 0.6 but greater than zero. B. between 0.6 and 1.0. C. between 1.0 and 1.6. D. greater than 1.6. E. zero or less. Betas, on average, equal one; thus, betas over time regress toward the mean, or 1. Therefore, if historic betas are less than 1, adjusted betas are between 1 and the calculated beta. 10. Which statement is not true regarding the market portfolio? A. It includes all publicly traded financial assets. B. It lies on the efficient frontier. C. All securities in the market portfolio are held in proportion to their market values. D. It is the tangency point between the capital market line and the indifference curve. E. All of the above are true. The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor. 11. Which statement is true regarding the market portfolio? A. It includes all publicly traded financial assets. B. It lies on the efficient frontier. C. All securities in the market portfolio are held in proportion to their market values. D. It is the tangency point between the capital market line and the indifference curve. E. A, B, and C are true. The tangency point between the capital market line and the indifference curve is the optimal portfolio for a particular investor. 12. Which statement is not true regarding the Capital Market Line (CML)? A. The CML is the line from the risk-free rate through the market portfolio. B. The CML is the best attainable capital allocation line. C. The CML is also called the security market line. D. The CML always has a positive slope. E. The risk measure for the CML is standard deviation. Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus C is not true; the other statements are true). 13. Which statement is true regarding the Capital Market Line (CML)? A. The CML is the line from the risk-free rate through the market portfolio. B. The CML is the best attainable capital allocation line. C. The CML is also called the security market line. D. The CML always has a positive slope. E. A, B, and D are true.

Both the Capital Market Line and the Security Market Line depict risk/return relationships. However, the risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus C is not true; the other statements are true). 14. The market risk, beta, of a security is equal to A. the covariance between the security's return and the market return divided by the variance of the market's returns. B. the covariance between the security and market returns divided by the standard deviation of the market's returns. C. the variance of the security's returns divided by the covariance between the security and market returns. D. the variance of the security's returns divided by the variance of the market's returns. E. none of the above. Beta is a measure of how a security's return covaries with the market returns, normalized by the market variance. 15. According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A. Rf+ [E(RM)]. B. Rf+ [E(RM) - Rf]. C. [E(RM) - Rf]. D. E(RM) + Rf. E. none of the above. The expected rate of return on any security is equal to the risk free rate plus the systematic risk of the security (beta) times the market risk premium, E(RM - Rf). 16. The Security Market Line (SML) is A. the line that describes the expected return-beta relationship for well-diversified portfolios only. B. also called the Capital Allocation Line. C. the line that is tangent to the efficient frontier of all risky assets. D. the line that represents the expected return-beta relationship. E. all of the above. The SML is a measure of expected return per unit of risk, where risk is defined as beta (systematic risk). 17. According to the Capital Asset Pricing Model (CAPM), fairly priced securities A. have positive betas. B. have zero alphas. C. have negative betas. D. have positive alphas. E. none of the above. A zero alpha results when the security is in equilibrium (fairly priced for the level of risk).

18. According to the Capital Asset Pricing Model (CAPM), underpriced securities A. have positive betas. B. have zero alphas. C. have negative betas. D. have positive alphas. E. none of the above. According to the Capital Asset Pricing Model (CAPM), underpriced securities have positive alphas. 19. According to the Capital Asset Pricing Model (CAPM), overpriced securities A. have positive betas. B. have zero alphas. C. have negative alphas. D. have positive alphas. E. none of the above. According to the Capital Asset Pricing Model (CAPM), overpriced securities have negative alphas. 20. According to the Capital Asset Pricing Model (CAPM), A. a security with a positive alpha is considered overpriced. B. a security with a zero alpha is considered to be a good buy. C. a security with a negative alpha is considered to be a good buy. D. a security with a positive alpha is considered to be underpriced. E. none of the above. A security with a positive alpha is one that is expected to yield an abnormal positive rate of return, based on the perceived risk of the security, and thus is underpriced. 1. ___________ a relationship between expected return and risk. A. APT stipulates B. CAPM stipulates C. Both CAPM and APT stipulate D. Neither CAPM nor APT stipulate E. No pricing model has found Both models attempt to explain asset pricing based on risk/return relationships. 2. Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1 and a beta of .86 on factor 2. The risk premium on the factor 1 portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no arbitrage opportunities exit? A. 9.26% B. 3% C. 4% D. 7.75% E. 9.75% 17.6% = 1.45(3.2%) + .86x + 5%; x = 9.26.

3. In a multi-factor APT model, the coefficients on the macro factors are often called ______. A. systemic risk B. factor sensitivities C. idiosyncratic risk D. factor betas E. both factor sensitivities and factor betas The coefficients are called factor betas, factor sensitivities, or factor loadings. 4. In a multi-factor APT model, the coefficients on the macro factors are often called ______. A. systemic risk B. firm-specific risk C. idiosyncratic risk D. factor betas E. unique risk The coefficients are called factor betas, factor sensitivities, or factor loadings. 5. In a multi-factor APT model, the coefficients on the macro factors are often called ______. A. systemic risk B. firm-specific risk C. idiosyncratic risk D. factor loadings E. unique risk The coefficients are called factor betas, factor sensitivities, or factor loadings. 6. Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios? A. The CAPM B. The multifactor APT C. Both the CAPM and the multifactor APT D. Neither the CAPM nor the multifactor APT E. No pricing model currently exists that provides guidance concerning the determination of the risk premium on any portfolio. The multifactor APT provides no guidance as to the determination of the risk premium on the various factors. The CAPM assumes that the excess market return over the risk-free rate is the market premium in the single factor CAPM. 7. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. A. small positive B. small negative C. zero D. large positive E. large negative

If the investor can construct a portfolio without the use of the investor's own funds and the portfolio yields a positive profit, arbitrage opportunities exist. 8. The APT was developed in 1976 by ____________. A. Lintner B. Modigliani and Miller C. Ross D. Sharpe E. Fama Ross developed this model in 1976. 9. A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor. A. factor B. market C. index D. factor and market E. factor, market, and index A factor model portfolio has a beta of 1 one factor, with zero betas on other factors. 10. The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called ___________. A. arbitrage B. capital asset pricing C. factoring D. fundamental analysis E. technical analysis Arbitrage is earning of positive profits with a zero (risk-free) investment. 1. If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. hard The semistrong form of the EMH maintains that stock prices immediately reflect all historical and current public information, but not inside information. 2. When Maurice Kendall examined the patterns of stock returns in 1953 he concluded that the stock market was __________. Now, these random price movements are believed to be _________. A. inefficient; the effect of a well-functioning market B. efficient; the effect of an inefficient market

C. inefficient; the effect of an inefficient market D. efficient; the effect of a well-functioning market E. irrational; even more irrational than before Random price changes were originally thought to be driven by irrationality. Now, financial economists believe random price changes occur because markets are informationally efficient. 3. The stock market follows a __________. A. random walk B. submartingale C. predictable pattern that can be exploited D. random walk and a predictable pattern that can be exploited E. submartingale and a predictable pattern that can be exploited The stock market follows a submartingale. 4. A hybrid strategy is one where the investor A. uses both fundamental and technical analysis to select stocks. B. selects the stocks of companies that specialize in alternative fuels. C. selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds. D. maintains a passive core and augments the position with an actively managed portfolio. E. None of these are correct. A hybrid strategy is one where the investor maintains a passive core and augments the position with an actively managed portfolio. 5. The difference between a random walk and a submartingale is the expected price change in a random walk is ______ and the expected price change for a submartingale is ______. A. positive; zero B. positive; positive C. positive; negative D. zero; positive E. zero; zero A random walk has an expected price change of zero and a submartingale has a positive expected price change. 6. Proponents of the EMH typically advocate A. an active trading strategy. B. investing in an index fund. C. a passive investment strategy. D. an active trading strategy and investing in an index fund E. investing in an index fund and a passive investment strategy Believers of market efficiency advocate passive investment strategies, and an investment in an index fund is one of the most practical passive investment strategies, especially for small investors.

7. Proponents of the EMH typically advocate A. buying individual stocks on margin and trading frequently. B. investing in hedge funds. C. a passive investment strategy. D. buying individual stocks on margin and trading frequently and investing in hedge funds E. investing in hedge funds and a passive investment strategy Believers of market efficiency advocate passive investment strategies, and an investment in an index fund is one of the most practical passive investment strategies, especially for small investors. 8. If you believe in the _______ form of the EMH, you believe that stock prices only reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. None of these are correct. The information described above is market data, which is the data set for the weak form of market efficiency. The semistrong form includes the above plus all other public information. The strong form includes all public and private information. 9. If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. None of these are correct. The strong form includes all public and private information. 10. If you believe in the reversal effect, you should A. buy bonds in this period if you held stocks in the last period. B. buy stocks in this period if you held bonds in the last period. C. buy stocks this period that performed poorly last period. D. go short. E. both buy stocks this period that performed poorly last period and go short The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period, and vice versa. 4. Information processing errors consist of I) forecasting errors II) overconfidence III) conservatism IV) framing

A. I and II B. I and III C. III and IV D. IV only E. I, II and III Information processing errors consist of forecasting errors, overconfidence, and conservatism. 5. Forecasting errors are potentially important because A. research suggests that people underweight recent information. B. research suggests that people overweight recent information. C. research suggests that people correctly weight recent information. D. research suggests that people either underweight recent information or overweight recent information depending on whether the information was good or bad. E. None of these is correct. Forecasting errors are potentially important because research suggests that people overweight recent information. 6. DeBondt and Thaler believe that high P/E result from investors' A. earnings expectations that are too extreme. B. earnings expectations that are not extreme enough. C. stock price expectations that are too extreme. D. stock price expectations that are not extreme enough. E. None of these is correct. DeBondt and Thaler believe that high P/E result from investors earnings expectations that are too extreme. 7. If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors. A. framing B. selection bias C. overconfidence D. conservatism E. forecasting If a person gives too much weight to recent information compared to prior beliefs, they would make forecasting errors. than women. This is due to greater ________ among men. A. framing B. regret avoidance C. overconfidence D. conservatism E. None of these is correct. Single men trade far more often than women. This is due to greater overconfidence among men.

9. ____________ may be responsible for the prevalence of active versus passive investments management. A. Forecasting errors B. Overconfidence C. Mental accounting D. Conservatism E. Regret avoidance Overconfidence may be responsible for the prevalence of active versus passive investments management. 10. Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to A. overconfidence B. framing C. regret avoidance D. sample neglect E. overconfidence, framing, regret avoidance, and sample neglect They attribute this to overconfidence. 1. ________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of these is correct. Book value per share is assets minus liabilities divided by number of shares. Liquidation value per share is the amount a shareholder would receive in the event of bankruptcy. Market value per share is the market price of the stock. 2. High P/E ratios tend to indicate that a company will ______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. not grow E. None of these is correct Investors pay for growth; hence the high P/E ratio for growth firms; however, the investor should be sure that he or she is paying for expected, not historic, growth. 3. _________ is equal to (common shareholders' equity/common shares outstanding). A. Book value per share B. Liquidation value per share

C. Market value per share D. Tobin's Q E. None of these is correct Book value per share is assets minus liabilities divided by number of shares. Liquidation value per share is the amount a shareholder would receive in the event of bankruptcy. Market value per share is the market price of the stock. 4. ________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts E. Specialists Fundamentalists use all public information in an attempt to value stock (while hoping to identify undervalued securities). 5. The _______ is defined as the present value of all cash proceeds to the investor in the stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback ratio E. None of these is correct The cash flows from the stock discounted at the appropriate rate, based on the perceived riskiness of the stock, the market risk premium and the risk free rate, determine the intrinsic value of the stock. 6. _______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of these is correct Book value per share is assets minus liabilities divided by number of shares. Liquidation value per share is the amount a shareholder would receive in the event of bankruptcy. Market value per share is the market price of the stock. 7. Since 1955, Treasury bond yields and earnings yields on stocks were _______. A. identical B. negatively correlated C. positively correlated D. uncorrelated

The earnings yield on stocks equals the expected real rate of return on the stock market, which should be equal to the yield to maturity on Treasury bonds plus a risk premium, which may change slowly over time. 8. Historically, P/E ratios have tended to be ________. A. higher when inflation has been high B. lower when inflation has been high C. uncorrelated with inflation rates but correlated with other macroeconomic variables D. uncorrelated with any macroeconomic variables including inflation rates E. None of these is correct P/E ratios have tended to be lower when inflation has been high, reflecting the market's assessment that earnings in these periods are of "lower quality", i.e., artificially distorted by inflation, and warranting lower P/E ratios. 9. The ______ is a common term for the market consensus value of the required return on a stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback rate E. None of these is correct The market capitalization rate, which consists of the risk-free rate, the systematic risk of the stock and the market risk premium, is the rate at which a stock's cash flows are discounted in order to determine intrinsic value. 10. The _________ is the fraction of earnings reinvested in the firm. A. dividend payout ratio B. retention rate C. plowback ratio D. dividend payout ratio and plowback ratio E. retention rate and plowback ratio Retention rate, or plowback ratio, represents the earnings reinvested in the firm. The retention rate, or (1 - plowback) = dividend payout. 1. Hedge funds I) are appropriate as a sole investment vehicle for an investor. II) should only be added to an already well-diversified portfolio. III) pose performance evaluation issues due to non-linear factor exposures. IV) have down-market betas that are typically larger than up-market betas. V) have symmetrical betas. A. I only B. II and V C. I, III, and IV D. II, III, and IV E. I, III, and V

Hedge funds should only be added to an already well-diversified portfolio, pose performance evaluation issues due to non-linear factor exposures, and have down-market betas that are typically larger than up-market betas. 2. Mutual funds show ____________ evidence of serial correlation and hedge funds show ____________ evidence of serial correlation. A. almost no; almost no B. almost no; substantial C. substantial; substantial D. substantial; almost no E. modest; modest Mutual funds show almost no evidence of serial correlation and hedge funds show substantial evidence of serial correlation. 3. The comparison universe is __________. A. a concept found only in astronomy B. the set of all mutual funds in the world C. the set of all mutual funds in the U. S. D. a set of mutual funds with similar risk characteristics to your mutual fund E. None of these is correct A mutual fund manager is evaluated against the performance of managers of funds of similar risk characteristics. 4. The comparison universe is not __________. A. a concept found only in astronomy B. the set of all mutual funds in the world C. the set of all mutual funds in the U. S. D. a set of mutual funds with similar risk characteristics to your mutual fund E. a concept found only in astronomy, the set of all mutual funds in the world, and the set of all mutual funds in the U. S. A mutual fund manager is evaluated against the performance of managers of funds of similar risk characteristics. 5. __________ did not develop a popular method for risk-adjusted performance evaluation of mutual funds. A. Eugene Fama B. Michael Jensen C. William Sharpe D. Jack Treynor E. Eugene Fama and Michael Jensen Michael Jensen, William Sharpe, and Jack Treynor developed popular models for mutual fund performance evaluation.

6. __________ developed a popular method for risk-adjusted performance evaluation of mutual funds. A. Eugene Fama B. Michael Jensen C. William Sharpe D. Jack Treynor E. Michael Jensen, William Sharpe, and Jack Treynor Michael Jensen, William Sharpe, and Jack Treynor developed popular models for mutual fund performance evaluation. 7. Henriksson (1984) found that, on average, betas of funds __________ during market advances. A. increased very significantly B. increased slightly C. decreased slightly D. decreased very significantly E. did not change Portfolio betas should have a large value if the market is expected to perform well and a small value if the market is not expected to perform well; thus, these results reflect the poor timing ability of mutual fund managers. 8. Most professionally managed equity funds generally __________. A. outperform the S&P 500 index on both raw and risk-adjusted return measures B. underperform the S&P 500 index on both raw and risk-adjusted return measures C. outperform the S&P 500 index on raw return measures and underperform the S&P 500 index on risk-adjusted return measures D. underperform the S&P 500 index on raw return measures and outperform the S&P 500 index on risk-adjusted return measures E. match the performance of the S&P 500 index on both raw and risk-adjusted return measures Most mutual funds do not consistently, over time, outperform the S&P 500 index on the basis of either raw or risk-adjusted return measures. 9. Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A __________. A. is better than the performance of portfolio B B. is the same as the performance of portfolio B C. is poorer than the performance of portfolio B D. cannot be measured as there is no data on the alpha of the portfolio E. None of these is correct. The Sharpe index is a measure of average portfolio returns (in excess of the risk free return) per unit of total risk (as measured by standard deviation). 10. Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Treynor measure, the

performance of portfolio A __________. A. is better than the performance of portfolio B B. is the same as the performance of portfolio B C. is poorer than the performance of portfolio B D. cannot be measured as there is no data on the alpha of the portfolio E. None of these is correct. The Treynor index is a measure of average portfolio returns (in excess of the risk free return) per unit of systematic risk (as measured by beta). 11. Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio A has a lower beta than portfolio B. According to the Treynor measure, the performance of portfolio A __________. A. is better than the performance of portfolio B B. is the same as the performance of portfolio B C. is poorer than the performance of portfolio B D. cannot be measured as there is no data on the alpha of the portfolio E. None of these is correct. The Treynor index is a measure of average portfolio returns (in excess of the risk free return) per unit of systematic risk (as measured by beta). 12. Suppose two portfolios have the same average return, the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Sharpe measure, the performance of Aggie Fund A. is better than the performance of Raider Fund. B. is the same as the performance of Raider Fund. C. is poorer than the performance of Raider Fund. D. cannot be measured as there is no data on the alpha of the portfolio. E. None of these is correct. The Sharpe index is a measure of average portfolio returns (in excess of the risk free return) per unit of total risk (as measured by standard deviation). 1. In the Treynor-Black model A. portfolio weights are sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers. B. portfolio weights are not sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers. C. portfolio weights are sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers. D. portfolio weights are not sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers. E. None of these is true. In the Treynor-Black model portfolio weight are sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers.

2. Absent research, you should assume the alpha of a stock is A. zero B. positive C. negative D. not zero E. zero or positive In efficient markets, alpha should be assumed to be zero. 3. If you begin with a ______ and obtain additional data from an experiment you can form a ______. A. posterior distribution; prior distribution B. prior distribution; posterior distribution C. tight posterior; Bayesian analysis D. tight prior; Bayesian analysis E. None of these is true. If you begin with a prior distribution and obtain additional data from an experiment you can form a posterior distribution. 4. Benchmark risk is defined as A. the return difference between the portfolio and the benchmark B. the standard deviation of the return of the benchmark portfolio C. the standard deviation of the return difference between the portfolio and the benchmark D. the standard deviation of the return of the actively-managed portfolio E. None of these is true. Benchmark portfolio risk is defined as the standard deviation of the return difference between the portfolio and the benchmark. 5. Benchmark risk A. is inevitable and is never a significant issue in practice. B. is inevitable and is always a significant issue in practice. C. cannot be constrained to keep a Treynor-Black portfolio within reasonable weights. D. can be constrained to keep a Treynor-Black portfolio within reasonable weights. E. None of these is true. Benchmark portfolio risk can be constrained to keep a Treynor-Black portfolio within reasonable weights. 6. ____________ can be used to measure forecast quality and guide in the proper adjustment of forecasts. A. Regression analysis B. Exponential smoothing C. ARIMA D. Moving average models E. GAUSS

Regression analysis can be used to measure forecast quality and guide in the proper adjustment of forecasts. 7. Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance. A. 0.656 B. 0.452 C. 0.258 D. 0.153 E. 0.001 The text provides an example where forecasts improved as r-squared improved from 0.001134 to 0.001536. 8. The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure. A. Black-Litterman B. Treynor-Black C. Treynor-Mazuy D. Black-Scholes E. None of these is true. The Black-Litterman model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.

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