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- Chapter 11 EMH
- Multiple Choice Questions for investment
- Chap021 Text Bank(1) Solution
- Chap 001
- FIN7013-chap5-8exam-8th_edition-test[1]
- Chap 012
- Sample Probs
- Exercises on Performance Evaluation
- Exercises on EMH
- PORTFOLIO PERFORMANCE EVALUATION AND OPTION
- ch7
- Chap009 Test Bank(1) Solution
- Chap 008
- Chap012 Text Bank(1) Solution
- 8a.equity Valuation Models_Text Bank(1)_Solution
- Chap017_Text Bank(1)_Solution
- Chap 006
- Exercises From International Diversification
- Chap010 Text Bank(1) Solution
- Equity Valuation

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Learner:

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work submitted or for the entire course, and may result in academic dismissal.

FIN 7013

Activity

Northcentral University

FIN7013

FIN7013-chap9-13exam

There are 50 multiple choice questions on the exam. Each question is worth 2 points. For a total of 100 points.

Please highlight the correct answer for the multiple choice questions. GOOD LUCK!

Northcentral University

FIN7013

1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is

A. unique risk.

B. beta.

C. standard deviation of returns.

D. variance of returns.

E. none of the above.

2. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return

is a function of

A. systematic risk

B. unsystematic risk

C. unique risk.

D. reinvestment risk.

E. none of the above.

3. The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively.

According to the capital asset pricing model (CAPM), the expected rate of return on security X

with a beta of 1.2 is equal to

A. 0.06.

B. 0.144.

C. 0.12.

D. 0.132

E. 0.18

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.

5. According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any

security is equal to

A. Rf + β [E(RM)].

B. Rf + β [E(RM) - Rf].

C. β [E(RM) - Rf].

D. E(RM) + Rf.

E. none of the above.

Northcentral University

FIN7013

6. 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. the line that represents the relationship between an individual security's return and the

market's return.

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.

8. The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If you expect

a stock with a beta of 1.3 to offer a rate of return of 12 percent, you should

A. buy the stock because it is overpriced.

B. sell short the stock because it is overpriced.

C. sell the stock short because it is underpriced.

D. buy the stock because it is underpriced.

E. none of the above, as the stock is fairly priced.

9. The risk-free rate is 4 percent. The expected market rate of return is 11 percent. If you expect

CAT with a beta of 1.0 to offer a rate of return of 13 percent, you should

A. buy stock X because it is overpriced.

B. sell short stock X because it is overpriced.

C. sell stock short X because it is underpriced.

D. buy stock X because it is underpriced.

E. none of the above, as the stock is fairly priced.

10. You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in

security B with a beta of 0.7. The beta of the resulting portfolio is

A. 1.40

B. 1.15

C. 0.36

D. 1.08

E. 0.80

Northcentral University

FIN7013

11. ___________ 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

12 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. none of the above

13. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio

that will yield a sure profit.

A. positive

B. negative

C. zero

D. all of the above

E. none of the above

14. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%.

Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%. If

you wanted to take advantage of an arbitrage opportunity, you should take a short position in

portfolio __________ and a long position in portfolio _______.

A. A, A

B. A, B

C. B, A

D. B, B

E. A, the riskless asset

15. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The beta of

a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-diversified

portfolio is approximately __________.

A. 3.6%

B. 6.0%

C. 7.3%

D. 10.1%

E. none of the above

Northcentral University

FIN7013

16. Consider the single factor APT. Portfolios A and B have expected returns of 14% and 18%,

respectively. The risk-free rate of return is 7%. Portfolio A has a beta of 0.7. If arbitrage

opportunities are ruled out, portfolio B must have a beta of __________.

A. 0.45

B. 1.00

C. 1.10

D. 1.22

E. none of the above

There are three stocks, A, B, and C. You can either invest in these stocks or short sell them.

There are three possible states of nature for economic growth in the upcoming year; economic

growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and

C for each of these states of nature are given below:

Northcentral University

FIN7013

17. If you invested in an equally weighted portfolio of stocks A and B, your portfolio return would

be ___________ if economic growth were moderate.

A. 3.0%

B. 14.5%

C. 15.5%

D. 16.0%

E. none of the above

18. If you wanted to take advantage of a risk-free arbitrage opportunity, you should take a short

position in _________ and a long position in an equally weighted portfolio of _______.

A. A, B and C

B. B, A and C

C. C, A and B

D. A and B, C

E. none of the above

Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-

free rate of return is 6%. The following information is available about two well-diversified

portfolios:

Northcentral University

FIN7013

19. Assuming no arbitrage opportunities exist, the risk premium on the factor F1 portfolio should

be __________.

A. 3%

B. 4%

C. 5%

D. 6%

E. none of the above

20. The APT differs from the CAPM because the APT _________.

A. places more emphasis on market risk

B. minimizes the importance of diversification

C. recognizes multiple unsystematic risk factors

D. recognizes multiple systematic risk factors

E. none of the above

21. 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. A, B, and C

E. none of the above

22. 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. negative; zero

B. negative; positive

C. zero; negative

D. zero; positive

E. zero; zero

A. an active trading strategy.

B. investing in an index fund.

C. a passive investment strategy.

D. A and B

E. B and C

Northcentral University

FIN7013

24. If you believe in the _______ form of the EMH, you believe that stock prices 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. all of the above

E. none of the above

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. C and D

26. Researchers have found that most of the small firm effect occurs

A. during the spring months.

B. during the summer months.

C. in December.

D. in January.

E. randomly.

27. Basu (1977, 1983) found that firms with low P/E ratios

A. earned higher average returns than firms with high P/E ratios.

B. earned the same average returns as firms with high P/E ratios.

C. earned lower average returns than firms with high P/E ratios.

D. had higher dividend yields than firms with high P/E ratios.

E. none of the above.

A. security prices react quickly to new information

B. security prices are seldom far above or below their justified levels

C. security analysts will not enable investors to realize superior returns consistently

D. one cannot make money

E. A, B, and C

Northcentral University

FIN7013

29. The weather report says that a devastating and unexpected freeze is expected to hit Florida

tonight, during the peak of the citrus harvest. In an efficient market one would expect the price

of Florida Orange's stock to

A. drop immediately.

B. remain unchanged.

C. increase immediately.

D. gradually decline for the next several weeks.

E. gradually increase for the next several weeks.

30. Which of the following are used by fundamental analysts to determine proper stock prices?

I) trendlines

II) earnings

III) dividend prospects

IV) expectations of future interest rates

V) resistance levels

A. I, IV, and V

B. I, II, and III

C. II, III, and IV

D. II, IV, and V

E. All of the items are used by fundamental analysts.

31. Conventional theories presume that investors ____________ and behavioral finance presumes

that they ____________.

A. are irrational; are irrational

B. are rational; may not be rational

C. are rational; are rational

D. may not be rational; may not be rational

E. may not be rational; are rational

A. conventional financial theory ignores how real people make decisions and that people make a

difference.

B. conventional financial theory considers how emotional people make decisions but the market

is driven by rational utility maximizing investors.

C. conventional financial theory should ignore how the average person makes decisions because

the market is driven by investors that are much more sophisticated than the average person.

D. B and C

E. none of the above

Northcentral University

FIN7013

33. Some economists believe that the anomalies literature is consistent with investors

____________ and ____________.

A. ability to always process information correctly and therefore they infer correct probability

distributions about future rates of return; given a probability distribution of returns, they always

make consistent and optimal decisions

B. inability to always process information correctly and therefore they infer incorrect probability

distributions about future rates of return; given a probability distribution of returns, they always

make consistent and optimal decisions

C. ability to always process information correctly and therefore they infer correct probability

distributions about future rates of return; given a probability distribution of returns, they often

make inconsistent or suboptimal decisions

D. inability to always process information correctly and therefore they infer incorrect probability

distributions about future rates of return; given a probability distribution of returns, they often

make inconsistent or suboptimal decisions

E. none of the above

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

35. Psychologists have found that people who make decisions that turn out badly blame

themselves more when that decision was unconventional. The name for this phenomenon is

A. regret avoidance

B. framing

C. mental accounting

D. overconfidence

E. obnoxicity

36. On October 29, 1991 there were 1,031 stocks that advanced on the NYSE and 610 that

declined. The volume in advancing issues was 112,866,000 and the volume in declining issues

was 58,188,000. The trin ratio for that day was ________ and technical analysts were likely to be

________.

A. 0.87, bullish

B. 0.87, bearish

C. 1.15, bullish

D. 1.15, bearish

E. none of the above

Northcentral University

FIN7013

37. In regard to moving averages, it is considered to be a ____________ signal when market price

breaks through the moving average from ____________.

A. bearish; below

B. bullish: below

C. bearish; above

D. bullish above

E. B and C

A. provides a conclusive rejection of market efficiency

B. provides a conclusive support of market efficiency

C. suggests that several strategies would have provided superior returns

D. A and C

E. none of the above

A. Conservatism

B. Regret avoidance

C. Prospect theory

D. Mental accounting

E. Model risk

40. Single men trade far more often than women. This is due to greater ________ among men.

A. framing

B. regret avoidance

C. overconfidence

D. conservatism

E. none of the above

A. by regulatory commissions in determining the costs of capital for regulated firms

B. in court rulings to determine discount rates to evaluate claims of lost future incomes

C. to advise clients as to the composition of their portfolios

D. all of the above

E. none of the above

42. In the empirical study of a multi-factor model by Chen, Roll, and Ross, a factor that appeared

to have significant explanatory power in explaining security returns was ________.

A. the change in the expected rate of inflation

B. the risk premium on bonds

C. the unexpected change in the rate of inflation

D. industrial production

E. B, C and D

Northcentral University

FIN7013

43. In the results of the earliest estimations of the security market line by Lintner (1965) and by

Miller and Scholes (1972), it was found that the average difference between a stock's return and

the risk-free rate was ________ to its nonsystematic risk.

A. positively related

B. negatively related

C. unrelated

D. related in a nonlinear fashion

E. none of the above

rit - rft = ai + bi(rmt - rft) + eit

where:

rit = return on stock i in month t

rft = the monthly risk-free rate of return in month t

rmt = the return on the market portfolio proxy in month t

This regression equation is used to estimate

A. the security characteristic line.

B. the security market line.

C. the capital market line.

D. all of the above.

E. none of the above.

ri - rf = g0 +g1b1 + g2s2(ei) + eit

where:

ri - rf = the average difference between the monthly return on stock i and the monthly risk-free

rate

bi = the beta of stock i

s2(ei) = a measure of the nonsystematic variance of the stock i

If you estimated this regression equation and the CAPM was valid, you would expect the

estimated coefficient g0 to be

A. 0.

B. 1.

C. equal to the risk-free rate of return.

D. equal to the average difference between the monthly return on the market portfolio and the

monthly risk-free rate.

E. none of the above.

Northcentral University

FIN7013

46. Consider the regression equation:

ri - rf = g0 + g1bi + eit

where:

ri - rf = the average difference between the monthly return on stock i and the monthly risk-free

rate

bi = the beta of stock i

This regression equation is used to estimate __________.

A. the security characteristic line

B. the security market line

C. the capital market line

D. A and B

E. A, B, and C

A. the exact composition of the true market portfolio is known and used in the tests.

B. all individual assets are included in the market proxy.

C. the market proxy and the true market portfolio are highly negatively correlated.

D. A and B.

E. B and C.

A. conditional average returns of stocks, indices, or portfolios.

B. unconditional average returns of stocks, indices, or portfolios.

C. conditional variance of stocks, indices, or portfolios.

D. unconditional variance of stocks, indices, or portfolios.

E. none of the above

49. 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. all of the above

E. none of the above

50. Your opinion is that Boeing has an expected rate of return of 0.112. It has a beta of 0.92. The

risk-free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital

Asset Pricing Model, this security is

A. underpriced.

B. overpriced.

C. fairly priced.

D. cannot be determined from data provided.

E. none of the above.

Northcentral University

FIN7013

Northcentral University

FIN7013

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