Beta is a measure of ______________.
relative systematic risk
The market portfolio has a beta of _________.
1
A stock's alpha measures the stock's ____________________.
abnormal return
An investor should do which of the following for stocks with negative alphas?
...
In a well-diversified portfolio, __________ risk is negligible.
unsystematic
According to the capital asset pricing model, a security with a _________.
positive alpha is considered underpriced
According to the CAPM, investors are compensated for all but which of the following?
residual risk
In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.
beta
Which of the following are assumptions of the simple CAPM model?
I. Individual trades of investors do not affect a stock's price.
II. All investors plan for one identical holding period.
III. All investors analyze securities in the same way and share the
I, II, and III only
In a simple CAPM world which of the following statements is (are) correct?
I. All investors will choose to hold the market portfolio, which includes all risky assets in the world.
II. Investors' complete portfolio will vary depending on their risk aversio
I, II, III, and IV
Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?
21.6%
Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%?
1.2
Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate?
8%
If all investors become more risk averse, the SML will _______________ and stock prices will _______________.
have the same intercept with a steeper slope; fall
According to the capital asset pricing model, a fairly priced security will plot _________.
along the security market line
According to the capital asset pricing model, fairly priced securities have _________.What if a stock is underpriced or a good buy? What alphas
zero alphas..... underpriced = positive alphas
You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?
1.048
The graph of the relationship between expected return and beta in the CAPM context is called the _________.
SML
Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ______ over time.
1
According to the CAPM, which of the following is not a true statement regarding the market portfolio.
It is always the minimum-variance portfolio on the efficient frontier.
In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line?
The capital market line is also called the security market line.
Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________.
overpriced
You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] =
1% because E(r) of beta= 6 + 1.1(10-6) = 17% given beta - 16%
Arbitrage is based on the idea that _________.
assets with identical risks must have the same expected rate of return
The possibility of arbitrage arises when ____________.
mispricing among securities creates opportunities for riskless profits
One can profit from an arbitrage opportunity by
long run in cheaper market followed by a short run in the expensive market
The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________.
recognizes only one systematic risk factor
Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you s
b;a
Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return
7% + .5(1%) + 1.25(7%)= 16.25%
Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is _________.
M(r)-4%=3 x .0225 =10.75%
You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________.
1.26
Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________.
...
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________.
buy stock X because it is underpriced
Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered
B; it offers an expected excess return of 1.8%
Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that port
...
Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are exp
12.9%
Which of the following beliefs would not preclude charting as a method of portfolio management?
Stock prices follow recurring patterns.
The weak form of the EMH states that ________ must be reflected in the current stock price.
all past information, including security price and volume data
The semistrong form of the EMH states that ________ must be reflected in the current stock price.
all publicly available information
The strong form of the EMH states that ________ must be reflected in the current stock price.
all information, including inside information
Random price movements indicate ________.
that markets are functioning efficiently
When the market risk premium rises, stock prices will ________.
fall
The small-firm effect is strongest in which month?
January
Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior.
short-run, long-run
Proponents of the EMH typically advocate __________.
a passive investment strategy
The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.
worst; best
Which of the following is not a method employed by followers of technical analysis?
earnings forecasting
Which of the following is not a method employed by fundamental analysts?
relative strength analysis
The primary objective of fundamental analysis is to identify __________.
mispriced stocks
__________ is the return on a stock beyond what would be predicted from market movements alone.
An abnormal return
A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund.
index
Choosing stocks by searching for predictable patterns in stock prices is called ________.
technical analysis
Which of the following is not an issue that is central to the debate regarding market efficiency?
the tax-loss selling issue
Most people would readily agree that the stock market is not _________.
strong-form efficient
Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.
varying risk premiums
Basu found that firms with high P/E ratios __________.
earned lower average returns than firms with low P/E ratios
You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the mo
$12,000
The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that _________.
either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor
The term random walk is used in investments to refer to ______________.
stock price changes that are random and unpredictabl
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
...
price behavior that differs from the behavior predicted by the efficient market hypothesis
An implication of the efficient market hypothesis is that __________.
nonzero alphas will quickly disappear
One type of passive portfolio management is ________.
investing in a well-diversified portfolio without attempting to search out mispriced securities
The four-factor model used to construct performance benchmarks for mutual funds uses the three Fama and French factors and one additional factor related to _________.
momentum
Value stocks may provide investors with better returns than growth stocks if:
I. Value stocks are out of favor with investors.
II. Prices of growth stocks include premiums for overly optimistic growth levels.
III. Value stocks are likely to generate posit
I, II, and III
In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?
diversification
The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________.
momentum effect
Behaviorists point out that even if market prices are ____________, there may be _______________.
distorted; limited arbitrage opportunities
A support level is ___________________.
a level below which the market is unlikely to fall
Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.
rational; irrational
If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______.
conservatism
If investors overweight recent performance in forecasting the future, they are exhibiting _______.
representativeness bias
Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________.
representativeness bias
If you believed in the reversal effect, you should __________.
...buy stocks this period that performed poorly last period
A _________ is a value above which it is difficult for the market to rise.
resistance level
An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________
mental accounting
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 th
Overconfidence
The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________.
support level