Q&A Hero

Q: Which of the following is considered a sentiment indicator? A. A 200-day moving average B. Short interest C. Credit balances in brokerage accounts D. Relative strength

Q: Which of the following is not a sentiment indicator? A. Confidence index B. Short interest C. Odd-lot trading D. Put/call ratio

Q: 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 _____________. A. mental accounting B. framing bias C. conservatism D. representativeness bias

Q: Trading activity and average returns in brokerage accounts tend to be _________. A. uncorrelated B. negatively correlated C. positively correlated D. positively correlated for women and negatively correlated for men

Q: If investors overweight recent performance in forecasting the future, they are exhibiting _______. A. representativeness bias B. framing error C. memory bias D. overconfidence

Q: If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______. A. representativeness bias B. framing error C. conservatism D. memory bias

Q: Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________. A. 5%; are excessively conservative B. 15%; overestimate their ability C. 20%; suffer from framing biases D. 25%; engage in mental accounting

Q: In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________. A. buy signal B. sell signal C. congestion area D. trend reversal

Q: The only way for behavioral patterns to persist in prices is if ______________. A. markets are not weak-form efficient B. there are limits to arbitrage activity C. there are no significant trading costs D. market psychology is inconsistent over time

Q: Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______. A. rational; irrational B. irrational; rational C. greedy; philanthropic D. philanthropic; greedy

Q: According to Elliot's wave theory, stock market behavior can be explained as _________________. A. a series of medium-term wave cycles with no short-term trend B. a series of long-term wave cycles with no short-term trend C. a series of superimposed long-term and short-term wave cycles D. sine and cosine functions

Q: According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________. A. 18 months B. 4 years C. 8 years D. 50 years

Q: A support level is ___________________. A. a level beyond which the market is unlikely to rise B. a level below which the market is unlikely to fall C. an equilibrium price level justified by characteristics such as earnings and cash flows D. the peak of a market wave or cycle

Q: When the housing bubble burst in 2007, it set off the worst financial crisis _____. A. in 25 years. B. in 40 years. C. in 50 years. D. in 75 years.

Q: A moving average of stock prices _________________. A. always lies above the most recent price B. always lies below the most recent price C. is less volatile than the actual prices D. is more volatile than the actual prices

Q: Following a period of falling prices, the moving average will _____. A. be below the current price B. be above the current price C. be equal to the current price D. become more volatile than it had been before prices fell

Q: When the stock price falls below a moving average, a possible conclusion is that _____. A. market momentum has become positive B. market momentum has become negative C. there is no regular pattern for this stock's market momentum D. professional analysts' opinions are invalid until the stock price rises again

Q: When a stock price breaks through the moving average from below, this is considered to be ______. A. the starting point for a new moving average B. a bearish signal C. a bullish signal D. none of these options

Q: According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________. A. the price index pierces the left shoulder B. the price index pierces the right shoulder C. the price index pierces the head D. none of these options takes place

Q: Behavioralists point out that even if market prices are ____________, there may be _______________. A. distorted; limited arbitrage opportunities B. distorted; fundamental efficiency C. allocationally efficient; limitless arbitrage opportunities D. distorted; allocational efficiency

Q: Technical analysis focuses on _____________________. A. finding opportunities for risk-free investing B. finding repeating trends and patterns in prices C. changing prospects for earnings growth of particular firms or industries D. forecasting technical regulatory changes

Q: A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal. A. bearish; bullish B. bullish; bearish C. bearish; false D. bullish; false

Q: The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________. A. market breadth B. market volume C. trin ratio D. relative strength ratio

Q: Market breadth is a ______ indicator. A. sentiment B. flow of funds C. technical D. fundamental

Q: Moving averages are ______ indicators. A. sentiment B. flow of funds C. trend D. fundamental

Q: Short interest is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

Q: Relative strength is ______ indicator. A. a fundamental B. an economic C. a technical D. an international

Q: The put/call ratio is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

Q: The trin statistic is a ______ indicator. A. sentiment B. flow of funds C. market structure D. fundamental

Q: Models of financial markets that emphasize psychological factors affecting investor behavior are called _______. A. data mining B. fundamental analysis C. charting D. behavioral finance

Q: Testing many different trading rules until you find one that would have worked in the past is called _______. A. data mining B. perceived patterning C. pattern searching D. behavioral analysis

Q: According to results by Seyhun, the main reason that investors cannot earn excess returns by following inside trades after they become public is that ______________. A. the information isn't available for at least 2 weeks B. transaction costs offset abnormal returns C. the SEC late-disclosure rule doesn't apply to insiders D. insiders don't have to disclose their trades

Q: According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits? A. Diversifying B. Investing in Treasury bills C. Investing in stocks of utility companies D. Engaging in active portfolio management to enhance returns

Q: Which of the following statements is (are) correct? A. If a market is weak-form efficient, it is also semistrong- and strong-form efficient. B. If a market is semistrong-form efficient, it is also strong-form efficient. C. If a market is strong-form efficient, it is also semistrong- but not weak-form efficient. D. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

Q: Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak-form and semistrong-form efficient B. strong-form efficient C. reasonably weak-form but not semistrong- or strong-form efficient D. neither weak-, semistrong-, nor strong-form efficient

Q: When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time. A. survivorship bias B. lucky event bias C. magnitude bias D. mean reversion bias

Q: Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock? A. January effect B. Neglected-firm effect C. P/E effect D. Reversal effect

Q: The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________. A. January effect B. liquidity effect C. neglected-firm effect D. P/E effect

Q: Which of the following is not a concept related to explaining abnormal excess stock returns? A. January effect B. Neglected-firm effect C. P/E effect D. Preferred stock effect

Q: The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________. A. fad effect B. martingale effect C. momentum effect D. reversal effect

Q: Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets? A. Jeff Vinik B. Peter Lynch C. Robert Stansky D. William Hayes

Q: Which of the following is not a topic related to the debate over market efficiency? A. IPO results B. Lucky event issue C. Magnitude issue D. Selection bias

Q: 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? A. Accounting for results B. Diversification C. Identifying undervalued stocks D. No need for a portfolio manager

Q: There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model? A. E(rP) = 5 + 1.12βP1 + 11.86βP2B. E(rP) = 5 + 4.96βP1 + 13.26βP2C. E(rP) = 5 + 3.23βP1 + 8.46βP2D. E(rP) = 5 + 8.71βP1 + 9.68βP2

Q: A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole. A. higher than B. lower than C. equal to D. indeterminable compared to

Q: 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 expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return? A. 15.9% B. 12.9% C. 13.2% D. 12%

Q: What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%? A. 3.8% B. 13.1% C. 15.6% D. 19.1%

Q: According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%? A. 5% B. 9% C. 13% D. 14%

Q: According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%? A. 4% B. 4.8% C. 6.6% D. 8%

Q: If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? A. .8 B. 1 C. 1.2 D. 1.5

Q: 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] = 16%. What is the stock's abnormal return? A. 1% B. 2% C. -1% D. -2%

Q: The expected return on the market is the risk-free rate plus the _____________. A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic return

Q: Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker? A. Advisor A was better because he generated a larger alpha. B. Advisor B was better because she generated a larger alpha. C. Advisor A was better because he generated a higher return. D. Advisor B was better because she achieved a good return with a lower beta.

Q: If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A. Option AB. Option BC. Option COption D

Q: What is the alpha of a portfolio with a beta of 2 and actual return of 15%? A. 0%B. 13%C. 15%D. 17%

Q: What is the expected return for a portfolio with a beta of .5? A. 5%B. 7.5%C. 12.5%D. 15%

Q: What is the beta for a portfolio with an expected return of 12.5%? A. 0B. 1C. 1.5D. 2

Q: What is the expected return on the market? A. 0%B. 5%C. 10%D. 15%

Q: 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 portfolios X and Y _________. A. are in equilibrium B. offer an arbitrage opportunity C. are both underpriced D. are both fairly priced

Q: The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________. A. SDA Corp. stock is underpriced B. SDA Corp. stock is fairly priced C. SDA Corp. stock's alpha is -.75% D. SDA Corp. stock alpha is .75%

Q: You run a regression of a stock's returns versus a market index and find the following: Based on the data, you know that the stock _____. A. earned a positive alpha that is statistically significantly different from zeroB. has a beta precisely equal to .890C. has a beta that is likely to be anything between .6541 and 1.465 inclusiveD. has no systematic risk

Q: One of the main problems with the arbitrage pricing theory is __________. A. its use of several factors instead of a single market index to explain the risk-return relationship B. the introduction of nonsystematic risk as a key factor in the risk-return relationship C. that the APT requires an even larger number of unrealistic assumptions than does the CAPM D. the model fails to identify the key macroeconomic variables in the risk-return relationship

Q: Standard deviation of portfolio returns is a measure of ___________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

Q: The measure of unsystematic risk can be found from an index model as _________. A. residual standard deviation B. R-square C. degrees of freedom D. sum of squares of the regression

Q: A stock's alpha measures the stock's ____________________. A. expected return B. abnormal return C. excess return D. residual return

Q: Arbitrage is __________________________. A. an example of the law of one price B. the creation of riskless profits made possible by relative mispricing among securities C. a common opportunity in modern markets D. an example of a risky trading strategy based on market forecasting

Q: The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________. A. places less emphasis on market risk B. recognizes multiple unsystematic risk factors C. recognizes only one systematic risk factor D. recognizes multiple systematic risk factors

Q: According to the CAPM, investors are compensated for all but which of the following? A. Expected inflation B. Systematic risk C. Time value of money D. Residual risk

Q: The expected return of the risky-asset portfolio with minimum variance is _________. A. the market rate of return B. zero C. the risk-free rate D. The answer cannot be determined from the information given.

Q: According to capital asset pricing theory, the key determinant of portfolio returns is _________. A. the degree of diversification B. the systematic risk of the portfolio C. the firm-specific risk of the portfolio D. economic factors

Q: Beta is a measure of ______________. A. total risk B. relative systematic risk C. relative nonsystematic risk D. relative business risk

Q: Liquidity is a risk factor that __________. A. has yet to be accurately measured and incorporated into portfolio management B. is unaffected by trading mechanisms on various stock exchanges C. has no effect on the market value of an asset D. affects bond prices but not stock prices

Q: The SML is valid for _______________, and the CML is valid for ______________. A. only individual assets; well-diversified portfolios only B. only well-diversified portfolios; only individual assets C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets D. both well-diversified portfolios and individual assets; well-diversified portfolios only

Q: In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by: I. Including the unsystematic risk of a stock II. Including human capital in the market portfolio III. Allowing for changes in beta over time A. I and II only B. II and III only C. I and III only D. I, II, and III

Q: Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size A. I only B. I and II only C. I and III only D. I, II, and III

Q: In his famous critique of the CAPM, Roll argued that the CAPM ______________. A. is not testable because the true market portfolio can never be observed B. is of limited use because systematic risk can never be entirely eliminated C. should be replaced by the APT D. should be replaced by the Fama-French three-factor model

Q: According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________. A. directly related to the risk aversion of the particular investor B. inversely related to the risk aversion of the particular investor C. directly related to the beta of the stock D. inversely related to the alpha of the stock

Q: 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 the better buy because _________. A. A; it offers an expected excess return of .2% B. A; it offers an expected excess return of 2.2% C. B; it offers an expected excess return of 1.8% D. B; it offers an expected return of 2.4%

Q: The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to _________. A. 12% B. 17% C. 18% D. 23%

Q: Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately _________. A. .60 B. 1 C. 1.67 D. 3.20