Q&A Hero

Q: According to results by Seyhun, ________. A) investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public B) investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public C) investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public D) investors cannot earn abnormal returns by trading before insiders

Q: The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that ________. A) high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor B) low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor C) either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor D) high book-to-market firms have more post-earnings drift

Q: The broadest information set is included in the ________. A) weak-form efficiency argument B) semistrong-form efficiency argument C) strong-form efficiency argument D) technical analysis trading method

Q: The effect of liquidity on stock returns might be related to: I. The small-firm effect II The book-to-market effect III The neglected-firm effect IV. The P/E effect A) I and II only B) I and III only C) II and IV only D) I, II, and III only

Q: The ________ effect may explain much of the small-firm anomaly. I. January II. neglected III. liquidity A) I only B) II only C) II and III only D) I, II, and III

Q: Most tests of semistrong efficiency are ________. A) designed to test whether inside information can be used to generate abnormal returns B) based on technical trading rules C) unable to generate any evidence of market anomalies D) joint tests of market efficiency and the risk-adjustment measure

Q: J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are. A) magnitude B) selection bias C) lucky event D) small firm

Q: DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced ________ performance in the following period and that the best-performing stocks in one time period experienced ________ performance in the following time period. A) good; good B) good; poor C) poor; good D) poor; poor

Q: "Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the ________ problem in deciding how efficient the markets are. A) magnitude B) selection bias C) lucky event D) allocation

Q: If the U.S. capital markets are not informationally efficient, ________. A) the markets cannot be allocationally efficient B) systematic risk does not matter C) no type of analysis can be used to generate abnormal returns D) returns must follow a random walk

Q: Banz found that, on average, the risk-adjusted returns of small firms ________. A) were higher than the risk-adjusted returns of large firms B) were the same as the risk-adjusted returns of large firms C) were lower than the risk-adjusted returns of large firms D) were negative

Q: Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index A) I only B) I and II only C) II and III only D) I, II, and III

Q: 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 most you can afford to spend on your research? A) $4,000 B) $8,000 C) $12,000 D) $16,000

Q: You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you? A) Stock A B) Stock B C) Stock C D) The answer cannot be determined from the information given.

Q: Fundamental analysis is likely to yield best results for ________. A) NYSE stocks B) neglected stocks C) stocks that are frequently in the news D) fast-growing companies

Q: Basu found that firms with high P/E ratios ________. A) earned higher average returns than firms with low P/E ratios B) earned the same average returns as firms with low P/E ratios C) earned lower average returns than firms with low P/E ratios D) had higher dividend yields than firms with low P/E ratios

Q: When stock returns exhibit positive serial correlation, this means that ________ returns tend to follow ________ returns. A) positive; positive B) positive; negative C) negative; positive D) positive; zero

Q: According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements ________. A) instantly B) in 1 day C) in 1 week D) gradually over time

Q: Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict ________. A) the strong-form EMH B) the weak-form EMH C) technical analysis D) the semistrong-form EMH

Q: In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds ________. A) had negative alphas before fees were considered B) had positive alphas after fees were considered C) had negative alphas after fees were considered D) had negative alphas before fees were considered and had negative alphas after fees were considered

Q: In a 1988 study, Fama and French found that the return on the aggregate stock market was ________ when the dividend yield was higher. A) higher B) lower C) unaffected D) more skewed

Q: Jaffe found that stock prices ________ after insiders intensively bought shares and ________ after insiders intensively sold shares. A) decreased; decreased B) decreased; increased C) increased; decreased D) increased; increased

Q: "Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a ________. A) trading rule B) market anomaly C) fundamental approach D) passive trading strategy

Q: Evidence supporting semistrong-form market efficiency suggests that investors should ________. A) rely on technical analysis to select securities B) rely on fundamental analysis to select securities C) use a passive trading strategy such as purchasing an index fund or an ETF D) select securities by throwing darts at the financial pages of the newspaper

Q: Proponents of the EMH think technical analysts ________. A) should focus on relative strength B) should focus on resistance levels C) should focus on support levels D) are wasting their time

Q: Fama and French have suggested that many market anomalies can be explained as manifestations of ________. A) regulatory effects B) high trading costs C) information asymmetry D) varying risk premiums

Q: Small firms have tended to earn abnormal returns primarily in ________. A) the month of January B) the month July C) the trough of the business cycle D) the peak of the business cycle

Q: Most people would readily agree that the stock market is not ________. A) weak-form efficient B) semistrong-form efficient C) strong-form efficient D) efficient at all

Q: Which of the following is not an issue that is central to the debate regarding market efficiency? A) the magnitude issue B) the tax-loss selling issue C) the lucky event issue D) the selection bias issue

Q: Choosing stocks by searching for predictable patterns in stock prices is called ________. A) fundamental analysis B) technical analysis C) index management D) random-walk investing

Q: A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an ________ fund. A) stock B) index C) hedge D) money market

Q: You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate an additional one-tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis? A) $12,000,000 B) $6,000,000 C) $3,000,000 D) $0

Q: 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, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ________ form of the EMH. A) semistrong B) strong C) weak D) perfect

Q: ________ is the return on a stock beyond what would be predicted from market movements alone. A) A normal return B) A subliminal return C) An abnormal return D) None of these options

Q: Most of the stock price response to a corporate earnings or dividend announcement occurs within ________. A) about 30 seconds B) about 10 minutes C) 6 months D) 2 years

Q: If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders. A) semistrong B) strong C) weak D) perfect

Q: If you believe in the ________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A) semistrong B) strong C) weak D) perfect

Q: The primary objective of fundamental analysis is to identify ________. A) well-run firms B) poorly run firms C) mispriced stocks D) high P/E stocks

Q: Which of the following is not a method employed by fundamental analysts? A) analyzing the Fed's next interest rate move B) relative strength analysis C) earnings forecasting D) estimating the economic growth rate

Q: Which of the following is not a method employed by followers of technical analysis? A) charting B) relative strength analysis C) earnings forecasting D) trading around support and resistance levels

Q: 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. A) worst; best B) worst; worst C) best; worst D) best; best

Q: Stock prices that are stable over time ________. A) indicate that prices are useful indicators of true economic value B) indicate that the market is not incorporating new information into current stock prices C) ensure that an economy allocates its resources efficiently D) indicates that returns follow a random-walk process

Q: Proponents of the EMH typically advocate ________. A) a conservative investment strategy B) a liberal investment strategy C) a passive investment strategy D) an aggressive investment strategy

Q: Evidence suggests that there may be ________ momentum and ________ reversal patterns in stock price behavior. A) short-run; short-run B) long-run; long-run C) long-run; short-run D) short-run; long-run

Q: The small-firm effect is strongest in which month? A) January B) June C) July D) December

Q: When the market risk premium rises, stock prices will ________. A) rise B) fall C) recover D) have excess volatility

Q: Random price movements indicate ________. A) irrational markets B) that prices cannot equal fundamental values C) that technical analysis to uncover trends can be quite useful D) that markets are functioning efficiently

Q: The strong form of the EMH states that ________ must be reflected in the current stock price. A) all security price and volume data B) all publicly available information C) all information, including inside information D) all costless information

Q: The semistrong form of the EMH states that ________ must be reflected in the current stock price. A) all security price and volume data B) all publicly available information C) all information, including inside information D) all costless information

Q: The weak form of the EMH states that ________ must be reflected in the current stock price. A) all past information, including security price and volume data B) all publicly available information C) all information, including inside information D) all costless information

Q: In a 1953 study of stock prices, Maurice Kendall found that ________. A) there were no predictable patterns in stock prices B) stock prices exhibited strong serial autocorrelation C) day-to-day stock prices followed consistent trends D) fundamental analysis could be used to generate abnormal returns

Q: Which of the following beliefs would not preclude charting as a method of portfolio management? A) The market is strong-form efficient. B) The market is semistrong-form efficient. C) The market is weak-form efficient. D) Stock prices follow recurring patterns.

Q: Compensation of money managers is ________ based on alpha or other appropriate risk-adjusted measures. A) never B) rarely C) almost always D) always

Q: One extensive study found that about ________ of financial managers use CAPM to estimate cost of capital. A) one-third B) one-half C) three quarters D) ninety percent

Q: An investor should do which of the following for stocks with negative alphas? A) go long B) sell short C) hold D) do nothing

Q: One can profit from an arbitrage opportunity by A) taking a long position in the cheaper market and a short position in the expensive market. B) taking a short position in the cheaper market and a long position in the expensive market. C) taking a long position in both markets. D) taking a short position in both markets.

Q: The CAPM ________. A) predicts the relationship between risk and expected return of an asset B) provides a benchmark rate of return for evaluating possible investments C) helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace D) All of the options.

Q: The measure of risk used in the capital asset pricing model is ________. A) specific risk B) the standard deviation of returns C) reinvestment risk D) beta

Q: The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock? A) 11.6% B) 13% C) 15.3% D) 19.5%

Q: The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock? A) .2% B) 1.5% C) 3.6% D) 4%

Q: The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock? A) 8.7% B) 11.2% C) 13.8% D) 15.2%

Q: The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock? A) 10% B) 11.5% C) 13.6% D) 14%

Q: Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%? A) .0% B) 1% C) 2% D) 3%

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? Portfolio Beta on M1 Beta on M2 E[rp] A 1.5 1.75 35% B 1.0 0.65 20% A) E(rP) = 5 + 1.12βP1 + 11.86βP2 B) E(rP) = 5 + 4.96βP1 + 13.26βP2 C) E(rP) = 5 + 3.23βP1 + 8.46βP2 D) 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: 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: What is the expected return on the market? A) 0% B) 5% C) 10% D) 15%

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: Coefficients Lower 95% Upper 95% Intercept 0.789 -1.556 3.457 Slope 0.890 0.6541 1.465 Based on the data, you know that the stock ________. A) earned a positive alpha that is statistically significantly different from zero B) has a beta precisely equal to .890 C) has a beta that is likely to be anything between .6541 and 1.465 inclusive D) 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