Q&A Hero

Q: In the 1972 empirical study by Black, Jensen, and Scholes, they found that the risk adjusted returns of high beta portfolios were _____________ the risk adjusted returns of low beta portfolios. A. greater than B. equal to C. less than D. unrelated to E. More information is necessary to answer this question.

Q: Kandel and Stambaugh (1995) expanded Roll's critique of the CAPM by arguing that tests rejecting a positive relationship between average return and beta are demonstrating A. the inefficiency of the market proxy used in the tests. B. that the relationship between average return and beta is not linear. C. that the relationship between average return and beta is negative. D. the need for a better way of explaining security returns. E. None of the options are correct.

Q: In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that __________ might be a proxy for systematic factors. A. the monthly growth rate in industrial production B. unexpected inflation C. expected inflation D. the monthly growth rate in industrial production and unexpected inflation E. the monthly growth rate in industrial production, unexpected inflation, and expected inflation

Q: If a market proxy portfolio consistently beats all professionally managed portfolios on a risk adjusted basis, it may be concluded that A. the CAPM is valid. B. the market proxy is mean/variance efficient. C. the CAPM is invalid. D. the CAPM is valid and the market proxy is mean/variance efficient. E. the market proxy is mean/variance efficient and the CAPM is invalid.

Q: Given the results of the early studies by Lintner (1965) and Miller and Scholes (1972), one would conclude that A. high beta stocks tend to outperform the predictions of the CAPM. B. low beta stocks tend to outperform the predictions of the CAPM. C. there is no relationship between beta and the predictions of the CAPM. D. high beta stocks and low beta stocks tend to outperform the predictions of the CAPM. E. None of the options are correct.

Q: If a professionally managed portfolio consistently outperforms the market proxy on a risk adjusted basis and the market is efficient, it should be concluded that A. the CAPM is invalid. B. the proxy is inadequate. C. either the CAPM is invalid or the proxy is inadequate. D. the CAPM is valid and the proxy is adequate. E. None of the options are correct.

Q: In the 1972 empirical study by Black, Jensen, and Scholes, they found that the estimated slope of the security market line was _______ what the CAPM would predict. A. flatter than B. equal to C. steeper than D. one half as much as E. None of the options are correct.

Q: In the 1972 empirical study by Black, Jensen, and Scholes, they found that the estimated slope of the security market line was _______ what the CAPM would predict. A. higher than B. equal to C. less than D. twice as much as E. More information is required to answer this question.

Q: In the results of the earliest estimations of the security market line 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 and ________ to its beta. A. positively related; negatively related B. negatively related; positively related C. positively related; positively related D. negatively related; negatively related E. not related; not related

Q: In the results of the earliest estimations of the security market line 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 beta. A. positively related B. negatively related C. unrelated D. inversely related E. not proportional

Q: 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 options are correct.

Q: In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor that did not appear to have significant explanatory power in explaining security returns was A. the change in the expected rate of inflation. B. the risk premium on corporate bonds. C. the unexpected change in the rate of inflation. D. industrial production.

Q: In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor (the factors) that appeared to have significant explanatory power in explaining security returns was (were) A. the change in the expected rate of inflation. B. the risk premium on corporate bonds. C. the unexpected change in the rate of inflation. D. industrial production. E. the risk premium on corporate bonds, the unexpected change in the rate of inflation, and industrial production.

Q: Fama and MacBeth (1973) found that the relationship between average excess returns and betas was A. linear. B. nonexistent. C. as expected, based on earlier studies. D. linear and as expected, based on earlier studies. E. Fama and MacBeth did not examine the relationship between excess returns and beta.

Q: __________ argued in his famous critique that tests of the expected return/beta relationship are invalid and that it is doubtful that the CAPM can ever be tested. A. Kim B. Markowitz C. Modigliani D. Roll E. None of the options are correct.

Q: The expected return/beta relationship is not used 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. by regulatory commissions in determining the costs of capital for regulated firms and to advise clients as to the composition of their portfolios. E. None of the options are correct.

Q: The expected return/beta relationship is used 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 options are correct. E. None of the options are correct.

Q: ____________ measures the extent to which a security has outperformed or underperformed either the market as a whole or its particular industry. A. Put call ratio B. Trin ratio C. Breadth D. Relative strength E. All of the options are correct.

Q: Studies of closed end funds find __________, which __________ the EMH. A. prices at a premium to NAV; is consistent with B. prices at a premium to NAV; is inconsistent with C. prices at a discount to NAV; is consistent with D. prices at a discount to NAV; is inconsistent with E. prices at premiums and discounts to NAV; is inconsistent with

Q: Studies of equity carve outs find __________, which __________ the EMH. A. strong support for the law of one price; supports B. strong support for the law of one price; violates C. evidence against the law of one price; violates D. evidence against the law of one price; supports

Q: Studies of Siamese twin companies find __________, which __________ the EMH. A. correct relative pricing; supports B. correct relative pricing; does not support C. incorrect relative pricing; supports D. incorrect relative pricing; does not support

Q: __________ effects can help explain momentum in stock prices. A. Conservatism B. Regret avoidance C. Prospect theory D. Mental accounting E. Model risk

Q: Barber and Odean (2001) report that women __________ men. A. earn higher returns than B. earn lower returns than C. earn about the same returns as D. generate higher trading costs than

Q: Barber and Odean (2001) report that men __________ women. A. earn higher returns than B. earn lower returns than C. earn about the same returns as D. generate lower trading costs than

Q: Barber and Odean (2001) report that women trade __________ frequently than men. A. less B. less in down markets C. more in up markets D. more

Q: Barber and Odean (2001) report that men trade __________ frequently than women. A. less B. less in down markets C. more in up markets D. more

Q: Kahneman and Tversky (1973) reported that __________ give too much weight to recent experience compared to prior beliefs when making forecasts. A. young men B. young women C. people D. older men E. older women

Q: Kahneman and Tversky (1973) reported that people give __________ weight to recent experience compared to prior beliefs when making forecasts. This is referred to as ____________. A. too little; hyper rationality B. too little; conservatism C. too much; framing D. too much; memory bias

Q: The law of one price posits that ability to arbitrage would force prices of identical goods to trade at equal prices. However, empirical evidence suggests that __________ are often mispriced. A. Siamese twin companies B. equity carve outs C. closed end funds D. Siamese twin companies and closed end funds E. All of the options are correct.

Q: The assumptions concerning the shape of utility functions of investors differ between conventional theory and prospect theory. Conventional theory assumes that utility functions are __________, whereas prospect theory assumes that utility functions are __________. A. concave and defined in terms of wealth; s shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth B. convex and defined in terms of losses relative to current wealth; s shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth C. s shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth; concave and defined in terms of wealth D. s shaped (convex to losses and concave to gains) and defined in terms of wealth; concave and defined in terms of losses relative to current wealth E. convex and defined in terms of wealth; concave and defined in terms of gains relative to current wealth

Q: If information processing was perfect, many studies conclude that individuals would tend to make __________ decisions using that information due to __________. A. less than fully rational; behavioral biases B. fully rational; behavioral biases C. less than fully rational; fundamental risk D. fully rational; fundamental risk E. fully rational; utility maximization

Q: Conservatism implies that investors are too __________ in updating their beliefs in response to new evidence and that they initially __________ to news. A. quick; overreact B. quick; under react C. slow; overreact D. slow; under react

Q: Barber and Odean (2001) report that men trade __________ frequently than women and the frequent trading leads to __________ returns. A. less; superior B. less; inferior C. more; superior D. more; inferior

Q: DeBondt and Thaler (1990) argue that the P/E effect can be explained by A. forecasting errors. B. earnings expectations that are too extreme. C. earnings expectations that are not extreme enough. D. regret avoidance. E. forecasting errors and earnings expectations that are too extreme.

Q: Errors in information processing can lead investors to misestimate A. true probabilities of possible events and associated rates of return. B. occurrence of possible events. C. only possible rates of return. D. the effect of accounting manipulation. E. fraud.

Q: Kahneman and Tversky (1973) report that __________ and __________. A. people give too little weight to recent experience compared to prior beliefs; tend to make forecasts that are too extreme given the uncertainty of their information B. people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that are too extreme given the uncertainty of their information C. people give too little weight to recent experience compared to prior beliefs; tend to make forecasts that are not extreme enough given the uncertainty of their information D. people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that are not extreme enough given the uncertainty of their information

Q: __________ can lead investors to misestimate the true probabilities of possible events or associated rates of return. A. Information processing errors B. Framing errors C. Mental accounting errors D. Regret avoidance

Q: Markets would be inefficient if irrational investors __________ and actions of arbitragers were __________. A. existed; unlimited B. did not exist; unlimited C. existed; limited D. did not exist; limited

Q: Behavioral finance argues that A. even if security prices are wrong, it may be difficult to exploit them. B. the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency. C. investors are rational. D. even if security prices are wrong, it may be difficult to exploit them and the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency. E. All of the options are correct.

Q: The anomalies literature A. provides a conclusive rejection of market efficiency. B. provides conclusive support of market efficiency. C. suggests that several strategies would have provided superior returns. D. provides a conclusive rejection of market efficiency and suggests that several strategies would have provided superior returns. E. None of the options are correct.

Q: Tests of market efficiency have focused on A. the mean variance efficiency of the selected market proxy. B. strategies that would have provided superior risk adjusted returns. C. results of actual investments of professional managers. D. strategies that would have provided superior risk adjusted returns and results of actual investments of professional managers. E. the mean variance efficiency of the selected market proxy and strategies that would have provided superior risk adjusted returns.

Q: The efficient market hypothesis A. implies that security prices properly reflect information available to investors. B. has little empirical validity. C. implies that active traders will find it difficult to outperform a buy and hold strategy. D. has little empirical validity and implies that active traders will find it difficult to outperform a buy and hold strategy. E. implies that security prices properly reflect information available to investors and that active traders will find it difficult to outperform a buy and hold strategy.

Q: The put/call ratio is computed as ____________, and higher values are considered ____________ signals. A. the number of outstanding put options divided by outstanding call options; bullish or bearish B. the number of outstanding put options divided by outstanding call options; bullish C. the number of outstanding put options divided by outstanding call options; bearish D. the number of outstanding call options divided by outstanding put options; bullish E. the number of outstanding call options divided by outstanding put options; bearish

Q: The confidence index is computed from ____________, and higher values are considered ____________ signals. A. bond yields; bearish B. odd lot trades; bearish C. odd lot trades; bullish D. put/call ratios; bullish E. bond yields; bullish

Q: ____________ is a measure of the extent to which a movement in the market index is reflected in the price movements of all stocks in the market. A. Put call ratio B. Trin ratio C. Breadth D. Confidence index E. All of the options are correct.

Q: 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. bullish; above D. None of the options are correct.

Q: Suppose on August 27, there were 1,455 stocks that advanced on the NYSE and 1,553 that declined. The volume in advancing issues was 852,581, and the volume in declining issues was 1,058,312. 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

Q: A trin ratio of less than 1.0 is considered as a A. bearish signal. B. bullish signal. C. bearish signal by some technical analysts and a bullish signal by other technical analysts. D. bullish signal by some fundamentalists. E. bearish signal by some technical analysts, a bullish signal by other technical analysts, and a bullish signal by some fundamentalists.

Q: ____________ are good examples of the limits to arbitrage because they show that the law of one price is violated. I) Siamese twin companies II) Unit trusts III) Closed end funds IV) Open end funds V) Equity carve outs A. I and II B. I, II, and III C. I, III, and V D. IV and V E. V

Q: Arbitrageurs may be unable to exploit behavioral biases due to I) fundamental risk. II) implementation costs. III) model risk. IV) conservatism. V) regret avoidance. A. I and II only B. I, II, and III C. I, II, III, and V D. II, III, and IV E. IV and V

Q: An example of ________ is that it is not as painful to have purchased a blue chip stock that decreases in value as it is to lose money on an unknown start up firm. A. mental accounting B. regret avoidance C. overconfidence D. conservatism

Q: Statman (1977) argues that ________ is consistent with some investors' irrational preference for stocks with high cash dividends and with a tendency to hold losing positions too long. A. mental accounting B. regret avoidance C. overconfidence D. conservatism

Q: An example of ________ is that a person may reject an investment when it is posed in terms of risk surrounding potential gains, but may accept the same investment if it is posed in terms of risk surrounding potential losses. A. framing B. regret avoidance C. overconfidence D. conservatism

Q: 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.

Q: ________ bias means that investors are too slow in updating their beliefs in response to evidence. A. Framing B. Regret avoidance C. Overconfidence D. Conservatism E. None of the options are correct.

Q: 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.

Q: ____________ 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

Q: Single men trade far more often than women. This is due to greater ________ among men. A. framing B. regret avoidance C. overconfidence D. conservatism

Q: 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

Q: 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.

Q: 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 the options are correct.

Q: 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

Q: Some economists believe that the anomalies literature is consistent with investors' A. ability to always process information correctly, and therefore, they infer correct probability distributions about future rates of return; and 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; and 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; and 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; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions.

Q: The premise of behavioral finance is that 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 who are much more sophisticated than the average person. D. conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility maximizing investors and should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. E. None of the options are correct.

Q: 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

Q: Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that A. bad news about Matthews was announced yesterday. B. good news about Matthews was announced yesterday. C. no news about Matthews was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

Q: 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. unable to determine. C. increase immediately. D. gradually decline for the next several weeks. E. gradually increase for the next several weeks.

Q: In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be A. positive and large. B. positive and small. C. zero. D. negative and small. E. negative and large.

Q: The likelihood of an investment newsletter's successfully predicting the direction of the market for three consecutive years by chance should be A. between 50% and 70%. B. between 25% and 50%. C. between 10% and 25%. D. less than 10%. E. greater than 70%.

Q: Studies of mutual-fund performance A. indicate that one should not randomly select a mutual fund. B. indicate that historical performance is not necessarily indicative of future performance. C. indicate that the professional management of the fund insures above market returns. D. indicate that one should not randomly select a mutual fund and indicate that historical performance is not necessarily indicative of future performance. E. indicate that historical performance is not necessarily indicative of future performance and indicate that the professional management of the fund insures above market returns.

Q: Cumulative abnormal returns (CAR) A. are used in event studies. B. are better measures of security returns due to firm-specific events than are abnormal returns (AR). C. are cumulated over the period prior to the firm-specific event. D. are used in event studies and are better measures of security returns due to firm-specific events than are abnormal returns (AR). E. are used in event studies and are cumulated over the period prior to the firm-specific event.

Q: Two basic assumptions of technical analysis are that security prices adjust A. rapidly to new information, and market prices are determined by the interaction of supply and demand. B. rapidly to new information, and liquidity is provided by security dealers. C. gradually to new information, and market prices are determined by the interaction of supply and demand. D. gradually to new information, and liquidity is provided by security dealers. E. rapidly to information and to the actions of insiders.

Q: The weak form of the efficient-market hypothesis contradicts A. technical analysis but supports fundamental analysis as valid. B. fundamental analysis but supports technical analysis as valid. C. both fundamental analysis and technical analysis. D. technical analysis but is silent on the possibility of successful fundamental analysis.

Q: A finding that _________ would provide evidence against the semistrong form of the efficient-market theory. A. low P/E stocks tend to have positive abnormal returns B. trend analysis is worthless in determining stock prices C. one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon D. low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

Q: A support level is the price range at which a technical analyst would expect the A. supply of a stock to increase dramatically. B. supply of a stock to decrease substantially. C. demand for a stock to increase substantially. D. demand for a stock to decrease substantially. E. price of a stock to fall.

Q: The weak form of the efficient-market hypothesis asserts that A. stock prices do not rapidly adjust to new information contained in past prices or past data. B. future changes in stock prices cannot be predicted from past prices. C. technicians cannot expect to outperform the market. D. stock prices do not rapidly adjust to new information contained in past prices or past data, and future changes in stock prices cannot be predicted from past prices. E. future changes in stock prices cannot be predicted from past prices, and technicians cannot expect to outperform the market.

Q: In an efficient market, A. security prices react quickly to new information. B. security prices are seldom far above or below their justified levels. C. security analysis will not enable investors to realize superior returns consistently. D. one cannot make money. E. security prices react quickly to new information, security prices are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently.

Q: A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________. A. would be; it was a clear response to macroeconomic news B. would be; it was not a clear response to macroeconomic news C. would not be; it was a clear response to macroeconomic news D. would not be; it was not a clear response to macroeconomic news

Q: Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had an average annual return of _______, while the stocks of firms within the lowest decile of book-to-market ratios had an average annual return of ________. A. 15.6%; 13.1% B. 17.2%; 11.1% C. 13.2%; 16.4% D. 11.1%; 17.2%

Q: Work by Amihud and Mendelson (1986, 1991) A. argues that investors will demand a rate of return premium to invest in less liquid stocks. B. may help explain the small firm effect. C. may be related to the neglected firm effect. D. may help explain the small firm effect and may be related to the neglected firm effect. E. All of the options are correct.