Q&A Hero

Q: On November 22, the stock price of WalMart was $69.50, and the retailer stock index was 600.30. On November 25, the stock price of WalMart was $70.25, and the retailer stock index was 605.20. Consider the ratio of WalMart to the retailer index on November 22 and November 25. WalMart is _______ the retail industry, and technical analysts who follow relative strength would advise _______ the stock. A. outperforming; buying B. outperforming; selling C. underperforming; buying D. underperforming; selling E. equally performing; neither buying nor selling

Q: Studies of stock price reactions to news are called A. reaction studies. B. event studies. C. drift studies. D. reaction studies and event studies. E. event studies and drift studies.

Q: Studies of negative earnings surprises have shown that there is A. a negative abnormal return on the day that negative earnings surprises are announced. B. a positive drift in the stock price on the days following the earnings surprise announcement. C. a negative drift in the stock price on the days following the earnings surprise announcement. D. a negative abnormal return on the day that negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. E. a negative abnormal return on the day that negative earnings surprises are announced and a negative drift in the stock price on the

Q: Studies of positive earnings surprises have shown that there is A. a positive abnormal return on the day positive earnings surprises are announced. B. a positive drift in the stock price on the days following the earnings surprise announcement. C. a negative drift in the stock price on the days following the earnings surprise announcement. D. a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. E. a positive abnormal return on the day positive earnings surprises are announced and a negative drift in the stock price on the days

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. should focus on financial statements. E. are wasting their time.

Q: Banz (1981) found that, on average, the risk-adjusted returns of large firms A. were higher than the risk-adjusted returns of small firms. B. were the same as the risk-adjusted returns of small firms. C. were lower than the risk-adjusted returns of small firms. D. were unrelated to the risk-adjusted returns of small firms. E. were negative.

Q: Banz (1981) 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 unrelated to the risk-adjusted returns of large firms. E. were negative.

Q: Jaffe (1974) found that stock prices _________ after insiders intensively sold shares. A. decreased B. did not change C. increased D. became extremely volatile E. became much less volatile

Q: Jaffe (1974) found that stock prices _________ after insiders intensively bought shares. A. decreased B. did not change C. increased D. became extremely volatile E. became much less volatile

Q: Basu (1977, 1983) 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: 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.

Q: A common strategy for passive management is A. creating an index fund. B. creating a small firm fund. C. creating an investment club. D. creating an index fund and creating an investment club. E. creating a small firm fund and creating an investment club.

Q: The debate over whether markets are efficient will probably never be resolved because of A. the lucky event issue. B. the magnitude issue. C. the selection bias issue. D. All of the options are correct. E. None of the options are correct.

Q: ___________ the return on a stock beyond what would be predicted from market movements alone. A. An irrational return is B. An economic return is C. An abnormal return is D. None of the options are correct. E. All of the options are correct.

Q: _________ below which it is difficult for the market to fall. A. An intrinsic value is a value B. A resistance level is a value C. A support level is a value D. An intrinsic value and a resistance level are values E. A resistance level and a support level are values

Q: _________ above which it is difficult for the market to rise. A. A book value is a value B. A resistance level is a value C. A support level is a value D. A book value and a resistance level are values E. A book value and a support level are values

Q: __________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts

Q: If you believe in the reversal effect, you should 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. buy stocks this period that performed poorly last period and go short.

Q: 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 options are correct. E. None of the options are correct.

Q: If you believe in the _______ form of the EMH, you believe that stock prices only 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 options are correct. E. None of the options are correct.

Q: Proponents of the EMH typically advocate A. buying individual stocks on margin and trading frequently. B. investing in hedge funds. C. a passive investment strategy. D. buying individual stocks on margin, trading frequently, and investing in hedge funds. E. investing in hedge funds and a passive investment strategy.

Q: Proponents of the EMH typically advocate A. an active trading strategy. B. investing in an index fund. C. a passive investment strategy. D. an active trading strategy and investing in an index fund. E. investing in an index fund and a passive investment strategy.

Q: 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. positive; zero B. positive; positive C. positive; negative D. zero; positive E. zero; zero

Q: A hybrid strategy is one where the investor A. uses both fundamental and technical analysis to select stocks. B. selects the stocks of companies that specialize in alternative fuels. C. selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds. D. maintains a passive core and augments the position with an actively-managed portfolio.

Q: The stock market follows a A. nonrandom walk. B. submartingale. C. predictable pattern that can be exploited. D. nonrandom walk and predictable pattern that can be exploited. E. submartingale and predictable pattern that can be exploited.

Q: When Maurice Kendall examined the patterns of stock returns in 1953, he concluded that the stock market was __________. Now, these random price movements are believed to be _________. A. inefficient; the effect of a well-functioning market B. efficient; the effect of an inefficient market C. inefficient; the effect of an inefficient market D. efficient; the effect of a well-functioning market E. irrational; even more irrational than before

Q: 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. All of the options are correct. E. None of the options are correct.

Q: Del Guerico and Reuter (2014) report that the average underperformance of actively-managed mutual funds is driven largely by A. sector mutual funds. B. index funds. C. direct-sold funds. D. broker-sold funds. E. bank-sold mutual funds.

Q: Patell and Woflson (1984) report that most of the stock-price response to corporate dividend or earnings announcements occurs within ____________ of the announcement. A. 10 minutes B. 45 minutes C. 2 hours D. 4 hours E. 2 trading days

Q: If you believe in the reversal effect, you should A. sell bonds in this period if you held stocks in the last period. B. sell stocks in this period if you held bonds in the last period. C. sell stocks this period that performed well last period. D. go long. E. sell stocks this period that performed well last period and go long.

Q: Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be A. extremely profitable for long-term traders. B. extremely profitable for short-term traders. C. marginally profitable for long-term traders. D. marginally profitable for short-term traders. E. not sufficiently profitable to cover trading costs.

Q: At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with A. regret avoidance. B. selection bias. C. overconfidence. D. the lucky event issue.

Q: Your professor finds a stock-trading rule that generates excess risk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with A. regret avoidance. B. selection bias. C. framing. D. insider trading.

Q: The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that

Q: Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of 2% yesterday. This suggests that A. the market is not efficient. B. Music Doctors stock will probably rise in value tomorrow. C. investors expected the sales increase to be larger than what was actually announced. D. investors expected the sales increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

Q: LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that A. the market is not efficient. B. LJP stock will probably rise in value again tomorrow. C. investors view the international joint venture as bad news. D. investors view the international joint venture as good news. E. earnings are expected to decrease next quarter.

Q: QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that QQAG had an abnormal return of 1.7% yesterday. This suggests that A. the market is not efficient. B. QQAG stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

Q: QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that A. bad news about QQAG was announced yesterday. B. good news about QQAG was announced yesterday. C. no significant news about QQAG was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

Q: Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%, and the risk-free rate is currently 4%. You observe that Music Doctors had an annualized return yesterday of 15%. Assuming that markets are efficient, this suggests that A. bad news about Music Doctors was announced yesterday. B. good news about Music Doctors was announced yesterday. C. no news about Music Doctors was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

Q: Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that A. bad news about Google was announced yesterday. B. good news about Google was announced yesterday. C. no news about Google was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

Q: Which of the following are investment superstars who have consistently shown superior performance? I) Warren Buffet II) Phoebe Buffet III) Peter Lynch IV) Merrill Lynch V) Jimmy Buffet A. I, III, and IV B. II, III, and IV C. I and III D. III and IV E. I, III, IV, and V

Q: According to proponents of the efficient-market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably to A. perform fundamental analysis. B. exploit market anomalies. C. invest in Treasury securities. D. invest in derivative securities. E. invest in mutual funds.

Q: Which of the following are used by technical analysts to determine proper stock prices? I) Trendlines II) Earnings III) Dividend prospects IV) Expectations of future interest rates V) Resistance levels A. I 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.

Q: 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.

Q: Chartists practice A. technical analysis. B. fundamental analysis. C. regression analysis. D. insider analysis. E. psychoanalysis.

Q: The main difference between the three forms of market efficiency is that A. the definition of efficiency differs. B. the definition of excess return differs. C. the definition of prices differs. D. the definition of information differs. E. they were discovered by different people.

Q: If stock prices follow a random walk, A. it implies that investors are irrational. B. it means that the market cannot be efficient. C. price levels are not random. D. price changes are random. E. price movements are predictable.

Q: When Maurice Kendall first examined stock price patterns in 1953, he found that A. certain patterns tended to repeat within the business cycle. B. there were no predictable patterns in stock prices. C. stocks whose prices had increased consistently for one week tended to have a net decrease the following week. D. stocks whose prices had increased consistently for one week tended to have a net increase the following week. E. the direction of change in stock prices was unpredictable, but the amount of change followed a distinct pattern.

Q: Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of 1.2% yesterday. This suggests that A. the market is not efficient. B. Nicholas' stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

Q: Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 22%. The standard deviation on the factor portfolio is 14%. The beta of the well-diversified portfolio is approximately A. 0.80. B. 1.13. C. 1.25. D. 1.57.

Q: Consider the one-factor APT. The variance of returns on the factor portfolio is 11%. The beta of a well-diversified portfolio on the factor is 1.45. The variance of returns on the well-diversified portfolio is approximately A. 23.1%. B. 6.0%. C. 7.3%. D. 14.1%.

Q: Consider the one-factor APT. The variance of returns on the factor portfolio is 9%. The beta of a well-diversified portfolio on the factor is 1.25. The variance of returns on the well-diversified portfolio is approximately A. 3.6%. B. 6.0%. C. 7.3%. D. 14.1%.

Q: Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of 12%. Portfolio B has a beta of 0.4 and an expected return of 13%. The risk-free rate of return is 5%. 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

Q: Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return of 22%. Portfolio B has a beta of 1.5 and an expected return of 17%. The risk-free rate of return is 4%. 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

Q: Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 5%, the risk premium on the first-factor portfolio is 4%, and the risk premium on the second-factor portfolio is 6%. If portfolio A has a beta of 0.6 on the first factor and 1.8 on the second factor, what is its expected return? A. 7.0% B. 8.0% C. 18.2% D. 13.0% E. 13.2%

Q: Consider the multifactor APT. The risk premiums on the factor 1 and factor 2 portfolios are 6% and 4%, respectively. The risk-free rate of return is 4%. Stock A has an expected return of 16% and a beta on factor-1 of 1.3. Stock A has a beta on factor-2 of A. 1.33. B. 1.05. C. 1.67. D. 2.00.

Q: Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of return is 3%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A. 13.5% B. 13.4% C. 16.5% D. 23.0%

Q: Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better describe assets'returns by A. expanding beyond one factor to represent sources of systematic risk. B. using variables that are easier to forecast ex ante. C. calculating beta coefficients by an alternative method. D. using only stocks with relatively stable returns. E. ignoring firm-specific risk.

Q: Multifactor models seek to improve the performance of the single-index model by A. modeling the systematic component of firm returns in greater detail. B. incorporating firm-specific components into the pricing model. C. allowing for multiple economic factors to have differential effects. D. All of the options are correct. E. None of the options are correct.

Q: Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because A. they may result from data snooping. B. they are sources of systematic risk. C. they can be explained by security characteristic lines. D. they are more appropriate for a single-factor model. E. they are macroeconomic factors.

Q: Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 19%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately A. 1.58. B. 1.13. C. 1.25. D. 0.76.

Q: Consider the single-factor APT. Stocks A and B have expected returns of 12% and 14%, respectively. The risk-free rate of return is 5%. Stock B has a beta of 1.2. If arbitrage opportunities are ruled out, stock A has a beta of A. 0.67. B. 0.93. C. 1.30. D. 1.69.

Q: Which of the following factors were used by Fama and French in their multifactor model? A. Return on the market index B. Excess return of small stocks over large stocks C. Excess return of high book-to-market stocks over low book-to-market stocks D. All of the factors were included in their model. E. None of the factors were included in their model.

Q: Which of the following factors did Chen, Roll, and Ross include in their multifactor model? A. Change in industrial waste B. Change in expected inflation C. Change in unanticipated inflation D. Change in expected inflation and unanticipated inflation E. All of the factors were included in their model.

Q: Which of the following factors did Chen, Roll, and Ross not include in their multifactor model? A. Change in industrial production B. Change in expected inflation C. Change in unanticipated inflation D. Excess return of long-term government bonds over T-bills E. All of the factors are included in the Chen, Roll, and Ross multifactor model.

Q: In a factor model, the return on a stock in a particular period will be related to A. factor risk. B. nonfactor risk. C. standard deviation of returns. D. factor risk and nonfactor risk. E. None of the options are true.

Q: Which of the following is(are) true regarding the APT? I) The security market line does not apply to the APT. II) More than one factor can be important in determining returns. III) Almost all individual securities satisfy the APT relationship. IV) It doesn't rely on the market portfolio that contains all assets. A. II, III, and IV B. II and IV C. II and III D. I, II, and IV E. I, II, III, and IV

Q: Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2. The portfolios have expected returns of 15% and 6%, respectively. Based on this information, what would be the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor and 0.50 on the second factor? The risk-free rate is 3%. A. 15.2% B. 14.1% C. 13.3% D. 10.7% E. 8.4%

Q: If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected excess return must be A. inversely proportional to the risk-free rate. B. inversely proportional to its standard deviation. C. proportional to its weight in the market portfolio. D. proportional to its standard deviation. E. proportional to its beta coefficient.

Q: Which of the following is false about the security market line (SML) derived from the APT? A. The SML has a downward slope. B. The SML for the APT shows expected return in relation to portfolio standard deviation. C. The SML for the APT has an intercept equal to the expected return on the market portfolio. D. The benchmark portfolio for the SML may be any well-diversified portfolio. E. The SML has a downward slope, shows expected return in relation to portfolio standard . deviation, and has an intercept equal to the expected return on the market portfolio.

Q: Which of the following is true about the security market line (SML) derived from the APT? A. The SML has a downward slope. B. The SML for the APT shows expected return in relation to portfolio standard deviation. C. The SML for the APT has an intercept equal to the expected return on the market portfolio. D. The benchmark portfolio for the SML may be any well-diversified portfolio. E. The SML is not relevant for the APT.

Q: In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei ) equal to 18% and 250 securities? A. 1.14% B. 625% C. 0.5% D. 3.54% E. 3.16%

Q: In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei ) equal to 20% and 40 securities? A. 12.5% B. 625% C. 0.5% D. 3.54% E. 3.16%

Q: In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of (ei ) equal to 20% and 20 securities? A. 12.5% B. 625% C. 4.47% D. 3.54% E. 14.59%

Q: In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei ) equal to 25% and 50 securities? A. 12.5% B. 625% C. 0.5% D. 3.54% E. 14.59%

Q: The factor F in the APT model represents A. firm-specific risk. B. the sensitivity of the firm to that factor. C. a factor that affects all security returns. D. the deviation from its expected value of a factor that affects all security returns. E. a random amount of return attributable to firm events.

Q: To take advantage of an arbitrage opportunity, an investor would I) construct a zero-investment portfolio that will yield a sure profit. II) construct a zero-beta-investment portfolio that will yield a sure profit. III) make simultaneous trades in two markets without any net investment. IV) short sell the asset in the low-priced market and buy it in the high-priced market. A. I and IV B. I and III C. II and III D. I, III, and IV E. II, III, and IV

Q: The term "arbitrage" refers to A. buying low and selling high. B. short selling high and buying low. C. earning risk-free economic profits. D. negotiating for favorable brokerage fees. E. hedging your portfolio through the use of options.

Q: Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4%, and the risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor, what is its expected return? A. 7.0% B. 8.0% C. 9.2% D. 13.0% E. 13.2%

Q: Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? I) The expected return-beta relationship is maintained for all but a small number of well-diversified portfolios. II) The expected return-beta relationship is maintained for all well-diversified portfolios. III) The expected return-beta relationship is maintained for all but a small number of individual securities. IV) The expected return-beta relationship is maintained for all individual securities. A. I and III B. I and IV C. II and III D. II and IV E. Only I is correct.