FI 504 Exam#2

1.

1 point

What is meant by the "noise" in the Signal-To-Noise ratio?

the stock price momentum

externalities, such as which party wins an election

the day - to - day price volatility

the level of insider trading associated with a particular security

2.

1 point

What does it mean to say, "Stockprices follow a random walk?"

Differing transaction costs result in different signals for investors, so excess returns to investors are random.

Stock prices move in response to new information, but new information enters th e market randomly.

Stock prices move haphazardly and, thus, are unpredictable.

The stock market is both imperfect and inefficient.

3.

1 point

All else equal, which of the following bonds would
you expect to sell for the highest price?

BB+ bond

A+ bond

BBB bond

AAA bond

4.

1 point

Which of the following is not one of the underlying assumptions of the Capital Asset Pricing Model (CAPM)?

All investors hold well - diversified portfolios.

All investors face the same, single - period, time horizon.

Al l of the above are assumptions underlying CAPM.

We live in a world of perfect capital markets.

5.

1 point

For this question, use standard deviation as the appropriate measure of risk. On average, an individual stock is

less risky than the market portfolio

more risky than the market portfolio

equally risky compared to the market portfolio

6.

1 point

What is a reasonable estimate of the equity risk premium expected over the next 20 years?

3%

10%

-1%

7.

1 point

In the Value Trust case, Bill Miller’s portfolio was

very diversified

designed to take advantage of short term movements in stock prices

very concentrated

designed to profit when the overall market fell

8.

1 point

Which of the following is not an input to the capital asset pricing model?

expected return on the market portfolio

beta

standard deviation

risk - free rate

9.

1 point

Two securities have a correlation of 0.6. A portfolio that invests 50% in each security has a standard deviation:

Less than the weighted average of the two individual security standard deviations

Equal to the weighted average of the two individual security standard deviations

Greater than the weighted average of the two individual security standard deviations

10.

1 point

Which of the following statements is true?

Diversification serves to both increase your expected return and lower your risk.

In a diversified portfolio, all the assets' returns are perfectly positively correlated.

Diversification reduces both your expected return and your risk.

By diversifying, you can have the same expected return with less risk exposure.

11.

1 point

Which one of the following is true?

Imperfect m arket premia only influence the promised rate of return

Imperfect market premia influence both the promised and expected rates of return

Imperfect m arket premia only influence the promised rate of return

Imperfect market premia do not influence either the promised or expected rates of return

12.

1 point

Which of the following is a conclusion that can be drawn from the historical return data presented in this chapter?

An investment in any of the individual stocks would have provided you with higher returns than you would have earned by investing in a stock market index or in bonds.

An investment in an individual stock would have provided you with a higher return than an investment in bonds, but you would have earned an even h igher return by investing in the S&P 500 Index.

An investment in individual stocks tends to be riskier than investing in a stock market index.

Both A and C are true.

13.

1 point

For which of the following types of assets is the market closest to perfect?

corporate bonds

real estate

municipal bonds

large company stocks

14.

1 point

All else equal, which of the following bonds would you expect to offer the highest promised rate of return?

AAA bond

BBB bond

A+ bond

BB+ bond

15.

1 point

Rank the following
asset classes in terms of risk, from highest risk to lowest risk:
I. Bonds
II. Individual stocks
III. S&P 500 Index
IV. Certificates of deposit

II, III, I, IV

IV, II, III, I

II, IV, III, I

II, I, III, IV

16.

1 point

The more illiquid an investment is

the lower the price it should sell for, all else equal.

the lower its expected rate of return, all else equal.

the worse the investment is.

Both A and B are correct answers.

17.

1 point

If you believe that markets are semistrong form efficient and want to invest in the equity market, then you should invest in

Either actively managed or passively managed funds are acceptable given your beliefs

Neith er actively managed nor passively managed funds are acceptable given your beliefs

actively managed funds

passively managed index funds

18.

1 point

In the Beta Management case, why were Sarah Wolfe’s clients frustrated with her strategy?

She was not picking individual stocks

She had mistimed the market on several occasions

She purchased Brown Inc. just before it announced bad earnings

She was not diversified enough in her portfolio decisions

19.

1 point

An efficient market is defined as one in which

the current prices reflect all available information.

there are no transaction costs.

there are no taxes.

All of the above are necessary conditions for an efficient market.

20.

1 point

The stock of the Goldy Corporation has a beta of -0.25. If the expected return on the market decreases by 4%, then the expected return on Goldy should

increase by 1.6%

decrease by 1%

increase by 1%

decrease by 1.6%

21.

1 point

Which of the following best defines the mean-variance efficient frontier?

It is the set of portfolios that offer the greatest return.

It is the set of portfolios that provide the greatest reward for each unit of risk and the lowest risk for each level of reward.

It is the portfolio of all risky assets in existence.

It is the set of portfolios that offer the lowest risk.

22.

1 point

The average stock has a beta of

1

0

1.5

0.5

23.

1 point

Which of the following is a measure of risk?

expected value

standard deviation

variance

Both B and C are measures of risk

24.

1 point

Which of the following is NOT an imperfect market premium?

Liquidity premium

Tax premium

Risk premium