Financial Markets and Portfolio Management: Concepts of Risk and Return - Prof. Donna Dudn, Quizzes of Finance

Download Financial Markets and Portfolio Management: Concepts of Risk and Return - Prof. Donna Dudn and more Quizzes Finance in PDF only on Docsity! Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is __________. Answer: 3.7% Harry Markowitz is best known for his Nobel prize winning work on ______________. Answer: Techniques used to identify efficient portfolios of risky assets If you want to know the portfolio standard deviation for a three stock portfolio you will have to Answer: Calculate three covariances Reference: Stock The beta of this stock is _____. Answer: 1.32 Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ______________. Answer: Less than 1 Reference: Return What is the alpha of a portfolio with a beta of 2 and actual return of 15%? Answer: 0% Based on the outcomes in the table below choose which of the statements is/are correct: I. The covariance of Security A and Security B is zero II. The correlation coefficient between Security A and C is negative III. The correlation coefficient between Security B and C is positive Answer: I and II only The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation is 12.0%, what is the reward to variability ratio of the portfolio? Answer: 0.45 Empirical results estimated from historical data indicate that betas __________. Answer: Seem to regress toward one over time Standard deviation is a measure of ____________. Answer: Total risk When all investors analyze securities in the same way and share the same economic view of the world we say they have _____________________. Answer: Homogeneous expectations Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy because __________. Answer: B, it offers an expected excess return of 1.8% A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your money. Answer: 73% Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price II. All investors plan for one identical holding period III. All investors analyze securities in the same way and share the same economic view of the world IV. All investors have the same level of risk aversion Answer: I, II and III only Investors require a risk premium as compensation for bearing _______________. Answer: Systematic risk Rational risk-averse investors will always prefer portfolios ______________. Answer: Located on the capital market line to those located on the efficient frontier The risk-free rate and the expected market rate of return are 5% and 15% 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 __________. Answer: 17% Diversification is most effective when security returns are __________. Answer: Negatively correlated 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 Answer: Has a beta that could be anything between 0.6541 and 1.465 inclusive The market value weighted average beta of firms included in the market index will always be ______________. Answer: 1 According to the semi-strong form of the efficient markets hypothesis ____________. Answer: Future changes in stock prices cannot be predicted from any information that is publicly available Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using what approach? Answer: Passive investment Basu found that firms with high P/E ratios __________. Answer: Earned lower average returns than firms with low P/E ratios A market anomaly refers to ____ . Answer: Price behavior that differs from the behavior predicted by the efficient market hypothesis In a 1953 study of stock prices, Maurice Kendall found that ________. Answer: There were no predictable patterns in stock prices The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________. Answer: Liquidity effect Proponents of the EMH typically advocate __________. Answer: A passive investment strategy 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 which makes the performance of remaining funds seem more consistent over time. Answer: Survivorship bias Evidence supporting semi-strong form market efficiency suggests that investors should _________________________. Answer: Use a passive trading strategy such as purchasing an index fund or an ETF 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. Answer: Lucky event Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information