Question 1

Use the figure for the question(s)below.Consider the following graph of the security market line:  
-Portfolio "C":

Accepted Answer

A) is less risky than the market portfolio. 
B) has a relatively lower expected return than predicted. 
C) is underpriced. 
D) has a negative alpha. 
A) is less risky than the market portfolio. 
B) has a relatively lower expected return than predicted. 
C) is underpriced. 
D) has a negative alpha. A

Question 2

Use the equation for the question(s)below.Consider the following factor specification:
E[Rs] - rf =   (E[RMkt] - rf)+   E[RSMB] +   E[RHML] +   E[RPR1 YR]
-The term   measures the sensitivity of the securities' returns to:

Accepted Answer

A) size. 
B) book-to-market. 
C) momentum. 
D) the overall market. 
A) size. 
B) book-to-market. 
C) momentum. 
D) the overall market. D

Question 3

Use the following information to answer the question(s)below.
John Galt is a mutual fund manager at Atlas Asset Management.He can generate an alpha of 2% a year up to $500 million of invested capital.After that amount,his skills are spread too thin,so he cannot add value and his alpha is zero for all investments over $500 million.Atlas Asset Management charges a fee of 0.80% on the total amount of money under management.Assume that there are always investors looking for positive alpha investments and no investor would invest in a fund with a negative alpha.Assume that the fund is in equilibrium,meaning that no investor either takes out money or wishes to invest new money into the fund.
-The amount of money that Galt's fund will have under management is closest to:

Accepted Answer

A) $500 million. 
B) $600 million. 
C) $1000 million. 
D) $1250 million. 
A) $500 million. 
B) $600 million. 
C) $1000 million. 
D) $1250 million. D

Question 4

Use the following information to answer the question(s)below.
Assume that the economy has three types of people.20% are fad followers,75% are passive investors,and 5% are informed traders.The portfolio consisting of all informed traders has a beta of 1.4 and an expected return of 16%.The market has an expected return of 10% and the risk-free rate is 4%.
-The alpha for the informed investors is closest to:

Accepted Answer

A) -2.4%. 
B) -0.9%. 
C) 0.0%. 
D) 3.6%. 
A) -2.4%. 
B) -0.9%. 
C) 0.0%. 
D) 3.6%.

Question 5

Use the figure for the question(s)below.Consider the following graph of the security market line:  
-Portfolio "A":

Accepted Answer

A) has a relatively lower expected return than predicted. 
B) has a positive alpha. 
C) falls below the SML. 
D) is overpriced. 
A) has a relatively lower expected return than predicted. 
B) has a positive alpha. 
C) falls below the SML. 
D) is overpriced.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) The size effect is the observation that small stocks have positive alphas. 
B) When considering portfolios formed based on the book-to-market ratio,most of the portfolios plot below the security market line. 
C) The largest alphas occur in the smallest size deciles. 
D) When considering portfolios formed based on size,although the portfolios with the higher betas yield higher returns,most size portfolios plot above the security market line. 
A) The size effect is the observation that small stocks have positive alphas. 
B) When considering portfolios formed based on the book-to-market ratio,most of the portfolios plot below the security market line. 
C) The largest alphas occur in the smallest size deciles. 
D) When considering portfolios formed based on size,although the portfolios with the higher betas yield higher returns,most size portfolios plot above the security market line.

Question 7

Use the equation for the question(s)below.Consider the following regression model:
Rs - rf = as +   (RF1 - rf)+   (RF2 - rf)+ εS1U1B1sS1U1B0
-The term   is a(n):

Accepted Answer

A) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the second factor portfolio. 
B) error term that has an expectation of zero and is uncorrelated with either factor. 
C) constant term. 
D) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the first factor portfolio. 
A) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the second factor portfolio. 
B) error term that has an expectation of zero and is uncorrelated with either factor. 
C) constant term. 
D) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the first factor portfolio.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) A significant fraction of investors might care about aspects of their portfolios other than expected return and volatility,and so would be unwilling to hold inefficient investment portfolios. 
B) Although the true market portfolio of all invested wealth might be efficient,the proxy portfolio might not track the actual market very well. 
C) We might be using the wrong proxy portfolio when we calculate alphas. 
D) The true market portfolio consists of all traded investment wealth in the economy. 
A) A significant fraction of investors might care about aspects of their portfolios other than expected return and volatility,and so would be unwilling to hold inefficient investment portfolios. 
B) Although the true market portfolio of all invested wealth might be efficient,the proxy portfolio might not track the actual market very well. 
C) We might be using the wrong proxy portfolio when we calculate alphas. 
D) The true market portfolio consists of all traded investment wealth in the economy.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) The existence of momentum trading strategies has been widely known for at least ten years. 
B) The information required to implement a momentum strategy is not readily available to investors. 
C) If the market portfolio is not efficient,then a stock's beta with the market is not an adequate measure of its systematic risk. 
D) If the market portfolio is not efficient,then the so-called profits from a positive alpha trading strategy are really returns for bearing risk that investors are averse to and the CAPM doesn't capture. 
A) The existence of momentum trading strategies has been widely known for at least ten years. 
B) The information required to implement a momentum strategy is not readily available to investors. 
C) If the market portfolio is not efficient,then a stock's beta with the market is not an adequate measure of its systematic risk. 
D) If the market portfolio is not efficient,then the so-called profits from a positive alpha trading strategy are really returns for bearing risk that investors are averse to and the CAPM doesn't capture.

Question 10

A stock's ________ measures the stock's return relative to that predicted based on its beta,at the time of some event.

Accepted Answer

A) excessive abnormal return 
B) cumulative average return 
C) excessive predicted return 
D) cumulative abnormal return 
A) excessive abnormal return 
B) cumulative average return 
C) excessive predicted return 
D) cumulative abnormal return

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) A conclusion of the CAPM is that investors should hold the market portfolio only if they have high quality information. 
B) A conclusion of the CAPM is that investors should hold the market portfolio even if they do not have high trading skills. 
C) Even naive investors with no information should hold the market portfolio. 
D) The CAPM assumption of homogeneous expectations is not necessarily a good description of the real world. 
A) A conclusion of the CAPM is that investors should hold the market portfolio only if they have high quality information. 
B) A conclusion of the CAPM is that investors should hold the market portfolio even if they do not have high trading skills. 
C) Even naive investors with no information should hold the market portfolio. 
D) The CAPM assumption of homogeneous expectations is not necessarily a good description of the real world.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) As a practical matter,it is extremely difficult to identify portfolios that are efficient because we cannot measure the expected return and the standard deviation of a portfolio with great accuracy. 
B) The portfolios in a multifactor model can be thought of as either risk factors themselves or portfolios of stocks correlated with unobservable risk factors. 
C) Each factor beta is the expected percent change in the excess return of a security for a 1% change in the excess return of the factor portfolio. 
D) Even if the market portfolio is not efficient,it still must capture all components of systematic risk. 
A) As a practical matter,it is extremely difficult to identify portfolios that are efficient because we cannot measure the expected return and the standard deviation of a portfolio with great accuracy. 
B) The portfolios in a multifactor model can be thought of as either risk factors themselves or portfolios of stocks correlated with unobservable risk factors. 
C) Each factor beta is the expected percent change in the excess return of a security for a 1% change in the excess return of the factor portfolio. 
D) Even if the market portfolio is not efficient,it still must capture all components of systematic risk.

Question 13

Use the information for the question(s)below.
Consider two firms,Chihuahua Corporation and Bernard Industries that are each expected to pay the same $1.5 million dividend every year in perpetuity.Chihuahua Corporation is riskier and has an equity cost of capital of 15%.Bernard Industries is not as shaky as Chihuahua,so Bernard has an equity cost of capital of only 10%.Assume that the market portfolio is not efficient.Both stocks have the same beta and an expected return of 12%.
-The market value for Chihuahua is closest to:

Accepted Answer

A) $10.0 million. 
B) $12.5 million. 
C) $12.0 million. 
D) $15 million. 
A) $10.0 million. 
B) $12.5 million. 
C) $12.0 million. 
D) $15 million.

Question 14

Use the following information to answer the question(s)below.
Consider the price paths of the following stocks over a six-month period:   None of these stocks pay dividends.
-Assume that you are an investor with the disposition effect and you bought each of these stocks in January.Suppose that it is currently the end of June,which stocks are you most inclined to sell? 1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors

Accepted Answer

A) 1 only 
B) 1 and 3 only 
C) 2 only 
D) 1,2,and 3 only 
A) 1 only 
B) 1 and 3 only 
C) 2 only 
D) 1,2,and 3 only

Question 15

If investors have relative wealth concerns,they care most about:

Accepted Answer

A) the return on their portfolio relative to their overall current wealth. 
B) the performance of their portfolio relative to that of their peers. 
C) their current portfolio performance relative to their past portfolio performance. 
D) the performance of their current wealth relative to their past wealth. 
A) the return on their portfolio relative to their overall current wealth. 
B) the performance of their portfolio relative to that of their peers. 
C) their current portfolio performance relative to their past portfolio performance. 
D) the performance of their current wealth relative to their past wealth.

Question 16

Use the table for the question(s)below.
Consider the following information regarding the Fama-French-Carhart four factor model:  
-Using the FFC four factor model and the historical average monthly returns,the expected monthly return for GE is closest to:

Accepted Answer

A) 0.53%. 
B) 0.73%. 
C) 0.79%. 
D) 0.71%. 
A) 0.53%. 
B) 0.73%. 
C) 0.79%. 
D) 0.71%.

Question 17

Use the following information to answer the question(s)below.
Consider the price paths of the following stocks over a six-month period:   None of these stocks pay dividends.
-Assume that you are an investor with the disposition effect and you bought each of these stocks in January.Suppose that it is currently the end of March,which stocks are you most inclined to sell? 1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors

Accepted Answer

A) 1 only 
B) 1 and 3 only 
C) 2 only 
D) 2 and 4 only 
A) 1 only 
B) 1 and 3 only 
C) 2 only 
D) 2 and 4 only

Question 18

Use the equation for the question(s)below.Consider the following regression model:
Rs - rf = as +   (RF1 - rf)+   (RF2 - rf)+ εS1U1B1sS1U1B0
-The term as is a(n):

Accepted Answer

A) error term that has an expectation of zero and is uncorrelated with either factor. 
B) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the first factor portfolio. 
C) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the second factor portfolio. 
D) constant term. 
A) error term that has an expectation of zero and is uncorrelated with either factor. 
B) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the first factor portfolio. 
C) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the second factor portfolio. 
D) constant term.

Question 19

Use the following information to answer the question(s) below.

Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 12% volatility and the risk-free rate is 3%. New information arrives that does not change any of these numbers, but it does change the expected returns of the following stocks:

-Which of the following stocks represent selling opportunities? 
1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors

Accepted Answer

A) 1 only 
B) 1 and 2 only 
C) 2 and 3 only 
D) 2 and 4 only 
A) 1 only 
B) 1 and 2 only 
C) 2 and 3 only 
D) 2 and 4 only

Question 20

Use the equation for the question(s)below.Consider the following regression model:
Rs - rf = as +   (RF1 - rf)+   (RF2 - rf)+ εS1U1B1sS1U1B0
-The term   is a(n):

Accepted Answer

A) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the second factor portfolio. 
B) constant term. 
C) error term that has an expectation of zero and is uncorrelated with either factor. 
D) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the first factor portfolio. 
A) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the second factor portfolio. 
B) constant term. 
C) error term that has an expectation of zero and is uncorrelated with either factor. 
D) measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the first factor portfolio.

Exam 13: Investor Behavior and Capital Market Efficiency

Use the figure for the question(s)below.Consider the following graph of the security market line: -Portfolio "C":

Use the equation for the question(s)below.Consider the following factor specification: E[Rs] - rf = (E[RMkt] - rf)+ E[RSMB] + E[RHML] + E[RPR1 YR] -The term measures the sensitivity of the securities' returns to:

Use the figure for the question(s)below.Consider the following graph of the security market line: -Portfolio "A":

Which of the following statements is FALSE?

Use the equation for the question(s)below.Consider the following regression model: Rs - rf = as + (RF1 - rf)+ (RF2 - rf)+ εs -The term is a(n):

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A stock's ________ measures the stock's return relative to that predicted based on its beta,at the time of some event.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

If investors have relative wealth concerns,they care most about:

Use the table for the question(s)below. Consider the following information regarding the Fama-French-Carhart four factor model: -Using the FFC four factor model and the historical average monthly returns,the expected monthly return for GE is closest to:

Use the equation for the question(s)below.Consider the following regression model: Rs - rf = as + (RF1 - rf)+ (RF2 - rf)+ εs -The term as is a(n):

Use the equation for the question(s)below.Consider the following regression model: Rs - rf = as + (RF1 - rf)+ (RF2 - rf)+ εs -The term is a(n):

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Use the equation for the question(s)below.Consider the following regression model: Rs - rf = as + (RF1 - rf)+ (RF2 - rf)+ ε_s -The term is a(n):

Use the equation for the question(s)below.Consider the following regression model: Rs - rf = as + (RF1 - rf)+ (RF2 - rf)+ ε_s -The term as is a(n):

Use the equation for the question(s)below.Consider the following regression model: Rs - rf = as + (RF1 - rf)+ (RF2 - rf)+ ε_s -The term is a(n):