Exam 13: Investor Behavior and Capital Market Efficiency

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 alpha that investors in Galt's fund expect to receive is closest to:

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 fad follower's portfolio is closest to:

Explain why the market portfolio proxy may not be efficient.

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 passive investors is closest to:

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 expected return for the fad follower's portfolio is closest to:

Which of the following is NOT an investment likely to be found in any proxy for the market portfolio?

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

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 buying opportunities? 1.Taggart Transcontinental 2.Rearden Metal 3.Wyatt Oil 4.Nielson Motors

A group of portfolios from which we can form an efficient portfolio are called:

Which of the following statements is FALSE?

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:

What does the existence of a positive alpha investment strategy imply?

A stock's alpha is defined as the stock's:

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 Bernard is closest to:

Which of the following statements is FALSE?

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 alpha for Chihuahua is closest to:

When investors imitate each other's actions,this is known as ________ behavior.

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 Walmart is closest to:

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 fee income that Galt's fund will generate is closest to:

Which of the following statements is FALSE?