Question 1

Which of the following statements is FALSE?

Accepted Answer

A) A momentum strategy is one where you buy stocks that have had low past returns and (short)sell stocks that have had high past returns. 
B) Over the years since the discovery of the CAPM,it has become increasingly clear to researchers and practitioners alike that when forming portfolios based on market capitalization,book-to-market ratios,and past returns,one can construct trading strategies that have a positive alpha. 
C) In one study,portfolios containing firms with the highest realized returns over the previous 6-12 months had positive alphas over the next 3-12 months. 
D) If the market portfolio is not efficient,then a portfolio of small stocks will likely have positive alphas. 
A) A momentum strategy is one where you buy stocks that have had low past returns and (short)sell stocks that have had high past returns. 
B) Over the years since the discovery of the CAPM,it has become increasingly clear to researchers and practitioners alike that when forming portfolios based on market capitalization,book-to-market ratios,and past returns,one can construct trading strategies that have a positive alpha. 
C) In one study,portfolios containing firms with the highest realized returns over the previous 6-12 months had positive alphas over the next 3-12 months. 
D) If the market portfolio is not efficient,then a portfolio of small stocks will likely have positive alphas.

Question 2

Use the figure for the question(s)below.Consider the following graph of the security market line:  
-Which of the following statements regarding portfolio "A" is/are correct? 1.Portfolio "A" has a positive alpha.
2.Portfolio "A" is overpriced.
3.Portfolio "A" is less risky than the market portfolio.
4.Portfolio "A" should not exist if the market portfolio is efficient.

Accepted Answer

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

Question 3

According to a study by Berk and van Binsbergen,which risk model determines mutual fund flows?

Accepted Answer

A) The CAPM risk-adjusted return 
B) The absolute return 
C) The excess return over T-Bills 
D) Alpha-Beta factors 
A) The CAPM risk-adjusted return 
B) The absolute return 
C) The excess return over T-Bills 
D) Alpha-Beta factors

Question 4

According to a survey of 392 CFOs conducted by John Graham and Campbell Harvey,the most common method used in corporate America to estimate the cost of capital is:

Accepted Answer

A) the CAPM. 
B) multifactor models. 
C) characteristic models. 
D) the dividend discount model. 
A) the CAPM. 
B) multifactor models. 
C) characteristic models. 
D) the dividend discount model.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) If the CAPM correctly computes the risk premium,investors would stop investing only when they expected the alpha of an investment strategy to be negative. 
B) If the CAPM correctly computes the risk premium,an investment opportunity with a positive alpha is a positive NPV investment opportunity. 
C) If the CAPM correctly computes the risk premium,investors should flock to invest in positive alpha stocks. 
D) Anyone can implement a momentum trading strategy and therefore generate a positive investment opportunity. 
A) If the CAPM correctly computes the risk premium,investors would stop investing only when they expected the alpha of an investment strategy to be negative. 
B) If the CAPM correctly computes the risk premium,an investment opportunity with a positive alpha is a positive NPV investment opportunity. 
C) If the CAPM correctly computes the risk premium,investors should flock to invest in positive alpha stocks. 
D) Anyone can implement a momentum trading strategy and therefore generate a positive investment opportunity.

Question 6

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 Bernard is closest to:

Accepted Answer

A) +5%. 
B) -2%. 
C) -3%. 
D) +2%. 
A) +5%. 
B) -2%. 
C) -3%. 
D) +2%.

Question 7

The tendency to hang on to losers and sell winners is known as the:

Accepted Answer

A) cascade effect. 
B) disposition effect. 
C) overconfidence bias. 
D) systematic behavior bias. 
A) cascade effect. 
B) disposition effect. 
C) overconfidence bias. 
D) systematic behavior bias.

Question 8

Investors that suffer from a familiarity bias:

Accepted Answer

A) prefer not to invest in companies they are familiar with. 
B) favor investments in companies they are familiar with. 
C) invest in the same stocks that their friends or family recommend. 
D) tend to overestimate the precision of their knowledge. 
A) prefer not to invest in companies they are familiar with. 
B) favor investments in companies they are familiar with. 
C) invest in the same stocks that their friends or family recommend. 
D) tend to overestimate the precision of their knowledge.

Question 9

Which of the following is NOT true regarding individual investor behavior?

Accepted Answer

A) Individual investors fail to diversify their portfolios adequately. 
B) A vast majority of individual investors hold fewer than 10 stocks in their portfolio. 
C) Employees tend to overinvest in their company's own stock. 
D) Individual investors' portfolios consistently outperform the market averages. 
A) Individual investors fail to diversify their portfolios adequately. 
B) A vast majority of individual investors hold fewer than 10 stocks in their portfolio. 
C) Employees tend to overinvest in their company's own stock. 
D) Individual investors' portfolios consistently outperform the market averages.

Question 10

The tendency of uninformed individuals to overestimate the precision of their knowledge is known as:

Accepted Answer

A) overconfidence bias. 
B) herd behavior. 
C) familiarity bias. 
D) disposition bias. 
A) overconfidence bias. 
B) herd behavior. 
C) familiarity bias. 
D) disposition bias.

Question 11

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

Accepted Answer

A) is less risky than the market portfolio. 
B) is overpriced. 
C) has a positive alpha. 
D) falls above the SML. 
A) is less risky than the market portfolio. 
B) is overpriced. 
C) has a positive alpha. 
D) falls above the SML.

Question 12

An individual's desire for intense risk-taking experiences is known as:

Accepted Answer

A) phenomenon seeking. 
B) herd seeking. 
C) sensation seeking. 
D) rational expectations seeking. 
A) phenomenon seeking. 
B) herd seeking. 
C) sensation seeking. 
D) rational expectations seeking.

Question 13

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

Accepted Answer

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

Question 14

The CAPM does not require that investors have homogeneous expectations,but rather that they have:

Accepted Answer

A) rational biases. 
B) no biases. 
C) irrational expectations. 
D) rational expectations. 
A) rational biases. 
B) no biases. 
C) irrational expectations. 
D) rational expectations.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) Because expected returns are not easy to estimate,each portfolio that is added to a multifactor model increases the difficulty of implementing the model. 
B) The self-financing portfolio made from high minus low book-to-market stocks is called the high-minus-low (HML)portfolio. 
C) The Fama-French-Carhart (FF
C) factor specification was identified a little more than ten years ago.Although it is widely used in academic literature to measure risk,much debate persists about whether it really is a significant improvement over the CAPM. 
D) A trading strategy that each year short sells portfolio S (small stocks)and uses this position to buy portfolio B (big stocks)has produced positive risk-adjusted returns historically.This self-financing portfolio is widely known as the small-minus-big (SM
B) portfolio. 
A) Because expected returns are not easy to estimate,each portfolio that is added to a multifactor model increases the difficulty of implementing the model. 
B) The self-financing portfolio made from high minus low book-to-market stocks is called the high-minus-low (HML)portfolio. 
C) The Fama-French-Carhart (FF
C) factor specification was identified a little more than ten years ago.Although it is widely used in academic literature to measure risk,much debate persists about whether it really is a significant improvement over the CAPM. 
D) A trading strategy that each year short sells portfolio S (small stocks)and uses this position to buy portfolio B (big stocks)has produced positive risk-adjusted returns historically.This self-financing portfolio is widely known as the small-minus-big (SM
B) portfolio.

Question 16

Use the figure for the question(s)below.Consider the following graph of the security market line:  
-Which of the following statements regarding portfolio "B" is/are correct? 1.Portfolio "B" has a positive alpha.
2.Portfolio "B" is overpriced.
3.Portfolio "B" is less risky than the market portfolio.
4.Portfolio "B" should not exist if the market portfolio is efficient.

Accepted Answer

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

Question 17

Use the figure for the question(s)below.Consider the following graph of the security market line:  
-The market portfolio:

Accepted Answer

A) is underpriced. 
B) has a positive alpha. 
C) is overpriced. 
D) falls on the SML. 
A) is underpriced. 
B) has a positive alpha. 
C) is overpriced. 
D) falls on the SML.

Exam 13: Investor Behavior and Capital Market Efficiency

Which of the following statements is FALSE?

According to a study by Berk and van Binsbergen,which risk model determines mutual fund flows?

According to a survey of 392 CFOs conducted by John Graham and Campbell Harvey,the most common method used in corporate America to estimate the cost of capital is:

Which of the following statements is FALSE?

The tendency to hang on to losers and sell winners is known as the:

Investors that suffer from a familiarity bias:

Which of the following is NOT true regarding individual investor behavior?

The tendency of uninformed individuals to overestimate the precision of their knowledge is known as:

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

An individual's desire for intense risk-taking experiences is known as:

The CAPM does not require that investors have homogeneous expectations,but rather that they have:

Which of the following statements is FALSE?

Use the figure for the question(s)below.Consider the following graph of the security market line: -The market portfolio:

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

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