Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The most important example of non-tradeable wealth is human capital. 
B) If investors have a significant amount of non-tradeable wealth,this wealth will be an important part of their portfolios,but will not be part of the market portfolio of tradeable securities. 
C) If the entire portfolio of investments is efficient,then just the tradeable part of the portfolio should be efficient also. 
D) Researchers have found evidence that the presence of human capital can explain at least part of the reason for the inefficiency of the most commonly used market proxies. 
A) The most important example of non-tradeable wealth is human capital. 
B) If investors have a significant amount of non-tradeable wealth,this wealth will be an important part of their portfolios,but will not be part of the market portfolio of tradeable securities. 
C) If the entire portfolio of investments is efficient,then just the tradeable part of the portfolio should be efficient also. 
D) Researchers have found evidence that the presence of human capital can explain at least part of the reason for the inefficiency of the most commonly used market proxies. C

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) If indeed alphas are positive,it is possible that the positive alpha trading strategies contain risk that investors are unwilling to bear but the CAPM does not capture. 
B) If indeed alphas are positive,it is possible that the costs of implementing investment strategies are larger than the NPVs of undertaking them. 
C) If indeed alphas are positive,then investors have to be systematically ignoring negative-NPV investment opportunities. 
D) The only way a positive NPV investment opportunity can exist in a market is if some barrier to entry restricts competition. 
A) If indeed alphas are positive,it is possible that the positive alpha trading strategies contain risk that investors are unwilling to bear but the CAPM does not capture. 
B) If indeed alphas are positive,it is possible that the costs of implementing investment strategies are larger than the NPVs of undertaking them. 
C) If indeed alphas are positive,then investors have to be systematically ignoring negative-NPV investment opportunities. 
D) The only way a positive NPV investment opportunity can exist in a market is if some barrier to entry restricts competition. C

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

Accepted Answer

A) -.80% 
B) 0.0% 
C) 0.80% 
D) 1.8% 
A) -.80% 
B) 0.0% 
C) 0.80% 
D) 1.8% B

Question 4

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

Accepted Answer

A) falls below the SML. 
B) has a negative alpha. 
C) is overpriced. 
D) offers an expected return equal to the risk-free rate. 
A) falls below the SML. 
B) has a negative alpha. 
C) is overpriced. 
D) offers an expected return equal to the risk-free rate.

Question 5

Various trading strategies appear to offer non-zero alphas when we examine real world data.If indeed these alphas are positive,it could be explained by any of the following EXCEPT:

Accepted Answer

A) Investors are systematically ignoring positive-NPV investment opportunities. 
B) The market portfolio is inefficient,but the market portfolio proxy used to calculate the alphas is efficient. 
C) A stock's beta with the market portfolio does not adequately measure a stock's systematic risk. 
D) The positive alpha trading strategies contain risk that investors are unwilling to bear but the CAPM does not capture. 
A) Investors are systematically ignoring positive-NPV investment opportunities. 
B) The market portfolio is inefficient,but the market portfolio proxy used to calculate the alphas is efficient. 
C) A stock's beta with the market portfolio does not adequately measure a stock's systematic risk. 
D) The positive alpha trading strategies contain risk that investors are unwilling to bear but the CAPM does not capture.

Question 6

Use the equation for the question(s)below.
Consider the following factor model:
E[RS1U1B1sS1U1B0] - rS1U1B1fS1U1B0 =   (E[RS1U1B1MktS1U1B0] - rS1U1B1fS1U1B0)+   E[RS1U1B1SMBS1U1B0] +   E[RS1U1B1HMLS1U1B0] +   E[RPR1 YR]
-The term  
Measures the sensitivity of the securities returns to:

Accepted Answer

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

Question 7

Use the following information to answer the question(s)below.   All amounts are in millions.
-If the risk-free rate is 3% and the market risk premium is 5%,then the CAPM's predicted expected return for Nielson Motors is closest to:

Accepted Answer

A) 8.5% 
B) 9.0% 
C) 9.5% 
D) 10.0% 
A) 8.5% 
B) 9.0% 
C) 9.5% 
D) 10.0%

Question 8

The expected alpha for Wyatt Oil is closest to:

Accepted Answer

A) -3.00% 
B) -1.00% 
C) 0.00% 
D) 3.00% 
A) -3.00% 
B) -1.00% 
C) 0.00% 
D) 3.00%

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) Nonzero alphas may merely indicate that the wrong market proxy is beings used;they do not necessarily indicate forgone positive NPV investment opportunities. 
B) The true market portfolio contains much more than just stocks,it includes bonds,real estate,art,precious metals,and any other investment vehicles available. 
C) If the true market portfolio is efficient,but the proxy portfolio is not highly correlated with the true market portfolio,then the true market portfolio will not be efficient and stocks will have nonzero alphas. 
D) Much of the investment wealth cannot be included in the proxy for the market portfolio since it does not trade in competitive markets. 
A) Nonzero alphas may merely indicate that the wrong market proxy is beings used;they do not necessarily indicate forgone positive NPV investment opportunities. 
B) The true market portfolio contains much more than just stocks,it includes bonds,real estate,art,precious metals,and any other investment vehicles available. 
C) If the true market portfolio is efficient,but the proxy portfolio is not highly correlated with the true market portfolio,then the true market portfolio will not be efficient and stocks will have nonzero alphas. 
D) Much of the investment wealth cannot be included in the proxy for the market portfolio since it does not trade in competitive markets.

Question 10

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

Accepted Answer

A) Human capital 
B) Stocks 
C) Bonds 
D) Precious metals 
A) Human capital 
B) Stocks 
C) Bonds 
D) Precious metals

Question 11

Use the table for the question(s)below.
Consider the following information regarding the Fama French Carhart four factor model:  
-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 12

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 13

Use the following information to answer the question(s)below.   All amounts are in millions.
-If the risk-free rate is 3% and the market risk premium is 5%,then the CAPM's predicted expected return for Wyatt Oil is closest to:

Accepted Answer

A) 7.0% 
B) 8.5% 
C) 9.0% 
D) 9.5% 
A) 7.0% 
B) 8.5% 
C) 9.0% 
D) 9.5%

Question 14

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 Wal-Mart is closest to:

Accepted Answer

A) 0.71% 
B) 0.53% 
C) 1.38% 
D) 0.79% 
A) 0.71% 
B) 0.53% 
C) 1.38% 
D) 0.79%

Question 15

If investors believe that others have superior information which they can take advantage of by copying their trades,this can lead to:

Accepted Answer

A) an informational cascade effect. 
B) a disposition effect. 
C) a sensation seeking effect. 
D) an overconfidence bias. 
A) an informational cascade effect. 
B) a disposition effect. 
C) a sensation seeking effect. 
D) an overconfidence bias.

Question 16

The alpha for Chihuahua is closest to:

Accepted Answer

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

Question 17

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 18

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 19

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 20

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 IBM is closest to:

Accepted Answer

A) 0.79% 
B) 0.53% 
C) 0.71% 
D) 1.01% 
A) 0.79% 
B) 0.53% 
C) 0.71% 
D) 1.01%

Exam 13: Investor Behavior and Capital Market Efficiency

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

Various trading strategies appear to offer non-zero alphas when we examine real world data.If indeed these alphas are positive,it could be explained by any of the following EXCEPT:

Use the equation for the question(s)below. Consider the following factor model: 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 following information to answer the question(s)below. All amounts are in millions. -If the risk-free rate is 3% and the market risk premium is 5%,then the CAPM's predicted expected return for Nielson Motors is closest to:

The expected alpha for Wyatt Oil is closest to:

Which of the following statements is FALSE?

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

Use the table for the question(s)below. Consider the following information regarding the Fama French Carhart four factor model: -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:

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

Use the following information to answer the question(s)below. All amounts are in millions. -If the risk-free rate is 3% and the market risk premium is 5%,then the CAPM's predicted expected return for Wyatt Oil is closest to:

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 Wal-Mart is closest to:

If investors believe that others have superior information which they can take advantage of by copying their trades,this can lead to:

The alpha for Chihuahua is closest to:

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

The alpha for Bernard is closest to:

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 IBM is closest to:

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 factor model: E[R_s] - r_f = (E[R_Mkt] - r_f)+ E[R_SMB] + E[R_HML] + E[RPR1 YR] -The term Measures the sensitivity of the securities returns to: