Question 1

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 2

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 hold?
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 3

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

Accepted Answer

A) expected return minus its required return. 
B) expected return minus its actual return. 
C) nominal return minus its required return. 
D) required return minus its actual return. 
A) expected return minus its required return. 
B) expected return minus its actual return. 
C) nominal return minus its required return. 
D) required return minus its actual return.

Question 4

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 5

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 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

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

Accepted Answer

A) $3.75 million 
B) $8.00 million 
C) $10.00 million 
D) $25.00 million 
A) $3.75 million 
B) $8.00 million 
C) $10.00 million 
D) $25.00 million

Question 8

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

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) The existence of the 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 the 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

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

Accepted Answer

A) 11.5% 
B) 12.4% 
C) 13.6% 
D) 16.0% 
A) 11.5% 
B) 12.4% 
C) 13.6% 
D) 16.0%

Question 11

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 12

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 13

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 14

The alpha for the passive 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 15

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 16

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 17

Which of the following statements is FALSE?

Accepted Answer

A) The risk premium of any marketable security can be written as the sum of the risk premium of each factor multiplied by the sensitivity of the stock with that factor. 
B) The factor betas measure the sensitivity of the stock to a particular factor. 
C) If we use more than one portfolio as factors,then together these factors will capture systematic risk,but each factor captures different components of the systematic risk. 
D) When we use more than one portfolio to capture risk,the model is known as a single factor model. 
A) The risk premium of any marketable security can be written as the sum of the risk premium of each factor multiplied by the sensitivity of the stock with that factor. 
B) The factor betas measure the sensitivity of the stock to a particular factor. 
C) If we use more than one portfolio as factors,then together these factors will capture systematic risk,but each factor captures different components of the systematic risk. 
D) When we use more than one portfolio to capture risk,the model is known as a single factor model.

Question 18

The term ε 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 first factor portfolio. 
B) error term that has an expectation of zero and is uncorrelated with either factor. 
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) 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. 
B) error term that has an expectation of zero and is uncorrelated with either factor. 
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

Which of the following statements is FALSE?

Accepted Answer

A) A conclusion of the CAPM that investors should hold the market portfolio only if they have high quality information. 
B) A conclusion of the CAPM 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 that investors should hold the market portfolio only if they have high quality information. 
B) A conclusion of the CAPM 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 20

The alpha for the fad follower's portfolio is closest to:

Accepted Answer

A) -0.9% 
B) 0.0% 
C) 3.6% 
D) 6.0% 
A) -0.9% 
B) 0.0% 
C) 3.6% 
D) 6.0%

Exam 13: Investor Behavior and Capital Market Efficiency

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

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

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

Which of the following statements is FALSE?

Investors that suffer from a familiarity bias:

Which of the following statements is FALSE?

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

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:

Which of the following statements is FALSE?

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

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":

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.

The alpha for the passive investors is closest to:

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

The term ε is a(n):

Which of the following statements is FALSE?

The alpha for the fad follower's portfolio 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: