Question 1

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. D

Question 2

Investors tend to ________ stocks that have ________ since the time of purchase.

Accepted Answer

A)  hold on to; have lost value 
B)  sell; have lost value 
C)  hold on to; have risen in value 
D)  none of the above 
A)  hold on to; have lost value 
B)  sell; have lost value 
C)  hold on to; have risen in value 
D)  none of the above A

Question 3

One of the reasons that it is extremely difficult in practice to identify portfolios that are efficient is because

Accepted Answer

A)  we cannot measure the realized return and the standard deviation of a portfolio with great accuracy. 
B)  we cannot measure the expected return and the standard deviation of a portfolio with great accuracy. 
C)  we cannot measure the weighted average return and the standard deviation of a portfolio with great accuracy. 
D)  we cannot measure the required return and the standard deviation of a portfolio with great accuracy. 
A)  we cannot measure the realized return and the standard deviation of a portfolio with great accuracy. 
B)  we cannot measure the expected return and the standard deviation of a portfolio with great accuracy. 
C)  we cannot measure the weighted average return and the standard deviation of a portfolio with great accuracy. 
D)  we cannot measure the required return and the standard deviation of a portfolio with great accuracy. B

Question 4

Investors can ________ without reducing their expected return.

Accepted Answer

A)  take more risk 
B)  eliminate risk 
C)  take the same risk 
D)  reduce risk 
A)  take more risk 
B)  eliminate risk 
C)  take the same risk 
D)  reduce risk

Question 5

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 6

Which of the following statements is false?

Accepted Answer

A)  There is an economic reason why firm's betas might vary-the firm itself varies. 
B)  Only a few years of data are required to estimate risk premiums, since both risk premiums and betas remain stable over time. 
C)  When firms make new investments in new areas or shut down unprofitable projects in old areas their risk profiles change as well. 
D)  Calculating the cost of capital using multifactor models like the FFC factor specification or the CAPM relies on accurate estimates of risk premiums and betas. 
A)  There is an economic reason why firm's betas might vary-the firm itself varies. 
B)  Only a few years of data are required to estimate risk premiums, since both risk premiums and betas remain stable over time. 
C)  When firms make new investments in new areas or shut down unprofitable projects in old areas their risk profiles change as well. 
D)  Calculating the cost of capital using multifactor models like the FFC factor specification or the CAPM relies on accurate estimates of risk premiums and betas.

Question 7

The phenomenon in which individuals imitate each other's actions,is referred to as ________.

Accepted Answer

A)  herd behaviour 
B)  the cascade effect 
C)  the disposition effect 
D)  sensation seeking 
A)  herd behaviour 
B)  the cascade effect 
C)  the disposition effect 
D)  sensation seeking

Question 8

Which of the following statements is false?

Accepted Answer

A)  Rather than relying on the efficiency of a single portfolio (such as the market), multifactor models rely on the weaker condition that an efficient portfolio can be constructed from a collection of well-diversified portfolios or factors. 
B)  A positive alpha in a single factor model means that the portfolios that implement the trading strategy capture risk that is not captured by the market portfolio. 
C)  Multifactor models have a distinct advantage over single-factor models in that it is much easier to identify a collection of portfolios that captures systematic risk than just a single portfolio. 
D)  Trading strategies based on market capitalization, book-to-market ratios, and momentum have been developed that appear to have zero alphas. 
A)  Rather than relying on the efficiency of a single portfolio (such as the market), multifactor models rely on the weaker condition that an efficient portfolio can be constructed from a collection of well-diversified portfolios or factors. 
B)  A positive alpha in a single factor model means that the portfolios that implement the trading strategy capture risk that is not captured by the market portfolio. 
C)  Multifactor models have a distinct advantage over single-factor models in that it is much easier to identify a collection of portfolios that captures systematic risk than just a single portfolio. 
D)  Trading strategies based on market capitalization, book-to-market ratios, and momentum have been developed that appear to have zero alphas.

Question 9

Book-to-market ratio is the ratio of ________.

Accepted Answer

A)  book value of assets to the market value of assets 
B)  book value of equity to the market value of equity 
C)  book value of debt to the market value of debt 
D)  book value of working capital to the market value of working capital 
A)  book value of assets to the market value of assets 
B)  book value of equity to the market value of equity 
C)  book value of debt to the market value of debt 
D)  book value of working capital to the market value of working capital

Question 10

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 statements 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 11

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 FFC 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 FFC 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 12

Which of the following statements is false?

Accepted Answer

A)  If the CAPM correctly computed 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 computed 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 13

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 security's 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 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

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 by forming portfolios based on market capitalization, book-to-market ratios, and past returns, one can construct trading strategies that have positive alphas. 
C)  Portfolios containing firms with the highest realized returns over the previous six months tend to have positive alphas over the next six 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 by forming portfolios based on market capitalization, book-to-market ratios, and past returns, one can construct trading strategies that have positive alphas. 
C)  Portfolios containing firms with the highest realized returns over the previous six months tend to have positive alphas over the next six months. 
D)  If the market portfolio is not efficient, then a portfolio of small stocks will likely have positive alphas.

Question 16

Which of the following statements is false?

Accepted Answer

A)  Researchers use a proxy portfolio like the S&P/TSX Composite Index in Canada or the S&P 500 Index in the U.S. and assume that it will be highly correlated with the true market portfolio. 
B)  Many mutual funds exist that follow both the momentum-based trading strategy and the market capitalization/book-to-market-based strategy. 
C)  The true market portfolio should not consist of all traded investment wealth in the economy. 
D)  If the true market portfolio is efficient but the proxy portfolio is not highly correlated with the true market, then the proxy will not be efficient and stocks will have nonzero alphas. 
A)  Researchers use a proxy portfolio like the S&P/TSX Composite Index in Canada or the S&P 500 Index in the U.S. and assume that it will be highly correlated with the true market portfolio. 
B)  Many mutual funds exist that follow both the momentum-based trading strategy and the market capitalization/book-to-market-based strategy. 
C)  The true market portfolio should not consist of all traded investment wealth in the economy. 
D)  If the true market portfolio is efficient but the proxy portfolio is not highly correlated with the true market, then the proxy will not be efficient and stocks will have nonzero alphas.

Question 17

Which of the following statements is false?

Accepted Answer

A)  If alphas are positive, it is possible that the positive alpha trading strategies contain risk that investors are unwilling to bear but that the CAPM does not capture. 
B)  If alphas are positive, it is possible that the costs of implementing investment strategies are larger than the NPVs of undertaking them. 
C)  If alphas are negative, then investors have to be systematically ignoring positive-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 alphas are positive, it is possible that the positive alpha trading strategies contain risk that investors are unwilling to bear but that the CAPM does not capture. 
B)  If alphas are positive, it is possible that the costs of implementing investment strategies are larger than the NPVs of undertaking them. 
C)  If alphas are negative, then investors have to be systematically ignoring positive-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.

Question 18

Uninformed individuals tend to ________ the precision of their knowledge.In finance,we call this presumptuousness the ________ hypothesis.

Accepted Answer

A)  underestimate; underconfidence 
B)  overestimate; overconfidence 
C)  underestimate; overconfidence 
D)  overestimate; underconfidence 
A)  underestimate; underconfidence 
B)  overestimate; overconfidence 
C)  underestimate; overconfidence 
D)  overestimate; underconfidence

Question 19

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 20

According to the CAPM,investors should hold ________ assets in combination with the market portfolio of all risky securities.

Accepted Answer

A)  more risky 
B)  risk-free 
C)  less risky 
D)  same risk 
A)  more risky 
B)  risk-free 
C)  less risky 
D)  same risk

Exam 13: Investor Behaviour and Capital Market Efficiency

Which of the following statements is false?

Investors tend to ________ stocks that have ________ since the time of purchase.

One of the reasons that it is extremely difficult in practice to identify portfolios that are efficient is because

Investors can ________ without reducing their expected return.

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

Which of the following statements is false?

The phenomenon in which individuals imitate each other's actions,is referred to as ________.

Which of the following statements is false?

Book-to-market ratio is the ratio of ________.

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 statements EXCEPT:

Which of the following statements is false?

Which of the following statements is false?

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 security's returns 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:

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

Uninformed individuals tend to ________ the precision of their knowledge.In finance,we call this presumptuousness the ________ hypothesis.

Which of the following statements is false?

According to the CAPM,investors should hold ________ assets in combination with the market portfolio of all risky securities.

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Investors tend to stocks that have since the time of purchase.

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 security's returns to

Uninformed individuals tend to the precision of their knowledge.In finance,we call this presumptuousness the hypothesis.