Question 1

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 premiums of each factor multiplied by the sensitivity of the stock with those factors. 
B)  The factor beta measures 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 premiums of each factor multiplied by the sensitivity of the stock with those factors. 
B)  The factor beta measures 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 2

Investment strategy that ________ stocks that have had past ________ returns and ________ stocks that have had past ________ returns is called a momentum strategy.

Accepted Answer

A)  buys; low; sells high 
B)  sells; high; buys; low 
C)  buys; high; sells; low 
D)  none of the above 
A)  buys; low; sells high 
B)  sells; high; buys; low 
C)  buys; high; sells; low 
D)  none of the above

Question 3

Why is the high trading volume observed in markets inconsistent with the CAPM equilibrium?

Accepted Answer

Individual investors tend to trade very

Question 4

Which of the following statements is false?

Accepted Answer

A)  Once the characteristic variables have been identified and measured for each firm, the return of each characteristic can be inferred from the data. 
B)  Even though the risk and return associated with each characteristic may remain stable, because the characteristics of a firm may change over time, so will the firm's risk and expected return. 
C)  Using a long period of time to estimate beta reduces measurement error, but because firms evolve dynamically, old data might not reflect the current risk profile of the firm. 
D)  Rather than attempting to estimate the risk and expected return of the firm indirectly, the characteristic variable model of returns views firms as a portfolio of different measurable "characteristics" that together determine the firm's risk and return. 
A)  Once the characteristic variables have been identified and measured for each firm, the return of each characteristic can be inferred from the data. 
B)  Even though the risk and return associated with each characteristic may remain stable, because the characteristics of a firm may change over time, so will the firm's risk and expected return. 
C)  Using a long period of time to estimate beta reduces measurement error, but because firms evolve dynamically, old data might not reflect the current risk profile of the firm. 
D)  Rather than attempting to estimate the risk and expected return of the firm indirectly, the characteristic variable model of returns views firms as a portfolio of different measurable "characteristics" that together determine the firm's risk and return.

Question 5

The size effect reflects the fact that returns of small stocks appear ________ even accounting for their ________ beta.

Accepted Answer

A)  high; lower 
B)  low; higher 
C)  low; lower 
D)  high; higher 
A)  high; lower 
B)  low; higher 
C)  low; lower 
D)  high; higher

Question 6

Stock returns tend to be ________ when it is a ________ at the location of the stock exchange.

Accepted Answer

A)  higher; rainy day 
B)  lower; sunny day 
C)  higher; sunny day 
D)  lower; rainy day 
A)  higher; rainy day 
B)  lower; sunny day 
C)  higher; sunny day 
D)  lower; rainy day

Question 7

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

Accepted Answer

A)  is less risky than the market portfolio. 
B)  has a relatively lower expected return than predicted. 
C)  is underpriced. 
D)  has a negative alpha. 
A)  is less risky than the market portfolio. 
B)  has a relatively lower expected return than predicted. 
C)  is underpriced. 
D)  has a negative alpha.

Question 8

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 a cost of capital of 15%. Bernard Industries is not as shaky as Chihuahua, so Bernard has a cost of capital of only 10%. Assume that the market portfolio is not efficient. Both stocks have the same beta and the CAPM would assign them both an expected return of 12%.
-The market value for Bernard Industries is closest to

Accepted Answer

A)  $12.0 million. 
B)  $10.0 million. 
C)  $15.0 million. 
D)  $12.5 million. 
A)  $12.0 million. 
B)  $10.0 million. 
C)  $15.0 million. 
D)  $12.5 million.

Question 9

Use the equation for the question(s) below.
Consider the following regression model:
RS1U1B1sS1U1B0 - rS1U1B1fS1U1B0 = aS1U1B1sS1U1B0 +   (RS1U1B1FS1U1B0S1U1B11S1U1B0 - rS1U1B1fS1U1B0) +   (RS1U1B1FS1U1B0S1U1B12S1U1B0 - rS1U1B1fS1U1B0) + e
-The term   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 second factor portfolio. 
B)  constant term. 
C)  error term that has an expectation of zero and is uncorrelated with either factor. 
D)  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. 
A)  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. 
B)  constant term. 
C)  error term that has an expectation of zero and is uncorrelated with either factor. 
D)  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.

Question 10

Which of the following statements regarding portfolio "C" is/are correct? 1.Portfolio "C" has a negative alpha.
2)Portfolio "C" is overpriced.
3)Portfolio "C" is less risky than the market portfolio.
4)Portfolio "C" should not exist if the market portfolio is efficient.

Accepted Answer

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

Question 11

There is an important difference between the characteristic variable model and the multifactor models.That difference is that

Accepted Answer

A)  in the multifactor models, the returns of the factor portfolios are observed, and we estimate the sensitivity of each stock to the different factors. In the characteristic variable model, the weight of each stock on each characteristic is observed, and then we estimate the return associated with each characteristic. 
B)  in the multifactor models, the returns of the factor portfolios are observed, and we estimate the return associated with each characteristic. In the characteristic variable model, the weight of each stock on each characteristic is observed, and then we estimate the sensitivity of each stock to the different factors. 
C)  in the characteristic variable model, the returns of the factor portfolios are observed, and we estimate the the return associated with each characteristic. In the multifactor models, the weight of each stock on each characteristic is observed, and then we estimate the sensitivity of each stock to the different factors. 
D)  in the multifactor models, the returns of the factor portfolios are not observed, and we estimate the sensitivity of each stock to the different factors. In the characteristic variable model, the weight of each stock on each characteristic is not observed, and then we estimate the return associated with each characteristic. 
A)  in the multifactor models, the returns of the factor portfolios are observed, and we estimate the sensitivity of each stock to the different factors. In the characteristic variable model, the weight of each stock on each characteristic is observed, and then we estimate the return associated with each characteristic. 
B)  in the multifactor models, the returns of the factor portfolios are observed, and we estimate the return associated with each characteristic. In the characteristic variable model, the weight of each stock on each characteristic is observed, and then we estimate the sensitivity of each stock to the different factors. 
C)  in the characteristic variable model, the returns of the factor portfolios are observed, and we estimate the the return associated with each characteristic. In the multifactor models, the weight of each stock on each characteristic is observed, and then we estimate the sensitivity of each stock to the different factors. 
D)  in the multifactor models, the returns of the factor portfolios are not observed, and we estimate the sensitivity of each stock to the different factors. In the characteristic variable model, the weight of each stock on each characteristic is not observed, and then we estimate the return associated with each characteristic.

Question 12

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

Question 14

Which of the following statements is false?

Accepted Answer

A)  It is not actually necessary to identify the efficient portfolio itself. All that is required is to identify a collection of portfolios from which the efficient portfolio can be constructed. 
B)  Although we might not be able to identify the efficient portfolio itself, we know some characteristics of the efficient portfolio. 
C)  An efficient portfolio can be constructed from other diversified portfolios. 
D)  An efficient portfolio need not be well diversified. 
A)  It is not actually necessary to identify the efficient portfolio itself. All that is required is to identify a collection of portfolios from which the efficient portfolio can be constructed. 
B)  Although we might not be able to identify the efficient portfolio itself, we know some characteristics of the efficient portfolio. 
C)  An efficient portfolio can be constructed from other diversified portfolios. 
D)  An efficient portfolio need not be well diversified.

Exam 13: Investor Behaviour and Capital Market Efficiency

Which of the following statements is false?

Investment strategy that ________ stocks that have had past ________ returns and ________ stocks that have had past ________ returns is called a momentum strategy.

Why is the high trading volume observed in markets inconsistent with the CAPM equilibrium?

Which of the following statements is false?

The size effect reflects the fact that returns of small stocks appear ________ even accounting for their ________ beta.

Stock returns tend to be ________ when it is a ________ at the location of the stock exchange.

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

Use the equation for the question(s) below. Consider the following regression model: Rs - rf = as + (RF1 - rf) + (RF2 - rf) + e -The term is a(n)

Which of the following statements regarding portfolio "C" is/are correct? 1.Portfolio "C" has a negative alpha. 2)Portfolio "C" is overpriced. 3)Portfolio "C" is less risky than the market portfolio. 4)Portfolio "C" should not exist if the market portfolio is efficient.

There is an important difference between the characteristic variable model and the multifactor models.That difference is that

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

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

Which of the following statements is false?

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

Investment strategy that stocks that have had past returns and stocks that have had past returns is called a momentum strategy.

The size effect reflects the fact that returns of small stocks appear even accounting for their beta.

Stock returns tend to be when it is a at the location of the stock exchange.

Use the equation for the question(s) below. Consider the following regression model: R_s - r_f = a_s + (R_F₁ - r_f) + (R_F₂ - r_f) + e -The term is a(n)

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