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Investment Mgmt

Measures time-weighted returns & allows for compounding
geometric avg return
Complete portfolio refers to the investment in:
the risk-free asset and the risky portfolio combined
Timing good last year. Invested more in your portfolio right before prices went up and sold before prices went down. In calculating historical performance measures, which one will be the largest:
dollar-weighted return
market risk premium defined as
the difference between return on an index fund & return on treasury bills
rate of return on ___ is known at the beginning of the holding period, while rate of return on __ is not known until end of holding period
treasury bills, risky assets
In the mean standard deviation graph, the line that connects the risk-free rate and optimal risky portfolio P is called:
capital allocation line
You invest all your money in 1 year T bills. Following statements are correct
your nominal return on the T-bills is riskless, your nominal sharpe ratio is zero
The CAL provided by combinations of 1 month Tbills and a broad index of common stocks is called the
CML
Arguments supporting passive investment strategies
active trading strategies may not guarantee higher returns but guarantee higher costs, passive investors can free-ride on the activity of knowledge investors whose trade force prices to reflect currently available info
risk that can be eliminated through diversification is called:
unique risk, firm-specific risk ,diversifiable risk
adding additional risky assets to the investment opportunity set will generally move the efficient frontier
UP & LEFT
investors degree of risk aversion will determine
optimal mix of risk-free asset and risky asset
correlation coefficient between two assets equals
their covariance divided by the product of their st devs
expected rate of return of a portfolio of risky securities is
the weighted sum of the securities’ expected returns
beta is a measure of security responsiveness to
market risk
firm specific risk is also called:
unique risk, diversifiable risk
Harry Markowitz is best known for work on
techniques used to identify efficient portfolios of risky assets
Suppose that a stock portfolio and a bond portfolio have a zero correlation. this means that
the returns on the stock and bond portfolios tend to vary independently of each other
on a standard expected return vs standard deviation graph, investors will prefer portfolios that lie to the ___ of the current investment opportunity set
LEFT & ABOVE
complete portfolio refers to a portfolio consisting of
the risk-free asset combined w at least one risky asset
rational risk-averse investors will always prefer portfolios
located on the CML to those located on the efficient frontier
The optimal risky portfolio can be identified by finding:
the tangency point of the CML and the efficient frontier, the line w the steepest slope that connects the riskfree rate to efficient frontier
the part of a stock’s return that is systematic is a function of which of the following variables:
volatility in excess returns of the stock market, the sensitivity of the stock’s returns to changes in the stock market
According to Tobin’s separation property, portfolio choice can be separated into 2 independent tasks consisting of
identifying the optimal risky portfolio & constructiong a complete portfolio from T-bills and the optimal risky portfolio based on the investors degree of risk aversion
You are recalculating the risk of ACE stock in relaation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. you must also find that the
correlation coefficient between ACE and the market has risen
the values of beta coefficients of securities are
usually positive but not restricted
a security’s beta coefficient will be negative if
its returns are negatively correlated w market-index returns
the market value weighted avg beta of firms included in the market index will always be
1
some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is
less than 1
if an investor does not diversify his portfolio and puts all his money in one stock, the appropriate measure of security risk for that investor is the:
stocks st dev
which of the following provides the best example of a systematic-risk event
federal reserve increases interest rates 50 basis points
Decreasing the # of stocks in a portfolio from 50 to 10 would likely
increase the unsystematic risk of the portfolio`
If you want to know the portfolio st dev for a 3 stock portfolio you will have to
calculate 3 covariances
What correlation coefficient will produce the least diversification benefit
the highest #
which correlation coefficient will produce the most diversification benefits
the lowest number
What is the most likely correlation coefficient between a stockindex mutual fund and the SP500
1
as you lengthen the time horizon of you investment period and decide to invest for multiple years, you will find that:
the average risk per year may be smaller over longer investment horizons, the overall risk of your investment will compound over time
you are considering adding a new security to your portfolio. to decide whether you should add the security, you need to know the securities:
expected return, st dev, correlation w portfolio
an adjusted beta will be __ than the unadjusted beta
closer to 1
assumptions of the simple CAPM model:
All the options
in CAPM, the systematic measure of risk is captured by:
beta
if enough investors decide to purchase stocks, they are likely to drive up stock prices thereby causing:
expected returns to fall; risk premiums to fall
the market portfolio has a beta of
1
in a well-diversified portfolio, __ risk is negligible
unsystematic
if all investors become more risk averse, the SML will ___ and stock prices will ___
have the same intercept with a steeper slope; fall
arbitrage is based on the idea that:
assets w identical risks must have the same expected rate of return
investors require a risk premium as compensation for bearing:
systematic risk
according to the CAPM, a fairly priced security will plot:
along the SML
according to the CAPM, fairly priced securities have:
zero alphas
the graph of the relationship between expected return and beta in the CAPM is called
SML
the beta of a security is equal to
the covariance between the security and market returns divded by the variance of the markets returns
according to the CAPM, in equilibrium….
all securities returns must lie on the SML
according to CAPM, which of the following is not a true statement regarding the market portfolio
it is always the minimum-variance portfolio on the efficient frontier
in a world where the CAPM holds, which one of the following is not a true statement regarding the CML
the capital market line is also called the security market line
an important characteristic of market equilibrium is
the absence of arbitrage opportunities
according to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is
directly related to the beta of the stock
in his famous critique of the CAPM, Roll argued that the CAPM
is not testable because the true market portfolio can never be observed
which of the following variables do Fama and French claim do a better job explaining stock returns than beta:
book to market ratio, firm size
the SML is valid for ___ and the CML is valid for ___
both well-diversified portfolios and individual assets; well difersified portoflios only
according to capital asset pricing theory, the key determinant of portfolio returns is
the systematic risk of the portfolio
the expected return of the risky-asset portfolio w minimum variance is
tcant be determined
the most significant conceptual difference between the arbitrage pricing theory and the CAPM is that
the CAPM recognizes only one systematic risk factor
the measure of unsystematic risk can be found from an index model as
residual standard devaiton
standard deviation of portfolio returns is a measure of
total risk
the measure of risk used in the CAPM model is
beta
which of the following beliefs would not preclude charting as a method of portfolio mgmt
stock prices follow recurring patterns
the weak form of the EMH states that __ must be reflected in the current stock price
all past info
the semistrong form of the EMH states that __ must be reflected in the current stock price
all publicly available info
the strong form of the EMH states that __ must be reflected
all information, including inside info
evidence suggests that there may be __ momentum and __ reversal patterns in stock price behavior
short run; long run
proponents of the EMH typically advocate
a passive investment strategy
the tendency when the __ performing stocks in one period are the best performers in the next and the current __ performers are lagging is called the reversal effect
worst; best
which of the following is not amethod employed by followers of technical analysis
earnigns forecasting
which of the following is not a method employed by fundamental analysis
relative strength analysis
the primary objective of fundamental analysis is to identify
mispriced stocks
if you believe in the __ form of the EMH, you believe that stock prices reflect all publicly available info but not inside info
semistrong
you believe that stock prices reflect all info that can be derived by examining market trading data but you do not believe stock prices reflect all publicly available info and inside info. this is __ form of EMH
weak
mutual fund that attempts to hold quantities of shares in proportion to their representation in the stock market is called a __ fund
index
choosing stocks by searching for predictable patterns in stock prices is called
technical analysis
which is not an issue that is central to debate regarding market efficiency
the tax-loss selling issue
small firms have tended to earn abnormal returns in
january
fama and French suggested that many market anomalies can be explained as manifestations of
varying risk premiums
proponents of the EMH think technical analysts
are wasting time
evidence supporting semistromg form market efficiency suggest investors should
use a passive trading strategy
“buy a stock if its price moves up by 2% more than Dow average” example of
trading rule
according to research by Ball and Brown, securities markets fully adjust to earnings annoucncements
gradually over time
when stock returns exhibit positive serial correlation, this means that __ returns tend to follow __ returns
positive; positive
Basu found that firms with high P/E ratios:
earned lower avg returns than firms w low P/E ratios
fundamental analysis is likely to yield best results for
neglected stocks
According to Laporta’s study, which stock is likely to generate greatest alpha
the stock expected to generate poor earnings growth
even if the markets are efficient, professional portfolio mgmt. is still important because it provides investors w
low cost diversification, portfolio w a specified risk level
Banz found that on avg, the risk adjusted returns of small firms:
were higher than the risk-adjusted returns of large firms
DeBondt and Thaler found
good; poor
JM keyes : example of __ problem
lucky event
most tests of semistrong efficiency are
joint tests of market efficiency and the risk-adjustment measure
the broadest info set is included in the
strong form
Fama French evidence that high book to market firms outperform low book to market firms even after adjusting for beta means that
either book to market firms are underpriced or book to market ratio is a proxy
the term random walk is used in investments to refer to
stock price changes that are random and unpredictable
Market efficiency characteristics
all 3
stock market analyssts have tended to be __
overwhelmingly optimistic
assume that a company announces unexpectedly high earnings. one might expect
an abnormal price change immediately after the announcement
market anomaly refers to
price behavior tha differs from the behavior predicted by the efficne tmarket hypotesis
which contradicts the proposition tha the stock market is weakly efficient
every January, stock market earns above normal returns
which observation would appear to contradict weak form of EMH
you could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall
the semistrong form of the EMH implies that __ generate abnormal returns and __ generate abnormal returns
tenchincal analysis cannot; fundamental analysis cannot
implication of the EMH is that
nonzero alphas will quickly disappear
one type of passive portfolio mgmt. is
investing in a well diversified portfolio w out attempting to search out mispriced securities
value stocks usually exhibit __ price to book ratios and __ price to earnings ratios
low low
growth stocks usually exhibit __ price to book ratios and __ price to earnings ratios
high; high
a technical analyst is most likely to be affiliated with which investment philosophy
active mgmt
someone who invests in vanguard index 500 describes which approach
passive
evidence by blake, Elton gruber indicates that actively managed bond funds
underperform passive fixed income indexes by an amount equal to fund expenses
insiders are able to profitably trade and earn abnormal returns prior to announcement of positive news. this violates what:
strong-form efficiency
in an efficient market and for an investor who believes in a passive approach to investing, what is the parimary duty of portfolio manager
diversificatino
which fidelity Magellan portfolio manager is often referneces as an exxception
peter lynch
tendency of poorly performing stocks and wellperforming stocks in one period to continue their performance into the next period
momentum effect
concept might explain the ability to produce excess returns on this stock
neglected-firm effect
when testing mutual fund performance over time, be careful of
survivorship bias
testing many dif trading rules until you find one that would would have worked in the past
data mining
models of financial markets that emphasize psychological factors affecting investor behavior
behavioral finance
technical analysis focuses on
finding repeating trends and patterns in prices
behaviorlists point out that even if market prices are __ there may be __
distorted; limited arbitrage opportunities
when stock price breaks through the moving avg from below, this is considered to be
a bullish signal
When the stock price falls below a moving average, a possible conclusion is that _____.
B. market momentum has become negative
A support level is ___________________.
a level below which the market is unlikely to fall
Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.
rational; irrational
The only way for behavioral patterns to persist in prices is if ______________.
there are limits to arbitrage activity
If investors are too slow to update their beliefs about a stock’s future performance when new evidence arises, they are exhibiting _______.
conservatism
If investors overweight recent performance in forecasting the future, they are exhibiting ___
representativeness bias
Your two best friends each tell you about a person they know who successfully started a small business. That’s it, you decide; if they can do it, so can you. This is an example of _____________.
representativeness bias
An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________.
mental accounting
Which of the following analysts focus more on past price movements of a firm’s stock than on the underlying determinants of its future profitability?
technical analysts
An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________.
metnal accounting
Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill’s and Shelly’s stocks fall 15%. According to regret theory, _________________________________________.
Shelly will have more regret over the loss than Bill
Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill’s behavior indicates __________________.
C. that she has a diminishing marginal utility of wealth
_________ is a value above which it is difficult for the market to rise.
resistence level
If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting _________
loss aversion
In technical analysis, __________ is a value below which the market is relatively unlikely to fall
support level
A possible limit on arbitrage activity that may allow behavioral biases to persist is _______.
fundamental risk
The tendency of investors to hold on to losing investments is called the ________.
disposition effect
Which one of the following best describes fundamental risk?
You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.
Problems with behavioral finance include:
all the above
Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?
overconfidence

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