# 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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