1.Let three stocks A, B, and C. The correlation coefficient between rates of return of A and of B equals 1, that is, A,B = 1. As a result

a.B,C > 0

b.B,C < 0

c.cannot tell

d.B,C = A,C

e.B,C = A,B

2.The market portfolio has a beta of

a.0.

b.1.

c.-1.

d.0.5.

3.If you believe in the reversal effect, you should

a.buy stocks this period that performed poorly last period and go short.

b.go short.

c.If you believe in the reversal effect, you should

d.buy stocks in this period if you held bonds in the last period.

4.Which of the following measures of risk best highlights the potential loss from extreme negative returns?

a.None of the options

b.Standard deviation

c.Value at risk (VaR)

d.Variance

e.Upper partial standard deviation

5.The weak form of the efficient market hypothesis contradicts

a.fundamental analysis, but supports technical analysis as valid.

b.technical analysis, but is silent on the possibility of successful fundamental analysis.

c.both fundamental analysis and technical analysis.

d.technical analysis, but supports fundamental analysis as valid.

6.If U(W) = 3W4 is the utility function of an investor, then the investor is

a.Risk lover

b.Risk neutral

c.Cannot tell

d.Risk averse

7.According to the index model, covariances among security pairs are

a.usually negative.

b.related to industry-specific events.

c.due to the influence of a single common factor represented by the market index return and are usually positive.

d.due to the influence of several common factors represented by the several market index return.

e.extremely difficult to calculate.

8.__________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.

a.Fundamental analysts

b.Technical analysts

c.Credit analysts

d.Systems analysts

9.You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05.

What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.09?

a.67% and 33%

b.75% and 25%

c.Cannot be determined

d.85% and 15%

e.57% and 43%

11.Variance (2) is a measure of risk superior to that of standard deviation (). Use of variance in the analysis will lead to consistently better decisions.

a. True

b. False

12.Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1 and a beta of .8 on factor 2. The risk premium on the factor 1 portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

a.4%

b.3%

c.7.75%

d.2%

14.A security has an expected rate of return of 10% and a beta of 1.1. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is

a.8.3%.

b.-1.7%.

c.1.7%.

d.5.5%.

16.When Maurice Kendall examined the patterns of stock returns in 1953, he concluded that the stock market was __________. Now, these random price movements are believed to be _________.

a.irrational; even more irrational than before

b.efficient; the effect of a well-functioning market

c.inefficient; the effect of a well-functioning market

d.efficient; the effect of an inefficient market

e.inefficient; the effect of an inefficient market

17.Let portfolio P that consists of two assets, risky stock A and riskless asset F. Also let the invested wealth be equally divided among those two assets. That is, wA = wF = .5. All else equal, if the standard deviation of stock A (A) increases by one percent (1%), then the standard deviation of P (P) will

a.will decrease by 1%

b.will stay the same

c.increase by 1%

d.None of the answers is correct

e.will decrease by 0.5%

f.increase by 0.5%

18.According to the mean-variance criterion, which one of the following investments dominates all others?

a.E(r) = 0.10; Variance = 0.20

b.E(r) = 0.15; Variance = 0.20

c.None of these options dominates the other alternatives.

d.E(r) = 0.15; Variance = 0.25

e.E(r) = 0.10; Variance = 0.25

19.Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that

a.no news about Matthews was announced yesterday.

b.interest rates rose yesterday.

c.interest rates fell yesterday.

d.good news about Matthews was announced yesterday.

e.bad news about Matthews was announced

20.All else equal, a risk seeking investor will choose the investment whose sigma () is

a.lower

b.higher

c.sigma () is not a consideration

21.Let five investment portfolios. Also let investment A rank at the top according to the measure we called "market price of risk," then, if we rank the same portfolios according to Sharpe ratio, investment A will rank

a.cannot tell

b.at the top

c.at the bottom

d.at the third position (middle)

22.Studies of stock price reactions to news are called

a.drift studies.

b.reaction studies.

c.event studies.

d.None of the answers are correct

23.According to CAPM if 2% of investor A's risky part of his portfolio consists of IBM, then 2% of investor B's risky part of his portfolio will consist of _____ IBM

a.less than 2%

b.may or may not own IBM

c.more than 2%

d.may or may not own IBM

24.Proponents of the EMH typically advocate

a.investing in an index fund and a passive investment strategy.

b.an active trading strategy and investing in an index fund.

c.a passive investment strategy.

d.an active trading strategy.

e.investing in an index fund.

25.If you believe in the _______ form of the EMH, you believe that stock prices only reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest.

a.strong

b.weak

c.semistrong

d.None of the options

26.As diversification increases, the total variance of a portfolio approaches

a.None of the options

b.1.

c.0

d.infinity.

e.the variance of the market portfolio.

27.The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight, during the peak of the citrus harvest. In an efficient market one would expect the price of Florida Orange's stock to

a.gradually decline for the next several weeks.

b.drop immediately.

c.remain unchanged.

d.increase immediately.

e.gradually increase for the next several weeks

28.Basu (1977, 1983) found that firms with low P/E ratios

a.had higher dividend yields than firms with high P/E ratios.

b.earned lower average returns than firms with high P/E ratios.

c.earned higher average returns than firms with high P/E ratios.

d.earned higher average returns than firms with high P/E ratios.

29.Let a risk-free and a risky asset (d), also let the following information regarding the two assets.

rf =4%

E(rd) =16%

d =21%

Then, the slope of CAL equals

a..02

b.0.26

c.1.2

d.0.57