7.

Investment guru Benjamin Graham said, The best way to measure your investing success is not by whether youre beating the market but by whether youve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.

Some investors try to beat the market by trading quickly on newly released public information. According to finance theory, the best explanation for why this is unlikely to generate abnormal returns is:

a.

Share prices only move in response to systematic risk factors, not firm-specific factors.

b.

Investment portfolios should be well-diversified

c.

The market does not reward idiosyncratic risk.

d.

Investment decisions should be weighed up slowly and carefully.

e.

Capital markets are mostly semi-strong form efficient.

8.

The below table shows the details of a portfolio of two assets A and B.

Portfolio Details
Asset	Expected return	Standard deviation	Beta	Covariance (A, B)	Expected Portfolio Return
A	0.05	0.4	1.3	0.16	0.08
B	0.09	0.7	1.6

Which one of the following statements is NOT correct?

a.

The portfolio has some diversification.

b.

The standard deviation of the portfolio is 0.588.

c.

The correlation of asset A and Bs returns is 0.571.

d.

The portfolio beta is 2.725.

e.

The portfolio weight in asset A is 25%.

10.

A firm has a debt-to-equity ratio of 2:1.

The firms debt beta is 0.7.

Five-year government bonds yield 6% pa with a coupon rate of 5% pa. The market's expected dividend return is 3% pa and its expected capital return is 7% pa.

The firm stocks next dividend is expected to be $1, paid one year from now. Dividends are expected to be paid annually and grow by 1% pa forever. The current stock price is $10.

The corporate tax rate is 30%. Assume a classical tax system.

Which statement is NOT correct?

a.

The expected return on equity is 11% pa.

b.

The expected return on debt is 8.8% pa.

c.

The beta of the firm's equity is 1.65.

d.

The beta of the firms assets is 0.883.

e.

The firms after-tax WACC is 7.77% pa.