true or false

1. A provision in the indenture that allows the issuer to repurchase the bond at a specified call price before the maturity date. A call provision may be invoked if a company issues a bond with a market interest rate (with a market-based coupon) and interest rates later rise.

2. Deviations from informational efficiency would result in a large cost that will be borne by all participants, namely inefficient resource allocation. Corporations with overpriced securities, for example, would be able to obtain capital too expensively while undervalued companies might forgo investment opportunities because the cost of raising capital would be too low.

3. Sample size and neglect suggests that people do not take into account the size of the sample, acting as if a small sample is just as representative of a population as a large one. They may too quickly infer a pattern too quickly based on a small sample and extrapolate apparent trends too far into the future.

4. Growth oriented technical analysts oftentimes use price momentum and moving averages to uncover investable trends while those with value-oriented predispositions and processes may employ relative strength and sentiment in an attempt to discern potential future instances of reversions to the mean.

5. The EMH makes two important predictions. First, it implies that security prices properly reflect whatever information is available to investors. A second implication follows, specifically, that active traders will find it difficult to outperform passive strategies such as holding market indices. To do this would require differential insight (i.e., information) and this, in a highly competitive market, is very hard to come by.

6. Sample size and neglect suggests that people do not take into account the size of the sample, acting as if a small sample is just as representative of a population as a large one. They may too quickly infer a pattern too quickly based on a small sample and extrapolate apparent trends too far into the future.

7. A conservatism bias suggests that investors are too quick (i.e., too fast, too aggressive) in updating their beliefs in response to new information. Conservatism may account for the observance of momentum in some securities.

8. Prices of zero-coupon bonds rise over time, providing a rate of appreciation equal to the internal, compounded rate of return. Zero coupon bonds are also the vehicles of choice in constructing a yield curve and are oftentimes estimated, when a zero is not readily available, by a treasury strip.

9. Beta is defined as the covariance of the asset with the market portfolio divided by the variance of the market portfolio. Intuitively, beta helps to objectively link risk with return and can be calculated by regressing excess stock returns on excess market returns. Beta can be positive, zero, or negative and is importantly, constant over time.

10. As a technical-based sentiment indicator, a rising put/call ratio (i.e., a ratio above one and increasing) portends increasing optimism with investors; however, an investor with a contrarian philosophy/style may view it as a selling opportunity.

11. Alpha is the difference between the actual and expected return on a stock. Alphas can be positive, zero, or negative and help to determine the value of security analysis. Alpha can be visualized via the Security Market Line.

12. While oftentimes referred to as risk-free, default-free bonds such as US Treasury issues are nonetheless subject to interest rate and inflation rate risk.

13. Bonds rate BBB or Baa or above are considered investment grade bonds whereas those lower rated bonds are classified as speculative grade, high yield, or junk bonds. Defaults on high-grade bonds - the reason for the rating - are not common as evidenced by our in-class discussion.

14. Bond default risk is usually referred to as credit risk and is orchestrated under the heading of credit analysis. Merrill Lynch, Morgan Stanley, and Goldman Sachs are some of the largest providers of quality ratings on bond issues.

15. Modified duration is a natural measure of the bonds exposure to anticipated changes in interest rates. It depicts the change in price from the (negative) product of the duration measure and the change in interest rates.

16. Multifactor models seek to improve the explanatory power of single factor models by explicitly accounting for the various systematic components of security risk. The models use indicators intended to capture a wide range of big-picture factors. Ross APT and French-Famas factor models are examples of multifactor models.

17. Moving average measures the extent to which a security has outperformed or underperformed the market while relative strength is the average price over a given interval, where the interval is updated as time passes.

18. If an analyst expects bond prices to decline across the yield curve, the analyst would seek to have a shorter than the benchmark duration portfolio. If an analyst expects bond prices to increase across the yield curve, the analyst would seek to have a longer than the benchmark duration portfolio.

19. Beta is defined as the covariance of the asset with the market portfolio divided by the variance of the market portfolio. Intuitively, beta helps to objectively link risk with return and can be calculated by regressing excess stock returns on excess market returns. Beta can be positive, zero, or negative and is importantly, constant over time.

20. In the extended Labor CAPM, the CAPM measure of systematic risk, beta, is replaced by an adjusted beta that also accounts for covariance with the portfolio of aggregate human capital. Despite the complications inherent in any extension of the CAPM with a labor component, labor is an important consideration in explaining the systematic risk of financial securities

21. The CAPM has the assumptions that investors are rational, mean-variance optimizers, that investors use identical inputs lists (i.e., homogeneous expectations), and that all assets are publically traded.

22. Collateralized debt obligations (CDOs) are used to reallocate (via tranches) the general risk of a pool of loans. Each tranche is given a different level of security in terms of its claims on the underlying loan pool cash flows and each can be sold as a stand-alone security. Some of the largest collateralized pools are portfolios of mortgages, credit cards, auto loans, and student loans.

23. Multifactor models seek to improve the explanatory power of single factor models by explicitly accounting for the various systematic components of security risk. The models use indicators intended to capture a wide range of big-picture factors. Ross APT and French-Famas factor models are examples of multifactor models.

24. The APT (Ross) multifactor model uses a Morningstar-type construct while FF (French-Fama) uses one that is more macroeconomic. For example, APT uses a small minus big factor (capitalization) and a high minus low price-to-book factor while FF uses the growth rate in industrial production and unexpected inflation expectations, among others.

25. The equity risk premium puzzle originates from the observation that equity returns marginally exceed the risk-free rate to an extent that is consistent with low levels of risk aversion (on average). Over time, given the longer-term returns on equities relative to risk free assets, the equity risk premium has proven to be surprisingly low.