true or false

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.