True or false

1. Convertible bonds give bondholders an option to exchange each bond for a specified number of shares of common stock of the company. While convertible bondholders may benefit if the stock price rises, it comes at a price as convertible bonds offer lower coupon rates than comparable, non-convertible bonds.

2. The CAPM provides a prediction of the relationship that one should observe between the risk of an asset and its expected return. It provides evidence that risk and return are inversely related.

3. Premium bond returns are a combination of below current market rate coupons and positive capital gains while discount bond returns are a combination of above market coupons and negative capital gains, essentially the reverse of the former. Discount bonds and premium bonds both mature at par.

4. Price changes should be random and unpredictable and are the result of investors competing to discover relevant information on which to buy or sell securities before the rest of the market becomes aware of that information.

5. The consumption based CAPM (Rubenstein, Lucas and Breeden) is a factor model in which the market portfolio excess return is replaced by a consumption-tracking portfolio. The Consumption CAPM is designed to accommodate investors who are concerned with time-varying, multi-period (i.e., lifetime) consumption.

6. The CAPM assumes that investors are single period planners who agree on a common input list from security analysis and seek mean variance optimal portfolios. The CAPM assumes that security markets are ideal in the sense that they are large and investors are price takers, there are no taxes or transaction costs, all risky assets are publicly traded, and investors can borrow and lend any amount at a fixed risk-free rate.

7. 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.

8. Duration is a direct measure of the sensitivity of a bonds price to a change in its yield. Convexity equals the weighted average of the times to each coupon or principal payment. Duration, the second derivative of price with respect to a change in interest rates, specifically refers to the curvature of a bonds price-yield relationship.

9. The EMH is the notion that stocks already reflect all available information. Market participants distinguish among three forms of the efficient market hypothesis. Each form has its own contentions, for example the semi-strong form asserts that all publicly available fundamental information is already reflected in prices as well as that from technical analysis (i.e., charts, graphs, etc.).

10. The SML graphically portrays the expected return-beta relationship. Accordingly, at a beta equal to one, an investor can read off the vertical axis on the chart for the expected return on the market portfolio. Fairly priced assets plot exactly on the SML.