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FINA 469 exam 2
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Terms in this set (59)
if the financial market is in CAPM equilibrium, the risk premium on individual security will be proportional to _________
the market risk premium and the beta coefficient of the security
systematic risk can be manipulated by
adjusting the beta of the portfolio
the risk of a portfolio considers the standard deviations of each of the assets and how the assets change in regards to eachother
TRUE
the risk of a single asset is its standard deviation of returns
TRUE
Among the securities with identical betas, a security with a POSITIVE alpha is underpriced and will yield higher expected returns, security with NEGATIVE alpha is overpriced and yields lower returns
Postive, negative
no benefits from diversification
when the correlation coefficient between two asset returns is +1
if security A's expected return increases while Security B's prices increase, then these assets vary in
opposition
portfolio risk depends on the________ between the returns on the assets in the portfolio
covariance
true of sharpe ratio
-its the slope of the CAL for a rational, risk averse investor
-is a measure of return beyond the risk-free return scaled by the risk taken to generate that return
the expected return is a probability weighted average while the risk is represented by the standard deviation of the probability weighted average of the squared deviations
FALSE
-the variance is the probability weighted average not the standard deviation
the________ risk of a portfolio can be controlled by changing the beta of the portfolio while the______ risk can be controlled by adding more securities to the portfolio
systematic, nonsystematic
a complete portfolio is a risky portfolio consisting of stocks and risky bonds
FALSE
-including risky and risk-free assets
the standard dev. of a portfolio will be _______ than a single asset if the assets in the portfolio have _______ correlation coefficient
less, low
it is impossible to achieve ZERO risk when investing in RISKY assets if an investor can find two assets that are perfectly NEGATIVELY correlated
zero, risky, negative
the expected rate of return of a portfolio is the wighted average of expected returns on the individuals securities
true
the portfolio variance is lower when the correlation coefficient of its components securities are_______
less than one
the correlation coefficient is the covariance of the two assets divided by the product of the standard dev. of those assets
true
the correlation coefficient is a scaled value and easier to interpret than the covariance
true
Efficient Frontier
-the optimal risky portfolio lies on the efficient frontier
-EF is the graph representing a set of portfolios that maximizes expected return at each level of portfolio risk
-various constraints may preclude a particular investor from choosing portfolios on the efficient frontier
individual assets forming a portfolio may lie above the graph of the efficient frontier as well as below it
FALSE
the optimal risky portfolio____
-has the greatest sharpe ratio of any of portfolio options
-is also called the tangent portfolio
placing constraints on a portfolio optimization has the effect of _______ the sharpe ratio of the optimal portfolio
reducing
according to the markowitz model, a portfolio manager will offer the _____ risky portfolio to all investors, regardless of their level risk aversion
same
the benefit of diversification implies that it is possible to find two assets and choose the investment proportions that will result in a portfolio with standard dev. lower than individual standard dev. of each asset
True
longer investment horizons can have a positive diversification effect on the risk portfolio
false
the standard dev of a portfolio is equal to the weighted average standard devs of its assets only when the assets are perfectly______
positively correlated
insurance principal states
overall risk can be reduced if it is derived from many different sources
according to CAPM there is no reward for bearing risk-free assets when the _____ is zero
alpha
assumptions of CAPM
-investors can access information at zero cost
-investors can access all information related to security analysis
___________ is the abnormal rate of return on a security in excess of what would be predicted by an equilibrium asset pricing model
alpha
the capital market line graphs the expected returns of efficient complete portfolios as a function of standard deviation
----
true
the security market line graphs the expected return on the individual assets as a function of their systematic risk
-----
true
average returns on small stocks and stocks of firms with low book to market ratio have historically been higher than predicted by the CAPM
false
CAPM predicts relationship between
the systematic risk and the equilibrium expected return on risky assets
_________ is the act of exploiting misplacing of two or more securities to achieve risk-free profits
arbitrage
before it is implemented, theoretical CAPM has two implications
-it relies on theoretical portfolio of all assets
-it implies to expected return not realized returns
NOT an assumption of CAPM
investors choose investments from heterogeneous lists
assumptions of CAPM
-investors are rational mean-variance optimizers
-investors choose investments from homogenous list
-all invest are publicly traded and investors can borrow or lend at the risk free rate
if there is no arbitrage opportunity in the capital markets, then the required return on a well diversified zero-net investment, risk-free portfolio should be
zero
in the APT, a factor portfolio is
a well-diversified portfolio constructed to have beta of 1 on one factor and have a beta of ) on another
the CAPM predicts that the y-intercept (slope) of the SCL is
0 zero
the financial market history shows that the CAPM fails the empirical test because
too many securities have statistically significant values of alpha
the equilibrium risk premium of the market portfolio is proportional both to the RISK of the market and to the degree of risk aversion by the AVERAGE investor
---
the CAPM implies that investors prefer passively invested mutual funds to actively invested index funds
---
weak form
stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices, trading volume, or short interest.
-if data ever conveyed reliable info about future performance, all investors would have exploited the signals
semi-strong form
all publicly available information regarding the prospects of a firm already must be reflected in the stock price.
-Such info includes, in addition to past prices, fundamental data on the firm's product line, quality of management, balance sheet composition, patents held, earning forecasts, and accounting practices
strong form
stock prices reflect all information relevant to the firm, even including information available only to company insiders
technical analysis
is generally the search for recurrent and predictable patterns in stock prices
-key to successful technical analysis is a sluggish response of stock prices to fundamental supply-and-demand factors
-opposition to efficient market
if investors could generate abnormal returns consistently by using ________ of a stock, it would be evidence against the weak form of efficient market hypothesis
resistance level
related active portfolio management strategies
-overvalued stock
NOT: buy and hold or index funds
NOT a role of portfolio mgmt in efficient capital market
identifying misplaced securities
-is a role of managers: low cost diversification, tax consideration, adjusted based on risk aversion
rational market forecasts in an efficient market will not turn out to be a wrong a prices reflect all available information
FALSE
-all available info is still far from complete info
if all investors attempted to follow passive investment strategies____
stock prices would fail to reflect all relevant new information
efficient market hypothesis implies that the
search for undervalued stock is wasted effort
which is NOT a variable financial economists used to predict broad market returns?
total debt ratio
-following are variables: dividend yield, earnings yield and credit spread
CANNOT be used to test the semi strong from of efficient market hypothesis
momentum effect
can be used: january and small firm effect, price earnings effect, neglected-from effect
as the financial market is competitive enough and efficient, no research can be justified to outperform the market
FALSE
among metal fund managers, very few are successful stock pickers
TRUE
financial market history shows that most actively invested mutual funds have underperformed index funds
TRUE
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