Section 9

Exposure to systematic or market risk can be reduced by?             A. adding low or negative beta stocks to the portfolio.   B. investing in a variety of economic sectors.   C. cannot be reduced or avoided.   D. diversifying internationally.

17- Which statement is true regarding the capital market line (CML)? a) The CML always has a negative slope. b) The CML is also called the security market line. The risk measure for the CML is correlation. d) The CML is the attainable capital allocation line with the smallest slope. e) The CML is the line from the risk-free rate through the market portfolio.

16. Which statement is not true regarding the Capital Market Line (CML)? a. The CML is the line from the risk free rate through the market portfolio. b. The CML is the best attainable capital allocation line. c. The CML is also called the security market line. d. The CML always has a positive slope. e. Not all of these statements are true.

Which of the following statements is true?   A.   Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares.   B.   All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases.   C.   Security market line (SML) plots return against total risk which is measured by the standard deviation of returns.   D.   Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.

Question Five: Which of the following is not an assumption that underpins the capital asset pricing model (CAPM)? Investors behave in accordance with Markowitz mean-variance portfolio theory. Investors are rational and risk averse. Investors all invest for the same period of time. Investors have heterogeneous expectations about expected returns and return variances for all assets. There is a risk free rate at which all investors can borrow or lend any amount. Capital markets are perfectly competitive, frictionless and efficient. Question Six: Which of the following expressions best describes the slope of the security market line? The slope of the security market line is equal to the Sharpe ratio. The slope of the security market line is equal to the Treynor ratio. The slope of the security market line is equal to alpha. The slope of the security market line is equal to the market risk premium. The slope of the security market line is equal to the standard deviation of the risky…

Which of the following is true of Behavioral Finance? Question 24 options: 1) It is a study of how sociological and economic factors drive investor buy-and-sell decisions 2) It argues that investors are always rational in their investment decision and that price anomalies are due to weak form market efficiency 3) It argues that investors often make decisions based on emotions and biases 4) It is a study of how market overreaction and underreaction are explained by the efficient market hypothesis

Which of the following statements about the Fama-French three-factor model is wrong: A. Company size has an explanatory power in explaining the portfolio returns. B. Market risk has an explanatory power in explaining the portfolio returns. C. Book-to-market value companies has an explanatory power in explaining the portfolio returns. D. None of these factors. E. All of these factors.

2. The Multi-factor Arbitrage Pricing Theory Model (APT) may be valid at the same time as the Capital Asset Pricing Model (CAPM) and for the same market... [choose the answer which best completes the sentence] A. depending on whether information other than market prices is considered B. never C. only if Arbitrage is possible D. always

A very high degree of capital market efficiency   a. mispricing never occurs.     b. means share prices always correctly reflect all available information.     c. the capital markets anticipate and price correctly all possible future payoffs and states of the world.     d. means share prices react quickly, completely, and without bias once new value-relevant information is available to the market.

a. Why do investors believe that low price-earnings stocks are trading cheap in the market b. An investment strategy that seeks to create a portfolio of stocks with low price-earnings ratios is believed to be able to earn excess market returns. Explain why this is not the case in perfect capital market under certainty.  c. Explain how in an imperfect capital market where there is risk, that a low price-earnings ratio strategy may be able to generate excess market returns.

i. What are the assumptions underlying the CAPM? ii. What is meant by the market portfolio?iii. Sketch the capital market line and the efficient frontier when borrowing and lending rates are equal. Label the axes and important points of your sketch. iv. Do the same for the Security Market Line v. Would you expect firms with high operating leverage to have higher betas?Explain! Step by step correct answer

Q1.  Why is some risk diversifiable and other risk is not (non-diversifiable)?   Q2.   Yes or no, are industries that have a high standard deviations (wide fluctuation of the price of the stock) not useful as investments?  Beyond answering Yes or no, state the reason behind your choice.

Why should stock market investors ignore specific risks when calculating required rates of return? There is no method for quantifying specific risks. Specific can be diversified away. Specific risks are compensated by the risk-free rate. Beta includes a component to compensate for specific risk.

6. Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? A) Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. B) Investors have homogeneous risk-averse preferences toward taking on risk. C) Investors hold only efficient portfolios of traded securities, that is portfolios that yield the maximum expected return for the given level of volatility. D) Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate.

8. The efficient markets hypothesis True or False: The efficient markets hypothesis holds only if all investors are rational. O False O True Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to "beat" the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current market prices reflect all relevant information, whether it is known publicly or privately. This statement is consistent with: O Semistrong form efficiency O Strong form efficiency O Weak form efficiency