Exam 12: Risk/Return and Asset Pricing Models

Themes of behavioral finance asset include: 1: Investors err in making investment decisions because they rely on ________. 2: Investors are influenced by form as well substance in making ________. 3: Prices in the financial market are affected ________ and decision frames.

Stock returns exhibit ________.

What is the return on a portfolio if the portfolio market value at the beginning of the interval is $1,250, the portfolio market value at the end of the interval is $1,385, and the cash distributions to the investor during the interval is $55.52?

Which of the below statements is FALSE?

The capital asset pricing model (or CAPM) hypothesizes that assets with the same level of systematic risk should experience the same level of returns.

The market model is the hypothesis that a security's return may be attributed to two forces, the returns on securities in general, and events related to the market itself.

We can distinguish between a security's ________, which can be washed away by mixing the security with other securities in a diversified portfolio, and its ________, which cannot be eliminated by diversification.

A security's return in equal to its systematic return plus its unsystematic return where ________.

Which of the below statements is TRUE?

The concept of heuristics means a rule-of-thumb strategy or good guide to follow in order to shorten the time it takes to make a decision. Psychology literature tells us that heuristics can lead to systematic biases in decision making, what psychologists refer to as cognitive biases. In the context of finance, these biases lead to errors in making ________.

Risk aversion means that investors want to minimize risk for any given level of expected return, or want to maximize return, for any given level of risk.

Consider an investor who owns three assets: asset 1, asset 2, and asset 3 and invests equally in each of the three assets. If the beta of asset 1 is 1.2, the beta of asset 2 is 1.5 and the Beta of asset 3 is zero, then what is the beta of the investor's portfolio.

Empirical studies suggest four possible economic factors for the APT. Which of the below include these economic factors?

If a security's market price were to deviate from the level justified by the APT factors and the security's price sensitivity to them, investors would engage in arbitrage and drive the market price to an appropriate level.

A problem with a portfolio return computation is: ________.

The two major standards of risk are: ________.

The multifactor CAPM says that investors want to be compensated only for market risk.

The riskless rate is 5.00% and the return on the market is 10.00%. If you form a portfolio with a beta of 0.8, what should be your rate of return according to the CAPM?

Describe two of the three major results of the empirical tests conducted on relationship between return and systematic risk.

Which of the below statements is TRUE?