Question 1

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.

Accepted Answer

A)  errors; investment decisions; by rules of thumb 
B)  rules of thumb; accounting decisions; by errors 
C)  errors; accounting decisions; by rules of thumb 
D)  rules of thumb; investment decisions; by errors

Question 2

Stock returns exhibit ________.

Accepted Answer

A)  a normal distribution. 
B)  symmetry in probability distributions and are not skewed. 
C)  fat tails or heavy tails where the "tails" of the distribution are where the extreme values occur. 
D)  periods when there are changes that are not much higher than the normal distribution predicts.

Question 3

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?

Accepted Answer

A)  15.12% 
B)  15.24% 
C)  15.36% 
D)  15.48%

Question 4

Which of the below statements is FALSE?

Accepted Answer

A)  The systematic risk of a portfolio is simply the market value-weighted average of the systematic risk of the individual securities. 
B)  The beta (β) for a portfolio consisting of all stocks is 1.00. 
C)  The beta of a security or portfolio can be estimated using statistical analysis. 
D)  There will be no difference in the calculated beta depending on the length of time over which a return is calculated and the number of observations used

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A)  systematic risk; unsystematic risk 
B)  portfolio risk; systematic risk 
C)  unsystematic risk; T-Bill risk 
D)  unsystematic risk; systematic risk

Question 8

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

Accepted Answer

A)  the security return, R, may be expressed as R = βRm + ε'. 
B)  the systematic return is proportional to the market return and it can be expressed as the symbol beta (or β) times the market return, Rm. 
C)  unsystematic return, which is independent of market returns, is usually represented by the symbol epsilon (ε'). 
D)  All of these

Question 9

Which of the below statements is TRUE?

Accepted Answer

A)  The APT states that the return on a security is dependent on its market sensitivity index and an unsystematic return. 
B)  The CAPM states that the return on a security is linearly related to H factors. 
C)  The APT asserts that an investor is compensated for accepting unsystematic risk 
D)  The APT states that investors want to be compensated for all the factors that systematically affect the return of a security.

Question 10

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 ________.

Accepted Answer

A)  accounting decisions. 
B)  investment decisions. 
C)  heuristic decisions. 
D)  psychological decisions.

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A)  0.75 
B)  0.90 
C)  1.10 
D)  1.25

Question 13

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

Accepted Answer

A)  1. Unanticipated changes in industrial production.
2. Unanticipated changes in the spread between the yield on low-grade and high-grade bonds.
3. Unanticipated changes in interest rates and the shape of the yield curve.
4. Unanticipated changes in inflation. It is interesting to note that one study expands that list to  five factors, some similar to the previous group and some new. 
B)  1. Unanticipated changes in industrial production.
2. Unanticipated changes in the spread between the yield on low-grade and high-grade bonds.
3. Unanticipated changes in interest rates and the shape of the yield curve.
4. Unanticipated changes in inflation. It is interesting to note that one study expands that list to five factors, some similar to the previous group and some new. 
C)  1. The business cycle, as measured by the Index of Industrial Production.
2. Interest rates, as given by the yields on long-term government bonds.
3. Unanticipated changes in industrial production.
4. Short-term inflation, as measured by month-to-month changes in the Consumer Price Index. 
D)  1 . The business cycle, as measured by the Index of Industrial Production.
2. Interest rates, as given by the yields on long-term government bonds.
3. Unanticipated changes in industrial production.
4. Unanticipated changes in industrial production.

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

A problem with a portfolio return computation is: ________.

Accepted Answer

A)  the underlying assumption is that all cash payments and inflows are made and received at the beginning of the period 
B)  we have to rely on the formula that is able to adjust portfolio returns with the same time horizon. 
C)  if two investments have the same return, but one investment makes a cash payment early and the other late, the one with early payment will be overstated 
D)  we cannot rely on the formula to compare return on a one-month investment with that on a 10-year return portfolio.

Question 16

The two major standards of risk are: ________.

Accepted Answer

A)  total risk and the relative index of systematic or nondiversifiable risk. 
B)  standard deviation and unsystematic risk. 
C)  total risk and the standard deviation. 
D)  beta and the relative index of systematic or nondiversifiable risk (beta).

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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?

Accepted Answer

A)  8.00% 
B)  8.50% 
C)  9.00% 
D)  9.50%

Question 19

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

Accepted Answer

The answer of Describe two of the three major results...

Question 20

Which of the below statements is TRUE?

Accepted Answer

A)  In modeling the stock market, the interactions of borrowers are modeled. 
B)  The computer simulations of mathematical models have been found to generate thin tails and other statistical characteristics that have been observed in real-world financial markets. 
C)  Support for return distributions not being well characterized by a normal distribution comes from the collaborative efforts of economists and physicists who have developed mathematical models of the stock market. 
D)  Mathematical models are by their nature accurate replications of real-world financial markets providing sufficient structure to analyze return distributions.

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?

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?

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?

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?

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.

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.