Practice questions: Quiz 3 FIR 3710 1.

If the daily returns on the stock market are normally distributed with a mean of 0.05% and a standard deviation of 1.00%, the probability that the stock market would have a return of -23.00% or worse on one particular day (as it did on Black Monday) is approximately __________. A) 0.0% B) 0.1% C) 1.0% D) 10.0%

2. A mutual fund which attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund. A) stock B) index C) hedge D) money market

3. Research has revealed that regardless of what the current estimate of a firm's beta is, it will tend to move closer to ______ over time. A) 1 B) 0 C) -1 D) None of the above

4. Which of the following beliefs would not preclude charting as a method of portfolio management. A) The market is strong form efficient. B) The market is semi-strong form efficient. C) The market is weak form efficient. D) Stock prices follow recurring patterns.

5. In the context of the capital asset pricing model, the systematic measure of risk is __________. A) unique risk B) beta C) standard deviation of returns D) variance of returns

6. The small firm in January effect is strongest ________. A) early in the month
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B) in the middle of the month C) late in the month D) in even numbered years.

7. Building a zero-investment portfolio will always involve _____________ A) a mixture of short and long positions B) only short positions C) only long positions D) Any of the above answers could be correct

8. The expected return of the risky asset portfolio with minimum variance is __________. A) the market rate of return B) zero C) the risk-free rate D) There is not enough information to answer this question

9. A finding that __________ would provide evidence against the semi-strong form of the efficient market theory. A) about 70% of mutual funds outperform the market in any year B) stocks of small firms tend to generate positive abnormal returns C) low P/E stocks tend to have positive abnormal returns D) More than one of the above answers is correct

10. Consider the following two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.20. Stock B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy because __________. A) A, it offers an expected excess return of 0.8%. B) A, it offers an expected excess return of 2.2%. C) B, it offers an expected excess return of 1.8%. D) B, it offers an expected return of 2.4%.

11. Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is __________. A) -1.7% B) 3.7% C) 5.5% D) 8.7%

12. The term random walk is used in investments to refer to ______________.

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A) B) C) D)

stock price changes that are random but predictable stock prices that respond slowly to both old and new information stock price changes that are random and unpredictable stock prices changes that follow the pattern of past price changes

13. According to the semi-strong form of the efficient markets hypothesis ____________. A) stock prices do not rapidly adjust to new information B) future changes in stock prices cannot be predicted from any information that is publicly available C) corporate insiders should have no better investment performance than other investors D) arbitrage between futures and cash markets should not produce extraordinary profits

14. According to capital asset pricing theory, the key determinant of portfolio returns is __________. A) the degree of diversification B) the systematic risk of the portfolio C) the firm specific risk of the portfolio D) economic factors

15. Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is __________. A) 6.75% B) 9.0% C) 10.75% D) 12.0%

16. If studies suggest that domestic securities markets are efficient at the semi-strong level this implies that all foreign securities markets are efficient at the _____________ level. A) weak B) semi-strong C) strong D) None of the above answers are correct

17. When the market risk premium rises, stock prices will ________. A) rise B) fall C) recover D) have excess volatility

18. An important characteristic of market efficiency is that _________________.

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A) B) C) D)

there are no arbitrage opportunities security prices react quickly to new information Active trading strategies will not consistently outperform passive strategies all of the above

19. In a fully efficient market, consistent weak portfolio performance would most likely be due to ________________. A) picking bad stocks consistently B) expenses incurred in trading and management of the portfolio C) picking good stocks erratically D) None of the above answers is correct

20. A rule for buying or selling stocks according to recent price movements is called __________. A) a filter rule B) a market anomaly C) an enigma D) none of the above

21. __________ is not a true statement regarding the capital market line. A) The capital market line always has a positive slope B) The capital market line is also called the security market line C) The capital market line is the best attainable capital allocation line D) The capital market line is the line from the risk-free rate through the market portfolio

22. The weak form EMH states that ________ must be reflected in the stock price. A) all market trading data B) all publicly available information C) all information including inside information D) none of the above

23. Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? A) 6% B) 15.6% C) 18% D) 21.6%

24. When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns. A) positive; positive
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B) positive ; negative C) negative; positive D) None of the above 25. Supply side economics tends to focus on ________________. A) government spending B) taxation C) monetary policy D) increasing productive capacity

26.

Assume the U.S. government were to decide to increase its budget deficit. This will cause __________ to increase. A) interest rates B) the output of the economy C) both a and b D) neither a nor b

27.

The gross domestic product (GDP), measures ________________________. A) the economy's total production of goods and services B) total goods and services consumed domestically C) excess goods and services produced domestically and sold in foreign countries D) excess goods and services sold domestically, but produced in foreign countries

28.

Assume that the Federal Reserve decreases the money supply. This will cause __________ to decrease. A) interest rates B) output of the economy C) both a and b D) neither a nor b

29.

A big increase in government spending is an example of __________. A) a demand shock B) a supply shock C) an unsurprising shock D) none of the above

30.

The degree of operating leverage (DOL) measures the ___________________. A) sensitivity of profits to changes in sales revenues B) sensitivity of profits to changes in fixed costs C) sensitivity of profits to changes in the tax rate D) sensitivity of profits to changes in interest rates

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31.

If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions. A) below average B) average C) above average D) since growth is expected to be slow, sensitivity to economic conditions is not an issue

32.

__________ probably the most direct way to stimulate or slow the economy. A) Fiscal policy is B) Monetary policy is C) Supply-side policy is D) None of the above are

33.

An analyst starts by examining the broad economic environment and then considers the implications of the outside environment on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called __________ analysis. A) bottom-up B) outside-inside C) top-down D) upside-down

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Answer Key -- Quiz3pra 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. A B A D B A A D D C B C B B C D B D B A B A D A D C A B A A A A C

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