Practice Quiz (Lecture 1 to Lecture 7)

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
1) Real assets in the economy include all but which one of the following?
A) Land
B) Buildings
C) Consumer durables
D) Common stock

2) Active trading in markets and competition among securities analysts helps ensure that:
1. Security prices approach informational efficiency.
2. Riskier securities are priced to offer higher potential returns.
3. Investors are unlikely to be able to consistently find under- or overvalued securities.

A) 1 only
B) 1 and 2 only
C) 2 and 3 only
D) 1, 2, and 3

3) Which of the following is not a money market security?

A) U.S. Treasury bill
B) 6-month maturity certificate of deposit
C) common stock
D) mortgage backed security

4) _______ assets generate net income to the economy, and _______ assets define allocation of
income among investors.
A) Financial; financial
B) Financial; real
C) Real; financial
D) Real; real

5) Asset allocation refers to _______.

A) the allocation of the investment portfolio across broad asset classes
B) the analysis of the value of securities
C) the choice of specific assets within each asset class
D) None of the choices are correct.

6) Security selection refers to the _______.

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 A) allocation of the investment portfolio across broad asset classes
B) analysis of the broad asset classes
C) choice of specific securities within each asset class
D) top-down method of investing

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7) _______ portfolio management calls for holding diversified portfolios without spending effort
or resources attempting to improve investment performance through security analysis.
A) Active
B) Momentum
C) Passive
D) Market-timing

8) Financial markets allow for all but which one of the following?
A) Shift consumption through time from higher-income periods to lower.
B) Price securities according to their riskiness.
C) Channel funds from lenders of funds to borrowers of funds.
D) Allow most participants to routinely earn high returns with low risk.

9) The efficient market hypothesis suggests that _______.

A) active portfolio management strategies are the most appropriate investment strategies
B) passive portfolio management strategies are the most appropriate investment strategies
C) either active or passive strategies may be appropriate, depending on the expected direction
of the market
D) a bottom-up approach is the most appropriate investment strategy

10) Real assets are _______.

A) assets used to produce goods and services
B) always the same as financial assets
C) always equal to liabilities
D) claims on a company’s income

11) Commercial paper is a short-term security issued by ______ to raise funds.

A) the Federal Reserve
B) the New York Stock Exchange
C) large well-known companies
D) All of the choices are correct.

12) _______ is not a money market instrument.

A) A certificate of deposit
B) A Treasury bill
C) A Treasury bond
D) Commercial paper

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13) A _______ gives its holder the right to buy an asset for a specified exercise price on or before
a specified expiration date.
A) call option
B) futures contract
C) put option
D) interest rate swap

14) Which of the following is used to back international sales of goods and services?

A) Certificate of deposit
B) Bankers' acceptance
C) Eurodollar deposits
D) Commercial paper

15) If you thought prices of stock would be rising over the next few months, you might want to
_______ on the stock.
A) purchase a call option
B) purchase a put option
C) sell a futures contract
D) place a short-sale order

16) An order to buy or sell a security at the current price is a _______.

A) limit order
B) market order
C) stop-loss order
D) stop-buy order

17) If an investor places a _______ order, the stock will be sold if its price falls to the stipulated
level. If an investor places a _______ order, the stock will be bought if its price rises above the
stipulated level.
A) buy stop; stop-loss
B) market; limit
C) stop-loss; buy stop
D) limit; market

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18) Consider the following limit order book of a specialist. The last trade in the stock occurred at
a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

Limit Buy Price Orders Limit Sell Orders

Shares Orders Shares
$ 39.75 100 $ 40.25 100
$ 39.50 100 $ 40.50 100

A) $39.75
B) $40.25
C) $40.375
D) $40.25 or less

19) The complete portfolio refers to the investment in __________.

A) the risk-free asset
B) the risky portfolio
C) the risk-free asset and the risky portfolio combined
D) the risky portfolio and the index

20) The holding period return on a stock is equal to __________.

A) the capital gain yield over the period plus the inflation rate
B) the capital gain yield over the period plus the dividend yield
C) the current yield plus the dividend yield
D) the dividend yield plus the risk premium

21) The geometric average of −12%, 20%, and 25% is __________.

A) 8.42%
B) 11.00%
C) 9.70%
D) 18.88%

22) Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a
10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this
investment?
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 A) 5.14%
B) 7.59%
C) 9.29%
D) 8.43%

23) Historically, small-firm stocks have earned higher returns than large-firm stocks. When
viewed in the context of an efficient market, this suggests that __________.
A) small firms are better run than large firms
B) government subsidies available to small firms produce effects that are discernible in stock
market statistics
C) small firms are riskier than large firms
D) small firms are not being accurately represented in the data

24) An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15%
and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate
of return and standard deviation are __________ and __________ respectively.

A) 10.00%; 6.75%
B) 12.00%; 22.40%
C) 12.00%; 15.65%
D) 10.00%; 35.65%

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25) You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with
a rate of return of 6%. __________ of your complete portfolio should be invested in the risky
portfolio if you want your complete portfolio to have a standard deviation of 9%.

A) 100%
B) 55%
C) 45%
D) 15%

26) Diversification is most effective when security returns are __________.

A) high
B) negatively correlated
C) positively correlated
D) uncorrelated

27) The risk that can be diversified away is __________.

A) beta
B) firm-specific risk
C) market risk
D) systematic risk

28) Consider an investment opportunity set formed with two securities that are perfectly
negatively correlated. The global minimum-variance portfolio has a standard deviation that is always
__________.
A) equal to the sum of the securities' standard deviations
B) equal to −1
C) equal to 0
D) greater than 0

29) The standard deviation of return on investment A is 10%, while the standard deviation of
return on investment B is 5%. If the covariance of returns on A and B is 0.0030, the correlation
coefficient between the returns on A and B is __________.
A) 0.12
B) 0.36
C) 0.60
D) 0.77

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30) A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of
35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the
returns on A and B is 0.45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of
the portfolio. The standard deviation of the return on this portfolio is __________.
A) 23.0%
B) 19.76%
C) 18.45%
D) 17.67%

31) The standard deviation of return on investment A is 10%, while the standard deviation of
return on investment B is 4%. If the correlation coefficient between the returns on A and B is −0.50,
the covariance of returns on A and B is __________.
A) −0.0447
B) −0.0020
C) 0.0020
D) 0.0447

32) The term excess return refers to __________.

A) returns earned illegally by means of insider trading
B) the difference between the rate of return earned and the risk-free rate
C) the difference between the rate of return earned on a particular security and the rate of
return earned on other securities of equivalent risk
D) the portion of the return on a security that represents tax liability and therefore cannot be
reinvested

33) What is the standard deviation of a portfolio of two stocks given the following data: Stock A
has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains
60% of stock A, and the correlation coefficient between the two stocks is -1.
A) 0.00%
B) 10.80%
C) 18.85%
D) 24.17%

34) The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio
standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?
A) 0.00
B) 0.45
C) 0.74
D) 1.35

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35) When all investors analyze securities in the same way and share the same economic view of
the world, we say they have __________.
A) heterogeneous expectations
B) equal risk aversion
C) asymmetric information
D) homogeneous expectations

36) According to the capital asset pricing model, fairly priced securities have __________.
A) negative betas
B) positive alphas
C) positive betas
D) zero alphas

37) The graph of the relationship between expected return and beta in the CAPM context is called
the __________.

A) CML
B) CAL
C) SML
D) SCL

38) In a world where the CAPM holds, which one of the following 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.

39) One of the main problems with the arbitrage pricing theory is __________.
A) its use of several factors instead of a single market index to explain the risk-return
relationship
B) the introduction of nonsystematic risk as a key factor in the risk-return relationship
C) that the APT requires an even larger number of unrealistic assumptions than does the
CAPM
D) the model fails to identify the key macroeconomic variables in the risk-return relationship

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40) Two investment advisers are comparing performance. Adviser A averaged a 20% return with
a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill
rate was 5% and the market return during the period was 13%, which adviser was the better stock
picker?
A) Advisor A was better because he generated a larger alpha.
B) Advisor B was better because she generated a larger alpha.
C) Advisor A was better because he generated a higher return.
D) Advisor B was better because she achieved a good return with a lower beta.

41) The weak-form of the EMH states that __________ must be reflected in the current stock
price.
A) all past information, including security price and volume data
B) all publicly available information
C) all information, including inside information
D) all costless information

42) Random price movements indicate __________.

A) irrational markets
B) that prices cannot equal fundamental values
C) that technical analysis to uncover trends can be quite useful
D) that markets are functioning efficiently

43) Proponents of the EMH typically advocate __________.

A) a conservative investment strategy

B) a liberal investment strategy
C) a passive investment strategy
D) an aggressive investment strategy

44) Which of the following is not a method employed by followers of technical analysis?
A) Charting
B) Relative strength analysis
C) Earnings forecasting
D) Trading around support and resistance levels

45) The __________ effect(s) may explain much of the small-firm anomaly.

1. January
2. neglected
3. liquidity
A) 1 only
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 B) 2 only
C) 2 and 3 only
D) 1, 2, and 3

46) Among the important characteristics of market efficiency is (are) that:

1. There are no arbitrage opportunities.

2. Security prices react quickly to new information.
3. Active trading strategies will not consistently outperform passive strategies.
A) 1 only
B) 2 only
C) 1 and 3 only
D) 1, 2, and 3

47) Market anomaly refers to __________.

A) an exogenous shock to the market that is sharp but not persistent

B) a price or volume event that is inconsistent with historical price or volume trends
C) a trading or pricing structure that interferes with efficient buying and selling of securities
D) price behavior that differs from the behavior predicted by the efficient market hypothesis

48) Which of the following stock price observations would appear to contradict the weak-form of
the efficient market hypothesis?

A) The average rate of return is significantly greater than zero.

B) The correlation between the market return one week and the return the following week is
zero.
C) You could have consistently made superior returns by buying stock after a 10% rise in
price and selling after a 10% fall.
D) You could have consistently made superior returns by forecasting future earnings
performance with your new Crystal Ball forecast methodology.

49) A technical analyst is most likely to be affiliated with which investment philosophy?
A) Active management
B) Buy and hold
C) Passive investment
D) Index funds

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50) The tendency of poorly performing stocks and well-performing stocks in one period to
continue their performance into the next period is called the __________.
A) fad effect
B) martingale effect
C) momentum effect
D) reversal effect

51) The lack of adequate trading volume in stock that may ultimately lead to its ability to produce
excess returns is referred to as the __________.
A) January effect
B) liquidity effect
C) neglected-firm effect
D) P/E effect

52) Which of the following statements is (are) correct?

A) If a market is weak-form efficient, it is also semistrong- and strong-form efficient.
B) If a market is semistrong-form efficient, it is also strong-form efficient.
C) If a market is strong-form efficient, it is also semistrong- but not weak-form efficient.
D) If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

53) Testing many different trading rules until you find one that would have worked in the past is
called __________.

A) data mining
B) perceived patterning
C) pattern searching
D) behavioral analysis

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54)

The moving average generates sell signals __________.

A) on days 3, 11, and 15

B) on days 7, 15, and 18
C) on days 5, 9, and 13
D) on day 16

55) If investors overweight recent performance in forecasting the future, they are exhibiting
__________.
A) representativeness bias
B) framing error
C) memory bias
D) overconfidence

56) An investor holds a very conservative portfolio invested for retirement, but she takes some
extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in
__________.

A) overconfidence
B) representativeness
C) forecast errors
D) mental accounting

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57) An investor needs cash to pay some hospital bills. He is willing to use his dividend income to
pay the bills, but he will not sell any stock to do so. He is engaging in __________.

A) overconfidence
B) representativeness
C) forecast errors
D) mental accounting

58) Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends
are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her
friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, __________.
A) Bill will have more regret over the loss than Shelly
B) Shelly will have more regret over the loss than Bill
C) Bill and Shelly will have equal regret over their losses
D) Bill's and Shelly's risk aversion will increase in the future

59) Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even
though net income is projected to fall over the current and next several years, the price of the stock
continues to rise. What behavioral concept may explain this price pattern?
A) Overconfidence
B) Loss aversion
C) Mental accounting
D) Calendar bias

60) A high amount of short interest is typically considered as a __________ signal, and
contrarians may consider it as a __________ signal.
A) bearish; bullish
B) bullish; bearish
C) bearish; false
D) bullish; false

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