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Question;Investor Behavior and Capital Market EfficiencyMULTIPLE CHOICE QUESTIONS26) Which of the following statements is;false?;A) Nonzero alphas may merely indicate;that the wrong market proxy is beings used, they do not necessarily indicate;forgone positive NPV investment opportunities.;B) The true market portfolio contains;much more than just stocks, it includes bonds, real estate, art, precious;metals, and any other investment vehicles available.;C) If the true market portfolio is;efficient, but the proxy portfolio is not highly correlated with the true;market portfolio, then the true market portfolio will not be efficient and;stocks will have nonzero alphas.;D) Much of the investment wealth cannot;be included in the proxy for the market portfolio since it does not trade in;competitive markets.;27) Which of the following statements is;false?;A) The most important example of;non-tradeable wealth is human capital.;B) If investors have a significant;amount of non-tradeable wealth, this wealth will be an important part of their;portfolios, but will not be part of the market portfolio of tradeable;securities.;C) If the entire portfolio of;investments is efficient, then just the tradeable part of the portfolio should;be efficient also.;D) Researchers have found evidence that;the presence of human capital can explain at least part of the reason for the;inefficiency of the most commonly used market proxies.;28) What does the existence of a;positive alpha investment strategy imply?;29) Explain why the market portfolio;proxy may not be efficient.;13.7 Multifactor Models of Risk;1) A group of portfolios from which we;can form an efficient portfolio are called;A) factor portfolios.;B) semi-efficient portfolios.;C) partially efficient portfolios.;D) characteristic portfolios.;2) The term asis a(n);A) error term that has an expectation of;zero and is uncorrelated with either factor.;B) measure of the expected percent;change in the excess return of a security for a 1% change in the excess return;of the first factor portfolio.;C) measure of the expected percent;change in the excess return of a security for a 1% change in the excess return;of the second factor portfolio.;D) constant term.;3) The term;is a(n);A) measure of the expected percent;change in the excess return of a security for a 1% change in the excess return;of the second factor portfolio.;B) error term that has an expectation of;zero and is uncorrelated with either factor.;C) constant term.;D) measure of the expected percent;change in the excess return of a security for a 1% change in the excess return;of the first factor portfolio.;4) The term;is a(n);A) measure of the expected percent;change in the excess return of a security for a 1% change in the excess return;of the second factor portfolio.;B) constant term.;C) error term that has an expectation of;zero and is uncorrelated with either factor.;D) measure of the expected percent;change in the excess return of a security for a 1% change in the excess return;of the first factor portfolio.;5) The term? is a(n);A) measure of the expected percent;change in the excess return of a security for a 1% change in the excess return;of the first factor portfolio.;B) error term that has an expectation of;zero and is uncorrelated with either factor.;C) measure of the expected percent;change in the excess return of a security for a 1% change in the excess return;of the second factor portfolio.;D) constant term.;6) Which of the following statements is;false?;A) The risk premium of any marketable;security can be written as the sum of the risk premium of each factor;multiplied by the sensitivity of the stock with that factor.;B) The factor betas measure the;sensitivity of the stock to a particular factor.;C) If we use more than one portfolio as;factors, then together these factors will capture systematic risk, but each;factor captures different components of the systematic risk.;D) When we use more than one portfolio;to capture risk, the model is known as asingle factor model.;7) Which of the following statements is;false?;A) It is not actually necessary to;identify the efficient portfolio itself. All that is required is to identify a;collection of portfolios from which the efficient portfolio can be constructed.;B) Although we might not be able to;identify the efficient portfolio itself, we know some characteristics of the;efficient portfolio.;C) An efficient portfolio can be;constructed from other diversified portfolios.;D) An efficient portfolio need not be;well diversified.;8) Which of the following statements is;false?;A) A portfolio costs nothing to;construct is called a self-financing portfolio.;B) The most obvious portfolio to use in;a multifactor model is the market portfolio itself.;C) In general, a self-financing;portfolio is any portfolio with portfolio weights that sum to one rather than;zero.;D) We can construct a self-financing;portfolio by going long some stocks, and going short other stocks with equal;market value.;9) Which of the following statements is;false?;A) Rather than relying on the efficiency;of a single portfolio (such as the market), multifactor models rely on the;weaker condition that an efficient portfolio can be constructed from a;collection of well-diversified portfolios or factors.;B) A positive alpha in a single factor;model means that the portfolios that implement the trading strategy capture;risk that is not captured by the market portfolio.;C) Multifactor models have a distinct;advantage over single-factor models in that it is much easier to identify a;collection of portfolios that captures systematic risk than just a single;portfolio.;D) Trading strategies based on market;capitalization, book-to-market ratios, and momentum have been developed that;appear to have zero alphas.;10) Which of the following statements is;false?;A) Because expected returns are not easy;to estimate, each portfolio that is added to a multifactor model increases the;difficulty of implementing the model.;B) The self-financing portfolio made;from high minus low book-to-market stocks is called the high-minus-low (HML);portfolio.;C) The FFC factor specification was;identified a little more than ten years ago. Although it is widely used in;academic literature to measure risk, much debate persists about whether it;really is a significant improvement over the CAPM.;D) A trading strategy that each year;short sells portfolio S (small stocks) and uses this position to buy portfolio;B (big stocks) has produced positive risk adjusted returns historically. This;self-financing portfolio is widely known as the small minus big (SMB);portfolio.;11) Which of the following statements is;false?;A) As a practical matter, it is;extremely difficult to identify portfolios that are efficient because we cannot;measure the expected return and the standard deviation of a portfolio with;great accuracy.;B) The portfolios in a multifactor model;can be thought of as either risk factors themselves or portfolios of stocks;correlated with unobservable risk factors.;C) Each factor beta is the expected;percent change in the excess return of a security for a 1% change in the excess;return of the factor portfolio.;D) Even if the market portfolio is not;efficient, it still must capture all components of systematic risk.;Use the equation for the question(s);below.;Consider the following factor model;E[Rs] - rf =;(E[RMkt] - rf) +;E[RSMB] +;E[RHML] +;E[RPR1 YR];12) The term;measures the;sensitivity of the securities returns to;A) size.;B) book to market.;C) momentum.;D) the overall market.;13) The term;measures the;sensitivity of the securities returns to;A) momentum.;B) the overall market.;C) book to market.;D) size.;14) The term;measures the;sensitivity of the securities returns to;A) book to market.;B) momentum.;C) size.;D) the overall market.;15) The term;measures the;sensitivity of the securities returns to;A) the overall market.;B) book to market.;C) size.;D) momentum.;Use the table for the question(s) below.;Consider the following information;regarding the Fama French Carhart four factor model;Factor Portfolio;Average;Monthly Return (%);IBM Factor;Betas;GE Factor;Betas;Wal-Mart;Factor Betas;Rm - rf;0.64;0.712;0.937;0.782;SMB;0.17;-0.103;-0.214;0.224;HML;0.53;0.124;0.154;0.123;PR1;YR;0.76;0.276;-0.147;0.247;16) Using the FFC four factor model and;the historical average monthly returns, the expected monthly return for IBM is;closest to;A) 0.79%;B) 0.53%;C) 0.71%;D) 1.01%;17) Using the FFC four factor model and;the historical average monthly returns, the expected monthly return for GE is;closest to;A) 0.53%;B) 0.73%;C) 0.79%;D) 0.71%;18) Using the FFC four factor model and;the historical average monthly returns, the expected monthly return for;Wal-Mart is closest to;A) 0.71%;B) 0.53%;C) 1.38%;D) 0.79%;13.8 Methods Used in Practice;1) According to a survey of 392 CFOs;conducted by John Graham and Campbell Harvey, the most common method used in;corporate America to estimate the cost of capital is;A) the CAPM.;B) multifactor models.;C) characteristic models.;D) the dividend discount model.

 

Paper#44912 | Written in 18-Jul-2015

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