TrueFalseFinance

  1. Capital allocation line (CAL) describes all feasible risk-return combinations available from allocating the complete portfolio between a risky portfolio and the risk-free asset.
    True
  2. Passive investment strategy attempts to identify mispriced securities or to forecast broad market trends
    False
  3. The Sharpe ratio of the market portfolio should be one.
    False
  4. Short selling is an advantageous strategy if you expect a stock price to decline in the future
    True
  5. Under the CAPM assumptions, stocks of small firms cannot have higher returns than those of big firms
    False
  6. Participating in financial markets allows you to smooth your consumption.
    True
  7. Financial market is where real assets are traded
    False
  8. Land, buildings, equipment, and knowledge are examples of real assets.
    True
  9. Risk neutral investors require risk premium for holding risky assets.
    False
  10. No arbitrage opportunity implies that equivalent investment opportunities must be traded at the same price.
    True
  11. Empirical evidence shows that the CAPM has a significant predictability of stocks’ returns.
    False
  12. The portfolio weights of a self-financing portfolio sum to one.
    False
  13. The CAPM may be wrong even when the market is efficient.
    True
  14. If market is strong-form efficient, past prices do not give any information.
    True
  15. High book-to-market stocks have historically earned higher average returns than low book-to-market stocks.
    True (Warren Buffett)
  16. Yield to maturity is the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond.
    True
  17. An American option cannot be worth less than its European counterpart.
    True
  18. The value of an option generally decreases with the volatility of the stock.
    False
  19. OTC markets have advantages such as ease of trading, high liquidity.
    False
  20. Option delta measures the change in the price of the call option given a 1% change in the price of the stock.
    False
  21. Financial assets are claims on real assets or the income generated by them.
    True
  22. The law of one price states that equivalent assets must be traded at the same price.
    True
  23. In the presence of limits to arbitrage, bubbles may arise because even an obvious violation of the law of one price cannot be corrected.
    True
  24. Under the CAPM assumptions, there may exist a portfolio whose Sharpe ratio is higher than that of the market portfolio.
    False
  25. The CAPM implies that an active investment strategy is efficient.
    False
  26. The existence of momentum effect provides evidence against the weak form efficiency.
    True
  27. According to the semi-strong form efficiency, technical analysis should be useful.
    False
  28. If the market is efficient, stock prices should slowly increase for an extended period of time after good earnings are announced.
    False
  29. The default premium of a risk-free bond is equal to zero.
    True
  30. The writer (or seller) of a put option has the right to sell the underlying asset.
    False
  31. Including options in your portfolio generally increases the risk of your portfolio.
    False
  32. The value of an option generally increases with the volatility of the underlying asset.
    True
  33. Investment with higher volatility should always have a higher risk premium
    False
  34. If the market is efficient, then the market portfilio should have the highest Sharpe ratio
    True
  35. Stock 1 has a beta of 1, and Stock 2 has a beta of 2. If you hold a portfilio that consists of 30% stock 1 and 70% stock 2, the portfilio's beta is 1.7
    True
  36. In the CAPM model, any two portfolios with the same expected return should have the same beta.
    True
  37. Stock A and Stock B have equivalent risk, i.e. they have the same beta. Then, the CAPM implies that the expected return of Stock A should be equal to that of Stock B although stock A has more idiosyncratic risk relative to Stock B
    True (because the CAPM does not take idiosyncratic risk into consideration, only systematic risk)
  38. In both the Binomial and Black-Scholes Option Pricing Models, we do not need to know the actual probabilities of each possible future stock price to calculate the option price.
    True
  39. The current stock price of ABC Corp. is $50 per share, and the price of an at-the-money, 6-months European put option is $ 5. If one-year risk-free rate is 8 %, the price of an at-the-money, 6-months EUropean call option is higher than $7,50.
    False
  40. If the Law of one Price holds, the price of a security must be equal to the present value of its cash flows.
    True
  41. Suppose that the market risk premium is 5 %, and the risk-free rate is 3 %. The expected return of a stock is 9 %, and its beta is 1. Then, the stock has a positive alpha.
    True (according to the CAPM, E[r]=risk-free rate+β(market risk premium), so if 9%=3%+1*5% we need to fill it up with 1% positive α.)
  42. The Real interest rate measures the rate of growth of purchasing power of invested money
    True
  43. According to the semi-strong-form market efficiency, it is impossible to profit from trading on public information
    True
  44. The yield to maturity of a bond is the discount rate that sets the present value of the expected bond payments equal to the current market price of the bond.
    False
  45. The YTM of a defaultable bond is equal to the expected return of investing in the bond.
    False
  46. The credit spread is high for bonds with low ratings
    True
  47. APR can be higher than EAR depending on the number of compounding periods.
    False
  48. The beta of the risk-free asset is zero.
    True
  49. The Sharpe ratio of the market portfolio should be one
    False
  50. The CAPM may be wrong even when the market is efficient.
    True
  51. Under the CAPM assumptions, stocks of small firms cannot have higher returns than those of big firms.
    False
  52. Under the CAPM assumptions, risk premium can be affected by idiosyncratic risk.
    False
  53. The average of a sequence of independent random variables is approximately normallydistributed as the number of the random variables are sufficiently large.
    True (law of big numbers)
  54. Short selling is an advantageous strategy if you expect a stock price to decline in the future.
    True
  55. If market is strong-form efficient, past prices do not give any information.
    True
  56. When the durations of a firm’s equities and liabilities are significantly different, the firm has a duration mismatch
    False
  57. An American option cannot be worth less than its European counterpart.
    True (because American options are always more favourabe)
  58. Futures contract is similar to forward contract except that futures contract is not traded on an exchange
    False
  59. If a firm can pass along the cost increases to its customers, the firm’s exposure to the commodity price risk is smaller.
    True
  60. Which of the following positions benefit if the stock price decreases?
    a. Long position in a call
    b. Short position in a call
    c. Long position in a put
    d. Short position in a put
    b. Short call, and c. long put
  61. 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
    Answer: A
  62. Financial institutions that specialize in assisting corporations in primary market transactions are called _______. 

    A. mutual funds
    B. investment bankers
    C. pension funds
    D. globalization specialists
    Answer: B
  63. Which of the following are true concerning short sales of exchange-listed stocks?

    I. Proceeds from the short sale must be kept on deposit with the broker.

    II. Short-sellers must post margin with their broker to cover potential losses on the position.

    III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement. 

    A. I only
    B. I and III only
    C. I and II only
    D. I, II, and III
    Answer: C
  64. Maintenance requirements for margin accounts are set by ____. 

    A. brokerage firms
    B. the SEC
    C. the Federal Reserve System's Board of Governors
    D. the Supreme Court
    Answer: A
  65. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? 

    A. Required that corporations have more independent directors
    B. Required that the CFO personally vouch for the corporation's financial statements
    C. Required that firms could no longer employ investment bankers to sell securities to the public
    D. Required the creation of a new board to oversee the auditing of public companies
    Answer: C
  66. The holding period return (HPR) 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
    Answer B
  67. A security's beta coefficient will be negative if ____________.

    A. its returns are negatively correlated with market-index returns

    B. its returns are positively correlated with market-index returns

    C. its stock price has historically been very stable

    D. market demand for the firm's shares is very low
    Answer: A
  68. The ______ measure of returns ignores compounding.

    A. geometric average

    B. arithmetic average

    C. IRR

    D. dollar-weighted
    Answer: B
  69. Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

    A. Dollar-weighted return

    B. Geometric average return

    C. Arithmetic average return

    D. Mean holding-period return
    Answer: A
  70. Which risk can be partially or fully diversified away as additional securities are added to a portfolio?

    I. Total risk

    II. Systematic risk

    III. Firm-specific risk


    A. I only

    B. I and II only

    C. I, II, and III

    D. I and III
    Answer: D
  71. The strong form of the EMH states that ________ must be reflected in the current stock price.

    A. all security price and volume data

    B. all publicly available information

    C. all information, including inside information

    D. all costless information
    Answer: C
  72. You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH. 

    A. semistrong

    B. strong

    C. weak

    D. perfect
    Answer: C
  73. Choosing stocks by searching for predictable patterns in stock prices is called ________.

    A. fundamental analysis

    B. technical analysis

    C. index management

    D. random-walk investing
    Answer: B
  74. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______.

    A. multiyear analysis

    B. horizon analysis

    C. maturity analysis

    D. reinvestment analysis
    Answer: B
  75. The exchange of one bond for a bond that has similar attributes but is more attractively priced is called ______________.

    A. a substitution swap

    B. an intermarket spread swap

    C. a rate anticipation swap

    D. a pure yield pickup swap
    Answer: A
  76. The writer of a put option _______________. 

    A. agrees to sell shares at a set price if the option holder desires

    B. agrees to buy shares at a set price if the option holder desires

    C. has the right to buy shares at a set price

    D. has the right to sell shares at a set price
    Answer: B
  77. You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. 

    A. long straddle

    B. naked put

    C. protective put

    D. short stroll
    Answer: C
  78. A call option on Brocklehurst Corp. has an exercise price of $35. The current stock price of Brocklehurst Corp. is $32. The call option is _________.

    A. at the money

    B. in the money

    C. out of the money

    D. knocked in
    Answer: C (a call is the opportunity to buy at price $ 35. You want the current price to be above $ 35 to be in the money.)
  79. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

    What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?


    A. Sell a call.

    B. Purchase a put.

    C. Sell a straddle.

    D. Buy a straddle.
    Answer: C
  80. The intrinsic value of a call option is equal to _______________.

    A. the stock price minus the exercise price

    B. the exercise price minus the stock price

    C. the stock price minus the exercise price plus any expected dividends

    D. the exercise price minus the stock price plus any expected dividends
    Answer: A
  81. __________ 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
    Answer: C
  82. Which of the following are financial assets?

    I. Debt securities

    II. Equity securities

    III. Derivative securities


    A. I only

    B. I and II only

    C. II and III only

    D. I, II, and III
    Answer: D
  83. Which of the following are true concerning short sales of exchange-listed stocks?

    I. Proceeds from the short sale must be kept on deposit with the broker.

    II. Short-sellers must post margin with their broker to cover potential losses on the position.

    III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

    A. I only

    B. I and III only

    C. I and II only

    D. I, II, and III
    Answer: C
  84. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.

    A. dollar-weighted return

    B. geometric average return

    C. arithmetic average return

    D. index return
    Answer: C
  85. Beta is a measure of security responsiveness to _________. 

    A. firm-specific risk

    B. diversifiable risk

    C. market risk

    D. unique risk
    Answer: C
  86. The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.

    Which stock is likely to further reduce risk for an investor currently holding her portfolio in a welldiversified portfolio of common stock?

    A. Stock A

    B. Stock

    B C. There is no difference between A or B.

    D. The answer cannot be determined from the information given.
    Answer: Stock A (Man avgör detta genom att titta på den aktie som har störst spridning från market index. Eftersom denna har hög firm-speficic risk kommer den att diversifiera portföljen mer än en aktie som redan föler marknaden.)
  87. According to the capital asset pricing model, a fairly priced security will plot _________.

    A. above the security market line

    B. along the security market line

    C. below the security market line

    D. at no relation to the security market line
    Answer: B
  88. In the world where the CAPM holds, the SML (Security Market Line) is valid for _______________, and the CML (Capital Market Line) is valid for ______________.

    A. only individual assets; well-diversified portfolios only

    B. only well-diversified portfolios; only individual assets

    C. both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets

    D. both well-diversified portfolios and individual assets; well-diversified portfolios only
    Answer: D
  89. The strong form of the EMH states that ________ must be reflected in the current stock price.

    A. all security price and volume data

    B. all publicly available information

    C. all information, including inside information

    D. all costless information
    Answer: C
  90. The invoice price of a bond is the ______.

    A. stated or flat price in a quote sheet plus accrued interest

    B. stated or flat price in a quote sheet minus accrued interest

    C. bid price

    D. average of the bid and ask price
    Answer: A
  91. A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

    A. callable

    B. coupon

    C. puttable

    D. Treasury
    Answer: A
  92. Banks and other financial institutions can best manage interest rate risk by _____________.

    A. maximizing the duration of assets and minimizing the duration of liabilities

    B. minimizing the duration of assets and maximizing the duration of liabilities

    C. matching the durations of their assets and liabilities

    D. matching the maturities of their assets and liabilities
    Answer: C
  93. The writer of a put option _______________.

    A. agrees to sell shares at a set price if the option holder desires

    B. agrees to buy shares at a set price if the option holder desires

    C. has the right to buy shares at a set price

    D. has the right to sell shares at a set price
    Answer: B
  94. An American call option gives the buyer the right to _________.

    A. buy the underlying asset at the exercise price on or before the expiration date

    B. buy the underlying asset at the exercise price only at the expiration date

    C. sell the underlying asset at the exercise price on or before the expiration date

    D. sell the underlying asset at the exercise price only at the expiration date
    Answer: A
  95. A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.

    A. at the money

    B. in the money

    C. out of the money

    D. knocked in
    Answer: B (the call option gives the right to buy the stock at $ 30, so when current price > excercise price of the call option you are in the money)
  96. You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.

    A. covered call

    B. bullish spread

    C. protective put

    D. collar
    Answer: A
  97. The delta of an option is __________.

    A. the change in the dollar value of an option for a dollar change in the price of the underlying asset

    B. the change in the dollar value of the underlying asset for a dollar change in the call price

    C. the percentage change in the value of an option for a 1% change in the value of the underlying asset

    D. the percentage change in the value of the underlying asset for a 1% change in the value of the call
    Answer: A
  98. Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

    A. pension funds

    B. investment banks

    C. savings banks

    D. REITs
    Answer: B
  99. Debt securities promise:

    I. A fixed stream of income

    II. A stream of income that is determined according to a specific formula

    III. A share in the profits of the issuing entity

    A. I only

    B. I or II only

    C. I and III only

    D. II or III only
    Answer: B
  100. The ________ is equal to the square root of the systematic variance divided by the total variance.

    A. covariance

    B. correlation coefficient

    C. standard deviation

    D. reward-to-variability ratio
    Answer: B
  101. Diversification is most effective when security returns are _________.

    A. high

    B. negatively correlated

    C. positively correlated

    D. uncorrelated
    Answer: B (because the negative correlation decreases the total correlation instead of just spreading it)
  102. Beta is a measure of security responsiveness to _________.

    A. firm-specific risk

    B. diversifiable risk

    C. market risk

    D. unique risk
    Answer: C
  103. Standard deviation of portfolio returns is a measure of ___________.

    A. total risk

    B. relative systematic risk

    C. relative nonsystematic risk

    D. relative business risk
    Answer: A
  104. Arbitrage is __________________________.

    A. an example of the law of one price

    B. the creation of riskless profits made possible by relative mispricing among securities

    C. a common opportunity in modern markets

    D. an example of a risky trading strategy based on market forecasting
    Answer: B
  105. 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
    Answer: A
  106. The strong form of the EMH states that ________ must be reflected in the current stock price.

    A. all security price and volume data

    B. all publicly available information

    C. all information, including inside information

    D. all costless information
    Answer: C
  107. 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
    Answer: C (because there is no way you could beat the market)
  108. Floating-rate bonds have a __________ that is adjusted with current market interest rates.

    A. maturity date

    B. coupon payment date

    C. coupon rate

    D. dividend yield
    Answer: C
  109. Duration is a concept that is useful in assessing a bond's _________.

    A. credit risk

    B. liquidity risk

    C. price volatility

    D. convexity risk
    Answer: C
  110. A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________.

    A. decrease; decrease

    B. decrease; increase

    C. increase; decrease

    D. increase; increase
    Answer: A (the writer = den som säljer bort optionen. Den som säljer tjänar pengar om värdet minskar eftersom det gör att köparen av optionen måste betala ett högre pris än current value. Den som köper en put option köper rätten att sälja, och vill sälja till ett excercise-pris, då är det bra som värdet på underliggande tillgång sjunker så att det går att sälja den dyrare)
  111. __________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

    A. Writing an uncovered call option

    B. Writing an uncovered put option

    C. Buying a call option

    D. Buying a put option
    Answer: B
  112. The Black-Scholes option-pricing formula was developed for __________.

    A. American options

    B. European options

    C. Tokyo options

    D. out-of-the-money options
    Answer: B
  113. The hedge ratio is often called the option's _______.

    A. delta

    B. gamma

    C. theta

    D. beta
    Answer: A
  114. The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments.
    True
  115. The annual percentage rate (APR) indicates the amount of interest including the effect of compounding.
    False
  116. Suppose that the one-year spot interest rate is 5%, and the two-year spot interest rate is 3%. According to Expectations Hypothesis, the interest rates are expected to rise next year.
    False
  117. The relationship between the investment term and the interest rate is called the term structure of interest rates.
    True
  118. The interest rates that are quoted by banks and other financial institutions are real interest rates.
    False
  119. Payback rule always gives the same decision as NPV rule.
    False
  120. IRR sums up the attractiveness of investment opportunity without requiring an assumption about the cost of capital.
    True
  121. In capital budgeting decisions, interest expense is typically excluded.
    True
  122. Opportunity cost should be included in the incremental earnings analysis.
    True
  123. Earnings does not include depreciation.
    False
  124. If the market portfolio is efficient, then all securities and portfolios must plot on the SML, not just individual stocks.
    True
  125. Beta corresponds to the slope of the best-fitting line in the plot of the security’s excess returns versus the market excess return.
    True
  126. Small firms’ stocks have historically earned higher average returns than large firms’ stocks.
    True
  127. If market is efficient and the CAPM is correct, positive-alpha trading strategies should not exist.
    True
  128. If the market portfolio is not efficient, then a portfolio of high book-to-market stocks will likely have positive alphas.
    True
  129. A financial option contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date.
    False
  130. An option holder would not exercise an out-of-the-money option
    True
  131. The deeper out-of-the-money the put option is, the less negative its beta, and the lower is its expected return.
    False
  132. We are able to solve for the price of an option without knowing the actual probabilities of the states in the binomial tree model.
    True
  133. An American option cannot be worth more than its European counterpart.
    False
  134. The price of a risk-free zero-coupon bond is always less than its face value (or, trades at a discount) as long as its yield to maturity is positive.
    True
  135. Suppose that the one-year spot interest rate is 5%, and the two-year spot interest rate is 3%. According to Expectations Hypothesis, the interest rates are expected to rise next year.
    False
  136. An immunized portfolio has a zero duration.
    True
  137. The price of a two-year, risk-free, $1000 bond with 10% coupon rate and annual coupon payments is $1000. Then, the yield to maturity of the bond is 10%.
    True
  138. According to the NPV Decision Rule, you have to choose the alternative with the highest NPV
    True
  139. If stock A has a higher volatility than stock B, the expected return of stock A should be higher than that of stock B.
    False
  140. Beta measures both idiosyncratic and systematic risk.
    False
  141. The beta of the market portfolio is one.
    True
  142. It is possible that a stock whose beta is zero has a positive volatility, i.e., the beta of a risky stock can be zero.
    True
  143. ) If the market is weak-form efficient, it is impossible to profit by trading on information in past prices.
    True
  144. If there exists a portfolio which has a higher Sharpe ratio than the market portfolio, the market portfolio is not efficient.
    True
  145. Stock 1 has a beta of 1.5, and Stock 2 has a beta of 2. If you hold a portfolio that consists of 30% Stock 1 and 70% Stock 2, the portfolio’s beta is 1.7.
    False (0.3*1.5+0.7*2=1.85)
  146. Mr. A is a risk-averse person. He prefers a certain cash flow of $1000 to having either $2000 or $0 with an equal probability.
    True
  147. According to the CAPM, any two portfolios with the same expected return should have the same beta.
    True
  148. The value of an option generally increases with the volatility of the underlying stock. (Hint: An underlying stock is the stock on which the price of an option depends.)
    True
  149. If you exercise an out-of-the-money American call option right now, the payoff is positive.
    False (since you are out of the money)
  150. For a given strike price, the value of a call option is higher if the current price of the underlying stock is higher.
    True (since you are allowed to buy at the strike price, if the underlying stock is higher then the price of the option will be higher given the same strike price)
  151. The option delta, ∆, is interpreted as the sensitivity of an option value to changes in the price of the underlying stock.
    True
  152. The annual percentage rate (APR) indicates the amount of interest earned in one year without the effect of compounding.
    True
  153. The effective annual rate (EAR) decreases with the frequency of compounding
    False
  154. The yield to maturity of a corporate bond tends to be low when its credit rating is low (or bad).
    False
  155. The IRR decision rule always give the same answer as the NPV decision rule.
    False
  156. The Sharpe ratio of the riskfree asset is zero.
    True
  157. The SML shows the expected return for each security as a function of its volatility
    False (SML shows the return as a function of Beta)
  158. You can lower your portfolio’s return volatility to zero if you invest in two assets that have no correlation.
    False
  159. By holding an equal-weighted portfolio of all the assets, you can have a market portfolio
    False (not equal-weighted, the market portfolio consists of all assets with no weighing)
  160. The tendency to hang on to losers and sell winners is called as the disposition effect.
    True
  161. The Sharpe ratio of a portfolio increases if we buy stocks with negative alphas.
    False (on the contrary, negative alphas will lower the expected return and thus decrease the Sharpe ratio)
  162. The estimation of the mean is subject to statistical errors which are measured by the standard deviation.
    False
  163. According to the semi-strong form market efficiency, it should not be possible to profit by trading on private information
    False
  164. A financial option contract gives the writer the right (but not the obligation) to purchase or sell an asset at a fixed price at some future date.
    False
  165. Put leverage ratios are always negative.
    True
  166. In case of a futures contract, each counterparty of the contract is highly exposed to counterparty risk.
    False (not each counterpart)
  167. The value of a duration-neutral portfolio would not change if short-term interest rates rise while long-term rates remain stable.
    False
Author
maskenjao
ID
323469
Card Set
TrueFalseFinance
Description
TrueFalseFinance
Updated