TrueFalseNujävlar

  1. Risk neutral investors require risk premium for holding risky assets.
    False
  2. No arbitrage opportunity implies that equivalent investment opportunities must be traded at the same price
    True
  3. 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
  4. Passive investment strategy attempts to identify mispriced securities or to forecast broad market trends
    False
  5. The Sharpe ratio of the market portfolio should be one.
    False
  6. ) Under the CAPM assumptions, stocks of small firms cannot have higher returns than those of big firms.
    False
  7. Empirical evidence shows that the CAPM has a significant predictability of stocks’ returns.
    False
  8. The portfolio weights of a self-financing portfolio sum to one.
    False
  9. The CAPM may be wrong even when the market is efficient.
    True
  10. High book-to-market stocks have historically earned higher average returns than low book-to-market stocks.
    True
  11. 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
  12. An American option cannot be worth less than its European counterpart.
    True
  13. The value of an option generally decreases with the volatility of the stock.
    False
  14. OTC markets have advantages such as ease of trading, high liquidity
    False
  15. Option delta measures the change in the price of the call option given a 1% change in the price of the stock.
    False (it is actually given $ 1 change in the price of the stock)
  16. Debt security is a higher-priority claim and have an ownership interest.
    False
  17. Governments often use equity financing to raise funds.
    False
  18. Financial markets can help channelling resources to efficient use by allocating risk efficiently.
    True
  19. Whenever an arbitrage opportunity appears in financial markets, investors will race to take advantage of it.  Therefore, the law of one price will hold even in the presence of limits to arbitrage such as short sale constraint.
    False
  20. An investor with a linear utility function is risk-averse.
    False
  21. Risk premium increases when the expected return of a risky asset increases and the riskfree rate is fixed.
    True
  22. Under the CAPM assumption, the Sharpe ratio of any asset should be less that of the market portfolio
    True
  23. Portfolio risk falls with diversification, but the power of diversification to reduce risk is limited by common sources of risk such as market risk.
    True
  24. Even with a perfect negative correlation, you cannot completely eliminate risk.
    False
  25. Evidence shows that there exist many trading strategies which generate abnormal returns (or alphas), which are not justified by the systematic risk.
    True
  26. There is no clear theoretical explanation about which factors to choose for the multifactor models.
    True
  27. If market is strong-form efficient, it should not be possible to profit by trading on information in past prices.
    True
  28. Zero coupon Bond makes regular coupon interest payments.
    False (hence they are named ZERO coupon bond)
  29. OTC (over-the-counter) markets are decentralized market where investors trade bilaterally.
    True
  30. If immediately exercised, the payoff of an in-the-money put option would be negative.
    False (the payoff would be 0, it would be a negative profit though, i.e. a loss)
  31. Including options in your portfolio generally increases the risk of your portfolio.
    False
  32. A straddle position can be used to bet against volatility.
    False (not against, but betting on volatility)
  33. APR is the actual amount of interest that will be earned at the end of one year in case of annual compounding.
    True (APR tycks vara effektiv ränta, dvs att den räknar med ränta på ränta-effekten)
  34. In the dividend discount model (DDM), small changes in the assumed dividend growth rate may lead to large changes in the estimated stock price.
    True (DDM ger: value of stock = divident per share / (discount rate - growth rate)
  35. Suppose that there is a gamble that pays $20 or $0 with equal probabilities.   A riskaverse investor is willing to pay $10 for the gamble.
    False
  36. Two portfolios on the same capital allocation line have the same Sharpe ratio.
    True (eftersom CAL-lutningen = Sharpe-ratio)
  37. A risk-free asset pays the same amount of money regardless of the state of the world.
    True
  38. According to Mean-variance analysis, you can rank portfolios by their Sharpe ratios.
    True
  39. With a passive investment strategy, investors should do security analysis.
    False
  40. The efficient frontier dominates all the other possible choices in the investment opportunity set.
    True
  41. Under the CAPM assumptions, the required risk premium and the expected risk premium should be equal in equilibrium.
    True
  42. In Security Market Line (SML), total risk is measured by a stock’s volatility.
    False (it is determined by its β)
  43. Anomalies such as size and value effects may be still consistent with an efficient market.
    True (with the multifactor model of CAPM)
  44. The YTM for a bond is the IRR of investing in the bond and holding it to maturity without any default.
    True
  45. A bond may trade at a discount when coupon rate is less than the yield.
    True
  46. In case of an out-of-the money option, the payoff would be negative if immediately exercised.
    True
  47. Holders of bullish spreads benefit from stock price decreases.
    False
  48. Option delta of a call option measures the change in the price of the call option given a $1 change in the price of the stock.
    True
  49. In a competitive market, you can sell or buy assets without affecting prices.
    True
  50. Valuation Principle states that the value of an asset to the firm or its investors is determined by its competitive market price.
    True
  51. According to the NPV decision rule, you decide to invest in an investment opportunity if the expected cash flows exceed the expected cost of the investment.
    False (you have to consider the PRESENT value of cash flows and costs)
  52. The EAR increases with the frequency of compounding.
    True (EAR = effective annual rate)
  53. Suppose that there is a gamble that pays $20 or $0 with equal probabilities.   A riskneutral investor is willing to bet on it if the gamble costs $8 to do it.
    True
  54. An investor with mean variance preference would prefer an asset with lower risk regardless of its expected return.
    False (that is rather for a risk-neutral person)
  55. Indifference curves of an investor with mean variance preference become steeper with higher risk aversion.
    True
  56. Fluctuations of returns due to firm-specific news are related to systematic risk.
    False
  57. Suppose that there is a representative agent in the economy.  Then, the agent should own all the supply of the risky assets in equilibrium.
    True
  58. Under the CAPM assumptions, the Sharpe ratio of any portfolio cannot be higher than that of the market portfolio.
    True
  59. Under the CAPM assumptions, a passive investment strategy is efficient.
    True
  60. According to the semi-strong form efficiency, fundamental analysis should be useful.
    False
  61. To find anomalies, the CAPM beta is often used to calculate the risk-adjusted returns.
    True
  62. The YTM for a bond is the IRR of investing in the bond and holding it to maturity without any default.
    True
  63. A bond may trade at a discount when coupon rate is less than the yield.
    True (finns att kolla i formelbladet)
  64. 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
  65. Risk premium is the additional return that investors expect to earn to compensate them for a security’s risk
    True
  66. Having many securities with less than perfect return correlations in your portfolio can reduce exposure to firm-specific risk.
    True
  67. Suppose that there is a representative agent in the economy.  Then, the agent should not be borrowing nor lending in equilibrium.
    True
  68. Under the CAPM assumptions, the Sharpe ratio of any portfolio cannot be higher than that of the market portfolio.
    True
  69. Even though the CAPM is wrong, the market may still be efficient.
    True (multifactor models)
  70. In case of zero-coupon bond, it always trades at a discount as long as the YTM is positive.
    True
  71. When a bond trades at a discount, the price of the bond is lower than its face value.
    True (kolla formelblad)
  72. The greater the default risk, the higher the default premium.
    True
  73. The expiration date is the first date on which an option holder has the right to exercise the option.
    False
  74. 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
  75. One of the advantages of OTC market is that the terms of option contracts can be tailored.
    True
  76. Fluctuations of returns due to firm-specific news are diversifiable.
    True
  77. The CAPM implies that the beta of the market portfolio is equal to one
    True
  78. The CAPM implies that the beta of the risk-free asset is zero.
    True
  79. If the market is efficient, stock prices should slowly increase for an extended period of time after good earnings are announced.
    False
  80. The default premium of a risk-free bond is equal to zero.
    True
  81. The writer (or seller) of a put option has the right to sell the underlying asset.
    False
  82. Risk neutral investors require risk premium for holding risky assets.
    False
  83. 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
  84. Whenever an arbitrage opportunity appears in financial markets, investors will race to take advantage of it.  Therefore, the law of one price will hold even in the presence of limits to arbitrage such as short sale constraint.
    False
  85. There is no clear theoretical explanation about which factors to choose for the multifactor models.
    True
  86. According to the Law of One Price, equivalent investment opportunities must trade for the same price.
    True
  87. The yield to maturity of a corporate bond tends to be low when its credit rating is low (or bad).
    False
  88. Risk-averse investors prefer to have a safe income rather than a risky one of the same average amount
    True
  89. The SML shows the expected return for each security as a function of its volatility
    False (den kollar på β inte volatility σ)
  90. You can lower your portfolio’s return volatility to zero if you invest in two assets that have no correlation.
    False
  91. By holding an equal-weighted portfolio of all the assets, you can have a market portfolio.
    False
  92. 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
  93. The Sharpe ratio of a portfolio increases if we buy stocks with negative alphas.
    False
  94. Total risk of a security is measured by the security’s beta.
    False (beta mäter endast market risk)
  95. The underlying asset of a financial derivative should be tradable.
    False
  96. 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
  97. A call option is equivalent to a levered portfolio of the underlying asset
    True
  98. Calculating the implied volatility of a stock using option prices requires a time-series of return volatilities of the stock.
    False (det är ju just volatility som är den okända)
Author
maskenjao
ID
324617
Card Set
TrueFalseNujävlar
Description
tjena
Updated