Risk neutral investors require risk premium for holding risky assets.
False
No arbitrage opportunity implies that equivalent investment opportunities must be traded at the same price
True
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
Passive investment strategy attempts to identify mispriced securities or to forecast broad market trends
False
The Sharpe ratio of the market portfolio should be one.
False
) Under the CAPM assumptions, stocks of small firms cannot have higher returns than those of big firms.
False
Empirical evidence shows that the CAPM has a significant predictability of stocks’ returns.
False
The portfolio weights of a self-financing portfolio sum to one.
False
The CAPM may be wrong even when the market is efficient.
True
High book-to-market stocks have historically earned higher average returns than low book-to-market stocks.
True
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
An American option cannot be worth less than its European counterpart.
True
The value of an option generally decreases with the volatility of the stock.
False
OTC markets have advantages such as ease of trading, high liquidity
False
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)
Debt security is a higher-priority claim and have an ownership interest.
False
Governments often use equity financing to raise funds.
False
Financial markets can help channelling resources to efficient use by allocating risk efficiently.
True
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
An investor with a linear utility function is risk-averse.
False
Risk premium increases when the expected return of a risky asset increases and the riskfree rate is fixed.
True
Under the CAPM assumption, the Sharpe ratio of any asset should be less that of the market portfolio
True
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
Even with a perfect negative correlation, you cannot completely eliminate risk.
False
Evidence shows that there exist many trading strategies which generate abnormal returns (or alphas), which are not justified by the systematic risk.
True
There is no clear theoretical explanation about which factors to choose for the multifactor models.
True
If market is strong-form efficient, it should not be possible to profit by trading on information in past prices.
True
Zero coupon Bond makes regular coupon interest payments.
False (hence they are named ZERO coupon bond)
OTC (over-the-counter) markets are decentralized market where investors trade bilaterally.
True
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)
Including options in your portfolio generally increases the risk of your portfolio.
False
A straddle position can be used to bet against volatility.
False (not against, but betting on volatility)
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)
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)
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
Two portfolios on the same capital allocation line have the same Sharpe ratio.
True (eftersom CAL-lutningen = Sharpe-ratio)
A risk-free asset pays the same amount of money regardless of the state of the world.
True
According to Mean-variance analysis, you can rank portfolios by their Sharpe ratios.
True
With a passive investment strategy, investors should do security analysis.
False
The efficient frontier dominates all the other possible choices in the investment opportunity set.
True
Under the CAPM assumptions, the required risk premium and the expected risk premium should be equal in equilibrium.
True
In Security Market Line (SML), total risk is measured by a stock’s volatility.
False (it is determined by its β)
Anomalies such as size and value effects may be still consistent with an efficient market.
True (with the multifactor model of CAPM)
The YTM for a bond is the IRR of investing in the bond and holding it to maturity without any default.
True
A bond may trade at a discount when coupon rate is less than the yield.
True
In case of an out-of-the money option, the payoff would be negative if immediately exercised.
True
Holders of bullish spreads benefit from stock price decreases.
False
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
In a competitive market, you can sell or buy assets without affecting prices.
True
Valuation Principle states that the value of an asset to the firm or its investors is determined by its competitive market price.
True
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)
The EAR increases with the frequency of compounding.
True (EAR = effective annual rate)
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
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)
Indifference curves of an investor with mean variance preference become steeper with higher risk aversion.
True
Fluctuations of returns due to firm-specific news are related to systematic risk.
False
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
Under the CAPM assumptions, the Sharpe ratio of any portfolio cannot be higher than that of the market portfolio.
True
Under the CAPM assumptions, a passive investment strategy is efficient.
True
According to the semi-strong form efficiency, fundamental analysis should be useful.
False
To find anomalies, the CAPM beta is often used to calculate the risk-adjusted returns.
True
The YTM for a bond is the IRR of investing in the bond and holding it to maturity without any default.
True
A bond may trade at a discount when coupon rate is less than the yield.
True (finns att kolla i formelbladet)
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
Risk premium is the additional return that investors expect to earn to compensate them for a security’s risk
True
Having many securities with less than perfect return correlations in your portfolio can reduce exposure to firm-specific risk.
True
Suppose that there is a representative agent in the economy. Then, the agent should not be borrowing nor lending in equilibrium.
True
Under the CAPM assumptions, the Sharpe ratio of any portfolio cannot be higher than that of the market portfolio.
True
Even though the CAPM is wrong, the market may still be efficient.
True (multifactor models)
In case of zero-coupon bond, it always trades at a discount as long as the YTM is positive.
True
When a bond trades at a discount, the price of the bond is lower than its face value.
True (kolla formelblad)
The greater the default risk, the higher the default premium.
True
The expiration date is the first date on which an option holder has the right to exercise the option.
False
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
One of the advantages of OTC market is that the terms of option contracts can be tailored.
True
Fluctuations of returns due to firm-specific news are diversifiable.
True
The CAPM implies that the beta of the market portfolio is equal to one
True
The CAPM implies that the beta of the risk-free asset is zero.
True
If the market is efficient, stock prices should slowly increase for an extended period of time after good earnings are announced.
False
The default premium of a risk-free bond is equal to zero.
True
The writer (or seller) of a put option has the right to sell the underlying asset.
False
Risk neutral investors require risk premium for holding risky assets.
False
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
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
There is no clear theoretical explanation about which factors to choose for the multifactor models.
True
According to the Law of One Price, equivalent investment opportunities must trade for the same price.
True
The yield to maturity of a corporate bond tends to be low when its credit rating is low (or bad).
False
Risk-averse investors prefer to have a safe income rather than a risky one of the same average amount
True
The SML shows the expected return for each security as a function of its volatility
False (den kollar på β inte volatility σ)
You can lower your portfolio’s return volatility to zero if you invest in two assets that have no correlation.
False
By holding an equal-weighted portfolio of all the assets, you can have a market portfolio.
False
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
The Sharpe ratio of a portfolio increases if we buy stocks with negative alphas.
False
Total risk of a security is measured by the security’s beta.
False (beta mäter endast market risk)
The underlying asset of a financial derivative should be tradable.
False
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
A call option is equivalent to a levered portfolio of the underlying asset
True
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)