Question 1

A significant portion of the small-firm premium is earned in the first two weeks of the calendar year.

Accepted Answer

This statement is true. The January effect, which is the tendency for small-cap stocks to outperform the broader market in January, is a well-known phenomenon that contributes to the small-firm premium earned at the beginning of the year. Additionally, investors may be more willing to take on risk in the new year, leading to increased demand for small-cap stocks and higher prices.

Question 2

Which of the following statements is true?
A) An increase in coupons increases the duration of the bond.
B) The longer the maturity of a bond, the greater will be its duration.
C) An increase in the interest rate decreases the duration of the bond.
D) Duration is a measure of the sensitivity of the equities.

Accepted Answer

Duration is inversely related to interest rates; as interest rates increase, the present value of future cash flows decreases, leading to a decrease in duration.

Question 3

Which of the following investment strategies is inconsistent with a "contrarian" philosophy?
A) buying low, selling high
B) buying when odd-lot buying is lower than normal
C) buying when mutual fund cash positions are low
D) buying when most investment advisory services are bearish
E) selling after a market crash or decline

Accepted Answer

Selling after a market crash or decline is not a contrarian strategy, as it is following the herd mentality and selling when most investors are also selling. A contrarian strategy involves buying when others are selling, and selling when others are buying, to take advantage of market inefficiencies and mispricing. The other options (A, B, C, D) are consistent with a contrarian philosophy, as they involve buying securities that are undervalued or unloved by the market.

Question 4

Studies of stock splits indicate that one could make excess returns by investing in stocks after splits occur.

Accepted Answer

Studies generally show that while stocks may experience a temporary increase in value after a split due to perceived affordability and increased liquidity, consistently making excess returns solely based on stock splits is not supported by evidence. Over the long term, returns are more closely tied to the company's fundamental performance rather than the split itself.

Question 5

A common stock is expected to generate an end-of-period dividend of $5 and an end-of-period price of $62.If this security has a beta coefficient of 1.3,the risk-free interest rate is 10%,and the expected return on the market portfolio is 19%,then what is the value of this security today?
A) $55.50
B) $59.98
C) $55.05
D) $56.30

Accepted Answer

The value of the security today can be calculated using the dividend discount model (DDM) for a one-period model, which is $ P_0 = \frac{D_1 + P_1}{1 + k} $, where $P_0$ is the price of the stock today, $D_1$ is the dividend at the end of the period, $P_1$ is the price of the stock at the end of the period, and $k$ is the required rate of return. The required rate of return can be calculated using the Capital Asset Pricing Model (CAPM), which is $ k = r_f + \beta (r_m - r_f) $, where $r_f$ is the risk-free rate, $\beta$ is the beta coefficient, and $r_m$ is the expected return on the market portfolio. Substituting the given values:- $r_f = 10\%$- $\beta = 1.3$- $r_m = 19\%$The required rate of return ($k$) is $10\% + 1.3(19\% - 10\%) = 10\% + 1.3(9\%) = 10\% + 11.7\% = 21.7\%$.Now, substituting into the DDM:$ P_0 = \frac{5 + 62}{1 + 0.217} = \frac{67}{1.217} \approx 55.05 $.Therefore, the value of the security today is approximately $55.05.

Question 6

Studies show that stocks with high dividend yields and low P/E ratios earn excess returns.

Accepted Answer

The answer of Studies show that stocks with high dividend...

Question 7

A high positive serial correlation in prices would imply market inefficiency.

Accepted Answer

A high positive serial correlation in prices indicates that past prices have a strong influence on present prices, which implies that market participants are not fully incorporating all available information into their investment decisions. This suggests that the market may be inefficient, as prices may not accurately reflect all available information.

Question 8

Which of the following statements is true of warrants?
A) A warrant is almost identical to a put option.
B) When warrants are exercised the number of warrants still outstanding increases.
C) A warrant is a combination of call and put options.
D) A warrant is issued by the corporation rather than another investor.

Accepted Answer

A warrant is a security issued by a corporation that gives the holder the right to buy the company's stock at a certain price within a specified period. Unlike options, which are typically traded between investors, warrants are directly issued by the corporation. When a warrant is exercised, new shares of stock are issued by the corporation, increasing the total number of outstanding shares. Warrants are similar to call options but are issued by the company rather than an investor.

Question 9

Which of the following statement is correct with regard to bond valuation?
A) All else equal, the longer the time to maturity, the smaller the interest rate risk.
B) All else equal, the higher the coupon rate, the greater the interest rate risk
C) Spot interest rates are yields to maturity on loan or bonds that pay multiple cash flows to the investor.
D) Bond price will fall as the market interest rate rise, as the present value of the bond's future cash flows is obtained by discounting at a higher interest rate.

Accepted Answer

Bond price is inversely related to market interest rates. This is because a higher discount rate reduces the present value of future cash flows, resulting in a lower bond price. The other statements are incorrect. A longer time to maturity increases interest rate risk, as it exposes the bond to fluctuations in interest rates for a longer period. A higher coupon rate reduces interest rate risk, as it enhances the periodic cash flows to the investor. Spot interest rates are yields to maturity on zero-coupon bonds.

Question 10

Tests of market efficiency tend to
A) look for statistical dependencies that exist in price changes over time.
B) measure the nature of the impact of new information on security prices as that new information becomes available.
C) search for trading systems that might be able to generate supernormal profits.
D) all of the above

Accepted Answer

Tests of market efficiency can involve all of the above methods. Option A involves testing for the presence of any predictable patterns or trends in price changes over time, which can imply market inefficiencies. Option B involves examining how quickly and accurately new information is incorporated into security prices, which is a key aspect of market efficiency. Option C involves searching for trading strategies or systems that can consistently generate returns higher than what would be expected based on risk factors, which is not possible in efficient markets.

Question 11

Which of the following statements is (or are)true of the efficient markets hypothesis?
A) It implies perfect forecasting ability.
B) It implies that prices reflect all available information.
C) It results from keen competition among investors.
D) It implies that market is irrational.
E) It implies that prices do not fluctuate.

Accepted Answer

The efficient markets hypothesis suggests that asset prices reflect all available information due to the competition among investors, but it does not imply perfect forecasting ability, irrationality, or that prices do not fluctuate.

Question 12

In a strongly efficient market,the price of a firm's stock should not change if no new information comes out about the firm.

Accepted Answer

The answer of In a strongly efficient market,the price of...

Question 13

If expectation theory holds then:
A) a flat yield curve is an indication that long-run rates are expected to increase.
B) investors must be offered a higher expected return to hold a bond longer
C) the yield curve cannot be downward sloping
D) then an upward sloping yield curve is an indication that short-term rates are expected to increase.

Accepted Answer

Expectation theory suggests that an upward sloping yield curve indicates that investors expect future short-term interest rates to increase. This is because the theory posits that long-term interest rates are an average of current and expected future short-term rates.

Question 14

In a strongly efficient market,no mutual fund manager will beat the market in any period.

Accepted Answer

While it's challenging to consistently outperform the market, especially in strongly efficient markets where all information is already reflected in stock prices, there are instances where mutual fund managers might beat the market due to skill, luck, or taking on additional risks that happen to pay off in a given period.

Question 15

Studies of firms classified on the basis of P/E ratios come to the conclusion that low-P/E-ratio stocks earn much higher returns,after adjusting for risk,than high-P/E-ratio stocks.This is because
A) low-P/E-ratio stocks are riskier than high-P/E-ratio stocks.
B) investors like low-P/E-ratio stocks.
C) low-P/E-ratio stocks are more likely to be undervalued.

Accepted Answer

Studies suggest that the primary reason for low-P/E-ratio stocks to earn higher returns, after adjusting for risk, than high-P/E-ratio stocks is that they are more likely to be undervalued. The market may have overlooked these stocks or underestimated their future earnings potential, leading to a lower P/E ratio. As a result, as the market corrects its mistakes and realizes the true value of these stocks, their share prices tend to increase, setting the stage for higher returns.

Question 16

Which of the following is not a general conclusion of studies of stock prices?
A) The serial correlation in daily returns in U.S. stocks is positive.
B) The serial correlation in longer period returns (monthly, annual) in U.S. stocks is negative.
C) Filter rules greater than 1% generally do not make money.
D) Stocks that have done well in the past are also likely to do well in the future.
E) There are more runs in daily stock prices than we would expect to find under a random walk.

Accepted Answer

While the other options are generally supported by studies of stock prices, the idea that past performance can predict future performance is not universally accepted or proven. In fact, some studies suggest that the relationship between past and future stock performance is weak or nonexistent.

Question 17

All other things equal,which of the following bond price is more sensitive to interest rate changes?
A) a 10 year bond with a 10% coupon
B) a 20 year bond with a 7% coupon
C) a 20 year bond with a 10% coupon
D) a 30 year bond with 7% coupon

Accepted Answer

A bond's price sensitivity to interest rate changes, or its duration, increases with longer maturities and lower coupon rates. Among the options, a 30-year bond with a 7% coupon has the longest maturity and one of the lower coupon rates, making it the most sensitive to interest rate changes.

Question 18

Which of the following is an attribute of futures contract?
A) There are no limits on the size of the position that any investor can take in financial futures markets.
B) Futures contracts are marked to the market on a daily basis
C) Margins for futures are more relative to other types of markets.
D) Almost all futures positions are settled by delivery.

Accepted Answer

Futures contracts are marked to the market on a daily basis, which means the gains and losses are settled every day based on the current market prices. This allows investors to manage their risk and margin requirements more effectively. Option A is incorrect because there are position limits set by the exchange to control excessive speculation. Option C is incorrect because margins for futures are usually higher than other markets due to their high leverage. Option D is incorrect because most futures contracts are settled in cash instead of physical delivery.

Question 19

Which of the following is an implication of market efficiency?
A) Resources are allocated among firms that put them to the best use.
B) No investor will do better than the S&P 500 in any time period.
C) No investor will do better than the S&P 500 consistently after adjusting for risk.
D) No investor will do better than the S&P 500 consistently after adjusting for risk and transactions costs.

Accepted Answer

Market efficiency implies that all available information is reflected in stock prices, making it difficult for investors to consistently outperform the market after adjusting for risk and transaction costs. Therefore, the correct statement is that no investor will do better than the S&P 500 consistently after adjusting for risk and transaction costs. Choices A and B are not implications of market efficiency, while choice C is partially correct but does not take transaction costs into account.

Question 20

The fact that superior returns can not be made by selling stocks that cut dividends is evidence of:
A) weak-form efficiency.
B) semi-strong-form efficiency.
C) strong-form efficiency.

Accepted Answer

The fact that superior returns cannot be made by selling stocks that cut dividends is evidence of semi-strong-form efficiency. This form of market efficiency suggests that all publicly available information is already reflected in stock prices, including dividend announcements. Therefore, investors cannot achieve superior returns through trading on such information.

Quiz 4: Security Analysis and Portfolio Theory

A significant portion of the small-firm premium is earned in the first two weeks of the calendar year.

Which of the following statements is true?

Which of the following investment strategies is inconsistent with a "contrarian" philosophy?

Studies of stock splits indicate that one could make excess returns by investing in stocks after splits occur.

A common stock is expected to generate an end-of-period dividend of $5 and an end-of-period price of $62.If this security has a beta coefficient of 1.3,the risk-free interest rate is 10%,and the expected return on the market portfolio is 19%,then what is the value of this security today?

Studies show that stocks with high dividend yields and low P/E ratios earn excess returns.

A high positive serial correlation in prices would imply market inefficiency.

Which of the following statements is true of warrants?

Which of the following statement is correct with regard to bond valuation?

Tests of market efficiency tend to

Which of the following statements is (or are) true of the efficient markets hypothesis?

In a strongly efficient market,the price of a firm's stock should not change if no new information comes out about the firm.

If expectation theory holds then:

In a strongly efficient market,no mutual fund manager will beat the market in any period.

Studies of firms classified on the basis of P/E ratios come to the conclusion that low-P/E-ratio stocks earn much higher returns,after adjusting for risk,than high-P/E-ratio stocks.This is because

Which of the following is not a general conclusion of studies of stock prices?

All other things equal,which of the following bond price is more sensitive to interest rate changes?

Which of the following is an attribute of futures contract?

Which of the following is an implication of market efficiency?

The fact that superior returns can not be made by selling stocks that cut dividends is evidence of: