Finance II MCQ - MCQ, teoretiska frågor PDF

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MCQ, teoretiska frågor...

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Multiple Choice Questions (inte räknefrågor) Text = påstående/fråga Text = rätt svar Text = förklaring Week 1, Quiz 1 1. Asset allocation refers to the  allocation of assets into broad asset classes. Asset allocation refers to the allocation of assets into broad asset classes 2. Investors in closed-end funds who wish to liquidate their positions must sell their share through a broker. 3. Which of the following would increase the net asset value of a mutual fund share, assuming all other things remain unchanged? An increase in the value of one of the fund’s stocks. 4. Which of the following orders is most useful to short sellers who want to limit their potential losses? Stop-buy order. By issuing a stop-order, the short seller can limit potential losses by assuring that the stock will be purchased (and the short position closed) if the price increases to a certain level. 5. The bid price of a T-bill in the secondary market is the  price at which the dealer in T-bills is willing to buy the bill. T-bills are sold in the secondary market via dealers; the bid price quoted in the financial press is the price at which the dealer is willing to buy the bill. 6. The means by which individuals hold their claims on real assets in a well-developed economy are financial  assets. Financial assets allocate the wealth of the economy. Example: it is easier for an individual to own shares of an auto company than to own an auto company directly 7. Stocks and bonds is/are  financial assets. Machines and knowledge are real assets; stocks and bonds are financial assets, which represents claims on real assets.

Week 1, Quiz 2 1. Most actively managed mutual funds, when compared to a market index such as the Wilshire 5000 do  not generally outperform the market. Most actively managed mutual funds fail to equal the return earned by index funds, possibly due to higher transactions costs. 2. With regard to a futures contract, the long position is held by the trader who commits to purchasing the commodity on the delivery date. The trader agreeing to buy the underlying asset is said to be long the contract whereas the trader agreeing to deliver the underlying asset is said to be short the contract. 3. The material wealth of a society is a function of all real assets. The material wealth of a society is a function all real assets. Real assets are assets that are used to produce goods and services such as land, buildings and equipment. Financial assets on the other hand only represents claims to income generated by real assets and therefore they do not contribute to the material wealth of a society. 4. Which of the following securities is a money market instrument? Commercial  paper Only commercial paper is a money market security. The others are capital market instruments. 5. Which of the following statements is false? A market order is an order to buy or sell a stock on a specific exchange (market). All of the order descriptions above are correct except: A market order is an order to buy or sell a stock on a specific exchange (market). 6. Which of the following orders instructs the broker to buy at the current market price? Market order Market orders are to be executed immediately at the best prevailing price. 7. Which of the following orders instructs the broker to buy at or below a specified price? Limit-buy order. Limit- buy order are to be executed if the market price decreases to the specified limit price.

Week 2, Quiz 1 1. Kurtosis is a measure of the normality of a distribution by measuring the fatness of it’s tails. 2. Which of the following portfolio construction methods starts with asset allocation? Top down. Bottom-up refers to using security analysis to find securities that are attractively priced. Top-down refers to using asset allocation as a starting point. 3. Which of the following portfolio construction methods starts with security analysis? Bottom-up Bottom-up refers to using security analysis to find securities that are attractively priced. Top-down refers to using asset allocation as a starting point. 4. Security selection refers to choosing which securities to hold based on their valuation. Security selection refers to choosing which securities to hold based on their valuation. 5. When comparing investments with different horizons the effective  annual rate provides the more accurate comparison. The effective annual rate provides the more accurate comparison of investments with different horizons because it expresses the returns in a common period. 6. Other things equal, diversification is most effective when securities’  returns are negatively correlated. Negative correlation among securities results in the greatest reduction of portfolio risk, which is the goal of diversification. 7. Which of the following measures of risk best highlights the potential loss from extreme negative returns? Value at Risk (VaR) Only VaR measures potential loss from extreme negative returns.

Week 2, Quiz 2 1. Skewness is a measure of the  normality of a distribution by measuring if it is symmetric. Skewness is a measure of the normality of a distribution. A negative Skewness implies that a greater portion of the deviations is negative and thus, the standard deviation underestimates the risk. A positive skewness on the other hand implies that standard deviation overestimates the risk. A skewness of zero implies that the distribution is normal and thus, the standard deviation is an appropriate measure of risk. 2. Historical records regarding return on stocks, Treasury bonds, and Treasury billd between 1926 and 2009 show that stocks  offered investors greater rates of return than bonds and bills. The historical data show that, as expected, stocks offer a greater return and greater volatility than the other investment alternatives. Inflation sometimes exceeded the T-bill return 3. As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation? It  decreases at a decreasing rate. Statman's study, showed that the risk of the portfolio would decrease as random stocks were added. At first the risk decreases quickly, but then the rate of decrease slows substantially, as shown in Figure 7.2 in the book. The minimum portfolio risk in the study was 19.2%. 4. Practitioners often use a 5% VaR, meaning that 95% of returns will exceed the VaR, and 5% will be worse. 5. The unsystematic risk of a specific security results  from factors unique to the firm. Unsystematic (or diversifiable or firm-specific) risk refers to factors unique to the firm. Such risk may be diversified away; however, market risk will remain. 6. The change from a straight to a kinked capital allocation line is a result of: borrowing  rate exceeding lending rate. The linear capital allocation line assumes that the investor may borrow and lend at the same rate (the risk-free rate), which obviously is not true. Relaxing this assumption and incorporating the higher borrowing rates into the model results in the kinked capital allocation line.

Week 3, Quiz 1 1. One of the assumptions of the CAPM is that investors exhibit myopic behaviors. What does this mean? They plan for one identical holding period. Myopic behavior is shortsighted, with no concern for medium-term or long-term implications. 2. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases directly  with beta. The market rewards systematic risk, which is measured by beta, and thus, the risk premium on a stock or portfolio varies directly with beta. 3. What is the expected return of a zero-beta security? The risk-free rate.   - rf ) = rf . E(RS ) = rf  + 0(RM

4. If you believe in the semistrong form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. The semistrong form of the EMH maintains that stock prices immediately reflect all historical and current public information, but not inside information. 5. If you believe in the weak form of the EMH, you believe that stock prices only 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. The information described above is market data, which is the data set for the weak form of market efficiency. The semistrong form includes the above plus all other public information. The strong form includes all public and private information. 6. If you believe in the reversal effect, you should buy stocks this period that performed poorly last period. The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period, and vice versa. 7. Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of the  β of the asset

Week 3, Quiz 2 1. A farmer that grows strawberries will after the summer need to purchase new machinery, and is therefore a bit concerned about what the demand will be like around midsummer. The farmer ask you for help and wonder if you know a way of insuring the profits. The correlation between strawberry- and umbrella- prices are -1. Which of the following contracts would you recommend the farmer: Go short on forward contract(s) on strawberries. 2. What two types of investor irrationalities does an investor that use the last month’s return to determine the attractiveness of stocks suffer from? Forecasting  error and sample size neglection. 3. The yield curve shows at any point in time the  relationship between yield on a bond and the time to maturity on the bond.

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