2
FINA 5320 - Exam 3 Theoretical Questions with
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verified detailed answers || ||
The excess return is computed by ____ the average return for the investment
|| || || || || || || || || || || ||
a. subtracting the inflation rate from
|| || || || || ||
b. adding the inflation rate to
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c. subtracting the average return on the US treasury bill from
|| || || || || || || || || || ||
d. adding the average return on the us treasury bill to
|| || || || || || || || || || ||
e. subtracting the average return on long-term government bonds from - ✔✔c. subtracting the
|| || || || || || || || || || || || || ||
average return on the US treasury bill from
|| || || || || || ||
The variance of returns is computed by dividing the sum of the
|| || || || || || || || || || ||
a. squared deviations by the number of returns minus one
|| || || || || || || || || ||
b. average returns by the number of returns minus one
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c. average returns by the number of returns plus one
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d. squared deviations by the average rate of return
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e. squared deviations by the number of returns plus one - ✔✔a. squared deviations by the number
|| || || || || || || || || || || || || || || || ||
of returns minus one
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In estimating the future equity risk premium, it is important to include assumptions about the
|| || || || || || || || || || || || || ||
a. historical distribution of returns on derivative securities only
|| || || || || || || || ||
b. future risk environment only
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c. amount of risk aversion of future investors only
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d. historical distribution of returns on derivative securities and the future risk environment
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e. future risk environment and the amount of risk aversion of future investors - ✔✔e. future risk
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environment and the amount of risk aversion of future investors || || || || || || || || ||
Which one of these is a measure of the interrelationship between two securities?
|| || || || || || || || || || || ||
,2
a. covariance
|| ||
b. duration
|| ||
c. standard deviation
|| || ||
d. alpha
|| ||
e. variance - ✔✔a. covariance
|| || || ||
Which one of the following statements is correct concerning the expected rate of return on an
|| || || || || || || || || || || || || || || ||
individual stock given various states of the economy? || || || || || || ||
a. the expected return is a geometric average where the probabilities of the economic states are
|| || || || || || || || || || || || || || || ||
used as the exponential powers
|| || || || ||
b. the expected return is an arithmetic average of the individual returns for each state of the
|| || || || || || || || || || || || || || || || ||
economy ||
c. the expected return is a weighted average where the probabilities of the economic states are
|| || || || || || || || || || || || || || || ||
used as the weights || || || ||
d. the expected return is equal to the summation of the values computed by dividing the expected
|| || || || || || || || || || || || || || || || ||
return for each economic state by the probability of the state
|| || || || || || || || || || ||
e. as long as the total probabilities of the economic states equal 100%, then the expected return on
|| || || || || || || || || || || || || || || || || ||
the stock is a geometric average of the expected returns for each economic state - ✔✔c. the
|| || || || || || || || || || || || || || || || ||
expected return is a weighted average where the probabilities of the economic states are used as
|| || || || || || || || || || || || || || || ||
the weights
||
You have plotted the monthly returns for 2 securities for the past 5 years on the same graph. The
|| || || || || || || || || || || || || || || || || || ||
pattern of the movements of each of the 2 securities generally rose and fell to the same degree in
|| || || || || || || || || || || || || || || || || || ||
step with each other. This indicates the securities have:
|| || || || || || || ||
a. no correlation with each other
|| || || || || ||
b. a weak negative correlation
|| || || || ||
c. a strong negative correlation
|| || || || ||
d. a strong positive correlation
|| || || || ||
e. a weak positive correlation - ✔✔d. a strong positive correlation
|| || || || || || || || || ||
,2
The range of possible correlations between 2 securities is defined as
|| || || || || || || || || ||
a. 0 to +1
|| || || ||
b. 0 to -1
|| || || ||
c. >=0|| ||
d. <= 1|| || ||
e +1 to -1 - ✔✔e +1 to -1
|| || || || || || || ||
An efficient capital market is one in which
|| || || || || || ||
a. brokerage commissions are zero
|| || || || ||
b. taxes are irrelevant
|| || || ||
c. securities always offer a positive NPV
|| || || || || || ||
d. all investments earn the market rate of return
|| || || || || || || || ||
e. security prices reflect all available information - ✔✔e. security prices reflect all available
|| || || || || || || || || || || || || ||
information
Individuals that continually monitor the financial markets seeking mispriced securities || || || || || || || || || ||
a. tend to make substantial profits on a daily basis
|| || || || || || || || || ||
b. tend to make the markets more efficient
|| || || || || || || ||
c. are never able to find a security that is temporarily mispriced
|| || || || || || || || || || || ||
d. are always quite successful using only well-known public information as their basis of
|| || || || || || || || || || || || || ||
evaluation ||
e. are always quite successful using only historical price information as their basis of evaluation -
|| || || || || || || || || || || || || || || ||
✔✔b. tend to make the markets more efficient
|| || || || || || ||
The hypothesis that market prices reflect all available information of every kind is called _____
|| || || || || || || || || || || || || || ||
form efficiency || ||
a. open
|| ||
b. strong
|| ||
, 2
c. semistrong
|| ||
d weak
|| ||
e. stable - ✔✔b. strong
|| || || ||
Empirical evidence suggests that || || || ||
a. prices may not reflect their true underlying value
|| || || || || || || || ||
b. financial managers lack any ability to correctly time stock repurchases
|| || || || || || || || || || ||
c. managers may profitably speculate in foreign currency
|| || || || || || || ||
d. managers cannot boost stock prices by changing their accounting methods
|| || || || || || || || || || ||
e. wise accounting choices can impact a firms stock price - ✔✔d. managers cannot boost stock
|| || || || || || || || || || || || || || || ||
prices by changing their accounting methods
|| || || || ||
If Financial markets are efficient, then attempting to accurately predict interest rates is:
|| || || || || || || || || || || || ||
a. an endeavor best left to corporate executives
|| || || || || || || ||
b. a relatively easy and accurate exercise
|| || || || || || ||
c. a waste of good time
|| || || || || ||
d. relatively easy to do if you have a general understanding of finance and economics
|| || || || || || || || || || || || || || ||
e. a little tricky but wise managers tend to success at it on an ongoing basis - ✔✔c. a waste of
|| || || || || || || || || || || || || || || || || || || || ||
good time ||
The US securities and exchange commission periodically charges individuals with insider trading
|| || || || || || || || || || || ||
and claims those individuals have made unfair profits. Base on this fact, you would tend to argue
|| || || || || || || || || || || || || || || || ||
that the financial markets are at best ___form efficiency
|| || || || || || || || ||
a. weak
|| ||
b. semiweak
|| ||
c. semistrong
|| ||
d. strong
|| ||
e. perfect - ✔✔c. semistrong
|| || || ||
FINA 5320 - Exam 3 Theoretical Questions with
|| || || || || || || ||
verified detailed answers || ||
The excess return is computed by ____ the average return for the investment
|| || || || || || || || || || || ||
a. subtracting the inflation rate from
|| || || || || ||
b. adding the inflation rate to
|| || || || || ||
c. subtracting the average return on the US treasury bill from
|| || || || || || || || || || ||
d. adding the average return on the us treasury bill to
|| || || || || || || || || || ||
e. subtracting the average return on long-term government bonds from - ✔✔c. subtracting the
|| || || || || || || || || || || || || ||
average return on the US treasury bill from
|| || || || || || ||
The variance of returns is computed by dividing the sum of the
|| || || || || || || || || || ||
a. squared deviations by the number of returns minus one
|| || || || || || || || || ||
b. average returns by the number of returns minus one
|| || || || || || || || || ||
c. average returns by the number of returns plus one
|| || || || || || || || || ||
d. squared deviations by the average rate of return
|| || || || || || || || ||
e. squared deviations by the number of returns plus one - ✔✔a. squared deviations by the number
|| || || || || || || || || || || || || || || || ||
of returns minus one
|| || ||
In estimating the future equity risk premium, it is important to include assumptions about the
|| || || || || || || || || || || || || ||
a. historical distribution of returns on derivative securities only
|| || || || || || || || ||
b. future risk environment only
|| || || || ||
c. amount of risk aversion of future investors only
|| || || || || || || || ||
d. historical distribution of returns on derivative securities and the future risk environment
|| || || || || || || || || || || || ||
e. future risk environment and the amount of risk aversion of future investors - ✔✔e. future risk
|| || || || || || || || || || || || || || || || ||
environment and the amount of risk aversion of future investors || || || || || || || || ||
Which one of these is a measure of the interrelationship between two securities?
|| || || || || || || || || || || ||
,2
a. covariance
|| ||
b. duration
|| ||
c. standard deviation
|| || ||
d. alpha
|| ||
e. variance - ✔✔a. covariance
|| || || ||
Which one of the following statements is correct concerning the expected rate of return on an
|| || || || || || || || || || || || || || || ||
individual stock given various states of the economy? || || || || || || ||
a. the expected return is a geometric average where the probabilities of the economic states are
|| || || || || || || || || || || || || || || ||
used as the exponential powers
|| || || || ||
b. the expected return is an arithmetic average of the individual returns for each state of the
|| || || || || || || || || || || || || || || || ||
economy ||
c. the expected return is a weighted average where the probabilities of the economic states are
|| || || || || || || || || || || || || || || ||
used as the weights || || || ||
d. the expected return is equal to the summation of the values computed by dividing the expected
|| || || || || || || || || || || || || || || || ||
return for each economic state by the probability of the state
|| || || || || || || || || || ||
e. as long as the total probabilities of the economic states equal 100%, then the expected return on
|| || || || || || || || || || || || || || || || || ||
the stock is a geometric average of the expected returns for each economic state - ✔✔c. the
|| || || || || || || || || || || || || || || || ||
expected return is a weighted average where the probabilities of the economic states are used as
|| || || || || || || || || || || || || || || ||
the weights
||
You have plotted the monthly returns for 2 securities for the past 5 years on the same graph. The
|| || || || || || || || || || || || || || || || || || ||
pattern of the movements of each of the 2 securities generally rose and fell to the same degree in
|| || || || || || || || || || || || || || || || || || ||
step with each other. This indicates the securities have:
|| || || || || || || ||
a. no correlation with each other
|| || || || || ||
b. a weak negative correlation
|| || || || ||
c. a strong negative correlation
|| || || || ||
d. a strong positive correlation
|| || || || ||
e. a weak positive correlation - ✔✔d. a strong positive correlation
|| || || || || || || || || ||
,2
The range of possible correlations between 2 securities is defined as
|| || || || || || || || || ||
a. 0 to +1
|| || || ||
b. 0 to -1
|| || || ||
c. >=0|| ||
d. <= 1|| || ||
e +1 to -1 - ✔✔e +1 to -1
|| || || || || || || ||
An efficient capital market is one in which
|| || || || || || ||
a. brokerage commissions are zero
|| || || || ||
b. taxes are irrelevant
|| || || ||
c. securities always offer a positive NPV
|| || || || || || ||
d. all investments earn the market rate of return
|| || || || || || || || ||
e. security prices reflect all available information - ✔✔e. security prices reflect all available
|| || || || || || || || || || || || || ||
information
Individuals that continually monitor the financial markets seeking mispriced securities || || || || || || || || || ||
a. tend to make substantial profits on a daily basis
|| || || || || || || || || ||
b. tend to make the markets more efficient
|| || || || || || || ||
c. are never able to find a security that is temporarily mispriced
|| || || || || || || || || || || ||
d. are always quite successful using only well-known public information as their basis of
|| || || || || || || || || || || || || ||
evaluation ||
e. are always quite successful using only historical price information as their basis of evaluation -
|| || || || || || || || || || || || || || || ||
✔✔b. tend to make the markets more efficient
|| || || || || || ||
The hypothesis that market prices reflect all available information of every kind is called _____
|| || || || || || || || || || || || || || ||
form efficiency || ||
a. open
|| ||
b. strong
|| ||
, 2
c. semistrong
|| ||
d weak
|| ||
e. stable - ✔✔b. strong
|| || || ||
Empirical evidence suggests that || || || ||
a. prices may not reflect their true underlying value
|| || || || || || || || ||
b. financial managers lack any ability to correctly time stock repurchases
|| || || || || || || || || || ||
c. managers may profitably speculate in foreign currency
|| || || || || || || ||
d. managers cannot boost stock prices by changing their accounting methods
|| || || || || || || || || || ||
e. wise accounting choices can impact a firms stock price - ✔✔d. managers cannot boost stock
|| || || || || || || || || || || || || || || ||
prices by changing their accounting methods
|| || || || ||
If Financial markets are efficient, then attempting to accurately predict interest rates is:
|| || || || || || || || || || || || ||
a. an endeavor best left to corporate executives
|| || || || || || || ||
b. a relatively easy and accurate exercise
|| || || || || || ||
c. a waste of good time
|| || || || || ||
d. relatively easy to do if you have a general understanding of finance and economics
|| || || || || || || || || || || || || || ||
e. a little tricky but wise managers tend to success at it on an ongoing basis - ✔✔c. a waste of
|| || || || || || || || || || || || || || || || || || || || ||
good time ||
The US securities and exchange commission periodically charges individuals with insider trading
|| || || || || || || || || || || ||
and claims those individuals have made unfair profits. Base on this fact, you would tend to argue
|| || || || || || || || || || || || || || || || ||
that the financial markets are at best ___form efficiency
|| || || || || || || || ||
a. weak
|| ||
b. semiweak
|| ||
c. semistrong
|| ||
d. strong
|| ||
e. perfect - ✔✔c. semistrong
|| || || ||
