Investment analysis and portfolio management Mid-
term with verified answers
How many estimates are needed for the Markowitz Model? - answer -2n+(n^2-n)/2
estimates
What is the residual? - answer -Firm-specific surprise in the security return
How many estimates are needed for the Single-Index model? - answer -3n+2
estimates
What is the security characteristic line? - answer -The regression estimates with
intercept alpha and slope beta
What is alpha? - answer -The difference between the fair and actually expected rates
of return on a stock
What is the information ratio? - answer -It measures the extra return we incur when we
over- or underweight securities relative to the passive market index
What is a tracking portfolio? - answer -It is a portfolio designed to match the systematic
(market-sensitive) component of the portfolios return
What is alpha transport? - answer -The process of separating the search for alpha
from the choice of market exposure
What does homogeneous expectations mean? - answer -That all investors analyse
securities in the same way and share the same economic view of the world
What is the market portfolio? - answer -A portfolio consisting of all traded assets
What is the market price of risk? - answer -The extra return that investors demand to
bear portfolio risk
What is the liquidity of an asset? - answer -The ease and speed with which it can be
sold at fair market value
What is a factor portfolio? - answer -A well-diversified portfolio constructed to have a
beta of 1 on one of the factors and a beta of zero on any other factor
What is the efficient market hypothesis? - answer -It is the notion that stocks already
reflects all available information
, What is the weak-form hypothesis? - answer -It asserts that stock prices already reflect
all information that ca be derived by examining market trading data
What is the semistrong-form hypothesis? - answer -It states that all publicly available
information regarding the prospects of a fir must be reflected already in the stock price
What is the strong-form hypothesis? - answer -It states that stock prices reflect all
information relevant to the firm, including private information
What is technical analysis? - answer -The search for recurrent and predictable
patterns in stock prices
What is fundamental analysis? - answer -Examination of a firm's accounting
statements and other financial and economic value of a company's stock.
What is a passive investment strategy? - answer -It aims only at establishing a well-
diversified portfolio without attempting to find under- or overvalued stocks (buy-and-hold
strategy)
What is an event study? - answer -A technique of empirical financial research that
enables an observer to assess the impact of a particular event on a firm's stock price
What is abnormal return? - answer -The difference between the stock's actual return
and the benchmark
What is the cumulative abnormal return? - answer -The sum of all abnormal returns
over the time period of interest
What is the magnitude issue regarding EMH? - answer -Only managers with large
portfolios can earn enough trading profits to make the exploitation of minor mispricing
with the effort
What is the selection bias issue regarding EMH? - answer -Investment strategies that
work are not being reported to the public
What is the lucky event issue regarding EMH? - answer -We cannot exclude the fact
that successful investment schemes might just be luck rather than skill
What is the momentum effect? - answer -Good or bad recent performance of particular
stocks continue over time
What is the reversal effect? - answer -Stocks that have performed badly tend to
rebound and winners fade back over time. This suggests that the stock market
overreacts to relevant news and after time, this performance is reversed
term with verified answers
How many estimates are needed for the Markowitz Model? - answer -2n+(n^2-n)/2
estimates
What is the residual? - answer -Firm-specific surprise in the security return
How many estimates are needed for the Single-Index model? - answer -3n+2
estimates
What is the security characteristic line? - answer -The regression estimates with
intercept alpha and slope beta
What is alpha? - answer -The difference between the fair and actually expected rates
of return on a stock
What is the information ratio? - answer -It measures the extra return we incur when we
over- or underweight securities relative to the passive market index
What is a tracking portfolio? - answer -It is a portfolio designed to match the systematic
(market-sensitive) component of the portfolios return
What is alpha transport? - answer -The process of separating the search for alpha
from the choice of market exposure
What does homogeneous expectations mean? - answer -That all investors analyse
securities in the same way and share the same economic view of the world
What is the market portfolio? - answer -A portfolio consisting of all traded assets
What is the market price of risk? - answer -The extra return that investors demand to
bear portfolio risk
What is the liquidity of an asset? - answer -The ease and speed with which it can be
sold at fair market value
What is a factor portfolio? - answer -A well-diversified portfolio constructed to have a
beta of 1 on one of the factors and a beta of zero on any other factor
What is the efficient market hypothesis? - answer -It is the notion that stocks already
reflects all available information
, What is the weak-form hypothesis? - answer -It asserts that stock prices already reflect
all information that ca be derived by examining market trading data
What is the semistrong-form hypothesis? - answer -It states that all publicly available
information regarding the prospects of a fir must be reflected already in the stock price
What is the strong-form hypothesis? - answer -It states that stock prices reflect all
information relevant to the firm, including private information
What is technical analysis? - answer -The search for recurrent and predictable
patterns in stock prices
What is fundamental analysis? - answer -Examination of a firm's accounting
statements and other financial and economic value of a company's stock.
What is a passive investment strategy? - answer -It aims only at establishing a well-
diversified portfolio without attempting to find under- or overvalued stocks (buy-and-hold
strategy)
What is an event study? - answer -A technique of empirical financial research that
enables an observer to assess the impact of a particular event on a firm's stock price
What is abnormal return? - answer -The difference between the stock's actual return
and the benchmark
What is the cumulative abnormal return? - answer -The sum of all abnormal returns
over the time period of interest
What is the magnitude issue regarding EMH? - answer -Only managers with large
portfolios can earn enough trading profits to make the exploitation of minor mispricing
with the effort
What is the selection bias issue regarding EMH? - answer -Investment strategies that
work are not being reported to the public
What is the lucky event issue regarding EMH? - answer -We cannot exclude the fact
that successful investment schemes might just be luck rather than skill
What is the momentum effect? - answer -Good or bad recent performance of particular
stocks continue over time
What is the reversal effect? - answer -Stocks that have performed badly tend to
rebound and winners fade back over time. This suggests that the stock market
overreacts to relevant news and after time, this performance is reversed
