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Questions and Answers

What did Harry Markowitz develop in his landmark paper?

  • An approach to minimize return while reducing risk
  • An approach to maximize profit without considering risk
  • An approach solely focused on risk management
  • An approach to portfolio selection balancing risk and return (correct)
  • What character does the portfolio theory have as per the text?

  • Normative, prescribing what a rational investor should do (correct)
  • Prescriptive, dictating specific investment strategies
  • Descriptive, detailing what past investors have done
  • Evaluative, determining the performance of irrational investors
  • What does the Capital Asset Pricing Model (CAPM) predict?

  • The relationship between market volatility and stock price
  • The relationship between risk and profitability of a company
  • The relationship between return and diversification
  • The relationship between risk of an asset and its expected return (correct)
  • How is the CAPM useful according to the text?

    <p>It produces a benchmark for evaluating various investments</p> Signup and view all the answers

    What was the outcome of Harry Markowitz's seminal work according to the text?

    <p>He received the Nobel prize in economics</p> Signup and view all the answers

    What is the focus of the Capital Asset Pricing Model (CAPM)?

    <p>Relationship between risk and return for an efficient portfolio and individual security</p> Signup and view all the answers

    What are the four building blocks of standard finance according to the text?

    <p>Investor rationality, market efficiency, mean-variance portfolio theory, capital asset pricing model</p> Signup and view all the answers

    In which year did Merton Miller and Franco Modigliani characterize investors as rational?

    <p>1961</p> Signup and view all the answers

    Who described the markets as efficient in 1965?

    <p>Eugene Fama</p> Signup and view all the answers

    Who prescribed the rules of mean-variance portfolio theory first in its basic form in 1952?

    <p>Harry Markowitz</p> Signup and view all the answers

    When was the expanded version of mean-variance portfolio theory described?

    <p>1959</p> Signup and view all the answers

    According to standard finance, what is the expected return postulated to be a function of?

    <p>$\beta$ and risk alone</p> Signup and view all the answers

    What is the key difference between the traditional growth theory and the new growth theory?

    <p>The source of growth (endogenous vs. exogenous factors)</p> Signup and view all the answers

    What did Adam Smith recognize in his work The Wealth of Nations?

    <p>The agency problem between managers and shareholders</p> Signup and view all the answers

    How do the models described in the text differ from traditional equilibrium models?

    <p>They include rational but half-informed agents</p> Signup and view all the answers

    In the context of the text, what is the central essence of the 'agency problem'?

    <p>Managers squandering corporate resources for personal gain</p> Signup and view all the answers

    What is a common characteristic of the new market models described?

    <p>Efficient learning processes</p> Signup and view all the answers

    What tends to be high in companies that face the agency problem according to the text?

    <p>Free cash flows</p> Signup and view all the answers

    According to Michael Jensen and William Meckling, what can self-interested managers do in a company?

    <p>Squander corporate resources</p> Signup and view all the answers

    How do researchers in recent years apply the concept of endogenously generated change?

    <p>To explain short-term market fluctuations</p> Signup and view all the answers

    What was the traditional explanation for economic growth according to the text?

    <p>Exogenous factors</p> Signup and view all the answers

    What is more likely to happen in companies with substantial free cash flows?

    <p>Misuse of corporate resources by managers</p> Signup and view all the answers

    What did Michael Jensen and William Meckling analyze in their seminal paper 'Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure'?

    <p>'Agency problem' and managerial behavior in firms</p> Signup and view all the answers

    How are technological drivers of growth depicted in the new growth theory?

    <p>As a result of economic forces and decisions</p> Signup and view all the answers

    What did Fama learn from Shiller and Summers about irrational bubbles in stock prices?

    <p>Irrational bubbles are indistinguishable from rational time-varying expected returns.</p> Signup and view all the answers

    What was the significant finding presented by Andrei Shleifer in 1985 that challenged the efficient markets hypothesis?

    <p>New stocks added to the S&amp;P 500 performed better than the rest of the market.</p> Signup and view all the answers

    How did Shleifer's findings about new S&P 500 stocks relate to the concept of market efficiency?

    <p>They demonstrated a flaw in the efficient market hypothesis.</p> Signup and view all the answers

    What statement did Myron Scholes make when critiquing Shleifer's paper?

    <p>The paper reminds him of his rabbi back in Palo Alto.</p> Signup and view all the answers

    How did Andrei Shleifer's findings about new S&P 500 stocks differ from what should happen in an efficient market?

    <p>New stocks should perform poorly compared to the rest of the market in an efficient market.</p> Signup and view all the answers

    What impact did Fama's acknowledgment of irrational bubbles have on the efficient market theory?

    <p>It questioned the foundation of the efficient market theory without completely repudiating it.</p> Signup and view all the answers

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