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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?

It produces a benchmark for evaluating various investments Signup and view all the answers

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

He received the Nobel prize in economics Signup and view all the answers

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

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

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

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

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

1961 Signup and view all the answers

Who described the markets as efficient in 1965?

Eugene Fama Signup and view all the answers

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

Harry Markowitz Signup and view all the answers

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

1959 Signup and view all the answers

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

$\beta$ and risk alone Signup and view all the answers

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

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

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

The agency problem between managers and shareholders Signup and view all the answers

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

They include rational but half-informed agents Signup and view all the answers

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

Managers squandering corporate resources for personal gain Signup and view all the answers

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

Efficient learning processes Signup and view all the answers

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

Free cash flows Signup and view all the answers

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

Squander corporate resources Signup and view all the answers

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

To explain short-term market fluctuations Signup and view all the answers

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

Exogenous factors Signup and view all the answers

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

Misuse of corporate resources by managers 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'?

'Agency problem' and managerial behavior in firms Signup and view all the answers

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

As a result of economic forces and decisions Signup and view all the answers

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

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

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

New stocks added to the S&P 500 performed better than the rest of the market. Signup and view all the answers

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

They demonstrated a flaw in the efficient market hypothesis. Signup and view all the answers

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

The paper reminds him of his rabbi back in Palo Alto. 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?

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

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

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