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Questions and Answers
The total expense ratio (TER) for mutual funds expresses the total costs of running a fund as a percentage of the fund´s liabilities.
The total expense ratio (TER) for mutual funds expresses the total costs of running a fund as a percentage of the fund´s liabilities.
False
Strategic asset allocation involves continuously adjusting the weights of different asset classes based on market conditions.
Strategic asset allocation involves continuously adjusting the weights of different asset classes based on market conditions.
False
Beta-Hedging with index futures can completely eliminate systematic risk, provided CAPM is a good model and its parameters are accurate.
Beta-Hedging with index futures can completely eliminate systematic risk, provided CAPM is a good model and its parameters are accurate.
True
The Fama and French Three-Factor Model extends the CAPM by incorporating the size and the price-to-earnings ratio of stocks.
The Fama and French Three-Factor Model extends the CAPM by incorporating the size and the price-to-earnings ratio of stocks.
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Active portfolio management aims to replicate a benchmark index's performance as closely as feasible.
Active portfolio management aims to replicate a benchmark index's performance as closely as feasible.
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Increasing correlation among normally distributed assets in a portfolio leads to a reduction in the portfolio's standard deviation.
Increasing correlation among normally distributed assets in a portfolio leads to a reduction in the portfolio's standard deviation.
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If you hold a short position in a futures contract on a stock index, your margin account balance increases when the index goes up.
If you hold a short position in a futures contract on a stock index, your margin account balance increases when the index goes up.
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The capital market line represents the tangent line between the risk-free rate of return and the efficient frontier.
The capital market line represents the tangent line between the risk-free rate of return and the efficient frontier.
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According to Markowitz portfolio theory, a good portfolio is a collection of individually good assets.
According to Markowitz portfolio theory, a good portfolio is a collection of individually good assets.
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When entering into a forward contract, the buyer of the contract (long position) has to deposit money in a margin account while this is not necessary for the seller of the contract (short position).
When entering into a forward contract, the buyer of the contract (long position) has to deposit money in a margin account while this is not necessary for the seller of the contract (short position).
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The real risk-free rate is published on a regular basis (in Austria: monthly) in newspapers and online-databases.
The real risk-free rate is published on a regular basis (in Austria: monthly) in newspapers and online-databases.
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Mutual fund fees: While the front-end load fee has to be paid only when mutual funds are purchased, management fees repeatedly have to be paid on an annual basis.
Mutual fund fees: While the front-end load fee has to be paid only when mutual funds are purchased, management fees repeatedly have to be paid on an annual basis.
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The strong form of the efficient market hypothesis contends that only insiders can systematically earn abnormal returns.
The strong form of the efficient market hypothesis contends that only insiders can systematically earn abnormal returns.
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Diversification with foreign securities can help to reduce portfolio risk.
Diversification with foreign securities can help to reduce portfolio risk.
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The nominal value of a share typically corresponds to the market price of the share.
The nominal value of a share typically corresponds to the market price of the share.
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While price indices ignore dividend payments and the value of pre-emptive rights, these are incorporated in total return indices.
While price indices ignore dividend payments and the value of pre-emptive rights, these are incorporated in total return indices.
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Technical analysts believe that security prices adjust rapidly.
Technical analysts believe that security prices adjust rapidly.
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For a two-stock portfolio, the correlation coefficient of returns is equal to the covariance.
For a two-stock portfolio, the correlation coefficient of returns is equal to the covariance.
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One assumption of the classic Capital Asset Pricing Model (CAPM) is that investors cannot borrow or lend at the risk-free rate.
One assumption of the classic Capital Asset Pricing Model (CAPM) is that investors cannot borrow or lend at the risk-free rate.
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Large-cap stocks are stocks with a high book-value, which is the shareholders ‘ equity in the balance sheet.
Large-cap stocks are stocks with a high book-value, which is the shareholders ‘ equity in the balance sheet.
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Newly issued securities are sold in secondary markets, while existing securities are traded in primary markets.
Newly issued securities are sold in secondary markets, while existing securities are traded in primary markets.
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Tactical asset allocation is a long-term method of investing where fixed asset weights are considered.
Tactical asset allocation is a long-term method of investing where fixed asset weights are considered.
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If a prolonged downward trend sees a black candle followed by a white candle that surrounds the black candle, this is called a bearish engulfing and it signals a downward trend.
If a prolonged downward trend sees a black candle followed by a white candle that surrounds the black candle, this is called a bearish engulfing and it signals a downward trend.
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In the Capital Asset Pricing Model (CAPM), portfolios on the security market line (SML) are combinations of the risk-free asset and a market portfolio.
In the Capital Asset Pricing Model (CAPM), portfolios on the security market line (SML) are combinations of the risk-free asset and a market portfolio.
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Study Notes
Security Prices and Portfolio Analysis
- Technical analysts believe security prices don't adjust rapidly.
- For a two-stock portfolio, the correlation coefficient of returns equals the square root of the covariance.
- A key assumption of the CAPM is that investors can borrow or lend at the risk-free rate.
- Large-cap stocks have high book value.
- Newly issued securities trade in primary markets; existing securities trade in secondary markets.
- Tactical asset allocation modifies asset allocation, deviating from strategic asset allocation.
- A bearish engulfing pattern signals a downward trend.
- Capital Asset Pricing Model (CAPM) portfolios on the security market line (SML) are combinations of risk-free assets and the market portfolio.
- Dividend payout ratio = dividend per share / market price per share.
- Arbitrage Pricing Theory (APT) is an extension of CAPM, with 27 factors.
Investment Decisions and Portfolios
- Investors prefer future consumption, compensated for inflation, time, and risk.
- Only stocks bought on or before the ex-dividend day receive the next dividend.
- Equally weighted indices give each stock the same weight, regardless of market value.
- Completeness funds complement active funds that don't cover the complete market.
- Markowitz Portfolio Theory suggests investing in the stock with the highest expected return for a given level of risk; this is incorrect.
- A good portfolio consists of individually good assets (according to portfolio theory).
- Buying a forward contract requires a margin deposit by the buyer, not the seller.
- Real risk-free rates are not routinely published in a central location.
- Mutual funds' management fees are paid regularly (annually).
Efficient Market Hypothesis and Portfolio Concepts
- The strong form of the efficient market hypothesis states only insiders can earn abnormal returns.
- Diversification with foreign securities can reduce portfolio risk.
- Nominal and book values of shares don't equal market capitalization.
- Pure auction markets use centralized bid and ask prices for stocks.
- Price indices ignore dividends and pre-emptive rights, but total return indices incorporate them.
- Active equity portfolio management isn't a long-term buy-and-hold strategy.
- Efficient capital markets adjust prices immediately to reflect new information.
- A 50-day moving average line crossing the 200-day line from below is a bullish signal (technical analysis).
- A 50-day moving average crossing the 200-day line from below is a bearish signal (technical analysis).
- The CAPM's market portfolio includes all risky assets.
Financial Analysis and Models
- Technicians analyze financial statements for "breakouts."
- Total expense ratio (TER) for mutual funds represents total fund operating costs.
- Strategic asset allocation fixes asset class weights for the long term.
- Hedging with index futures eliminates systematic risk by assuming CAPM parameters are correct.
- Fama French Three-Factor Model extends CAPM by including size and book-to-market ratios.
- Active portfolio management seeks to closely match a benchmark index return.
- Increasing correlations in a portfolio increase standard deviation.
- A short index future position requires a margin reduction when the index rises.
- Capital market line's tangent reflects the highest risk-adjusted return among portfolios.
- Iceberg orders execute when a designated stock price is met.
Portfolio Management and Investing
- Passive portfolio management samples index securities with weights reflecting index weights; this is incorrect.
- A doji pattern signifies a pause in trend, not a reversal.
- Tobin separation indicates all investors invest in risk-free assets or the market portfolio.
- Jensen's alpha measures risk and return alternatives rather than fitting CAPM.
- Business risk (calculated using the standard deviation of gross profit).
- High book-to-market stocks outperform low book-to-market ones, challenging the CAPM.
- All markets facilitate the trading of goods/services.
- Markowitz model assumes investors only consider expected return and risk.
- Income bonds aren't as safe as debentures because income bonds typically pay interest at higher rates.
- Clients and managers should reach agreement on a benchmark portfolio to ensure client satisfaction, but not that it is absolutely essential.
- Most experts recommend at least five years' living expenses in cash.
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Description
Explore the intricate concepts of security prices and portfolio management through this quiz. From technical analysis principles to capital asset pricing models, assess your knowledge of market dynamics and investment strategies. Perfect for students and professionals alike seeking to deepen their understanding of finance.