Security Analysis And Portfolio Management MCQ Quiz

Firms may use forward contracts and futures to protect against currency fluctuations or changes in commodity prices. Interest-rate options help companies control financing costs.

The relevant measure of risk according to the context of the Capital Asset Pricing Model (CAPM) is beta. Beta measures the sensitivity of an asset's returns to the overall market returns. It indicates how much an asset's price is likely to move in relation to the market. A beta of 1 means the asset moves in line with the market, while a beta greater than 1 suggests the asset is more volatile than the market, and a beta less than 1 indicates the asset is less volatile. Therefore, beta is a key measure of risk in the CAPM framework.

Open market operations refer to the buying and selling of government securities by the central bank in order to control the money supply and interest rates in the economy. This tool is widely used because it allows the central bank to directly influence the liquidity in the financial system and adjust interest rates according to the prevailing economic conditions. By buying government securities, the central bank injects money into the economy, while selling securities removes money from circulation. Thus, open market operations are an effective and commonly used monetary tool to regulate the economy.

A resistance level is a value above which it is difficult for the market to rise. This means that when the market reaches this level, it tends to face selling pressure and struggles to continue moving upwards. Traders and investors often use resistance levels as indicators to make decisions about buying or selling securities. It is an important concept in technical analysis and can help determine potential price reversals or areas of consolidation in the market.

In a zero-investment portfolio, the expected return is positive, which means the investor can earn a profit without putting any money into the investment. This can only occur if there is a risk-free arbitrage opportunity available. Arbitrage involves taking advantage of price differences in different markets to make a profit with no risk. Therefore, if such an opportunity exists, it allows the investor to create a zero-investment portfolio with a positive expected return.

The correct answer is "all of the above" because all three factors mentioned - interest rate fluctuations, the business cycle, and inflation rates - can have an impact on stock returns. Interest rate fluctuations can affect borrowing costs and investment decisions, while the business cycle can influence overall economic conditions and company performance. Inflation rates can erode the purchasing power of investors and affect market expectations. Therefore, all three factors are important considerations for understanding and predicting stock returns.

Conventional theories in finance assume that investors are rational, meaning they make decisions based on logical analysis and maximize their own self-interest. On the other hand, behavioral finance suggests that investors may not always be rational, as their decisions can be influenced by psychological biases, emotions, and other non-rational factors. This perspective recognizes that human behavior can deviate from the rational expectations assumed by traditional finance theories.

The correct answer is "all real assets." This means that the net wealth of the aggregate economy includes the total value of all tangible and physical assets owned by individuals, businesses, and the government. Real assets can include land, buildings, machinery, equipment, and natural resources. Financial assets, such as stocks, bonds, and cash, are not included in the calculation of net wealth in this context.

Financial assets indirectly contribute to the country's productive capacity because these assets permit individuals to invest in firms and governments. This in turn allows firms and governments to increase productive capacity.

When two securities are perfectly negatively correlated, it means that their returns move in the opposite direction. This creates a situation where the risk of one security is perfectly offset by the other. As a result, when forming an investment portfolio with these two securities, the global minimum variance portfolio can be constructed in a way that eliminates all risk, resulting in a standard deviation of zero. This means that the portfolio's returns will have no variability or uncertainty, making the correct answer "equal to zero."

The Sharpe measure is used to assess the reward to volatility trade-off in a portfolio. It calculates the ratio of the average portfolio excess return (the return above the risk-free rate) to the standard deviation of returns. A higher Sharpe measure indicates a better risk-adjusted return, as it shows that the portfolio is generating higher returns for each unit of risk taken. Therefore, the Sharpe measure is the correct answer in this case.

The statement "All of the above are true" is the correct answer because all three statements mentioned in the question are accurate. Commodity futures pricing does converge to spot prices at maturity, meaning that the price of a futures contract will align with the current spot price of the commodity when the contract expires. Additionally, commodity futures pricing includes the cost of carry, which accounts for the expenses associated with holding the commodity until the futures contract matures. Finally, commodity futures pricing must be related to spot prices since the two are interconnected in the market.

HPR = .25 (25%) + .45 (15%) + .30 (9%) = 15.7%

Portfolio theory, as described by Markowitz, focuses on the effect of diversification on portfolio risk. Markowitz's theory suggests that by diversifying investments across different asset classes, the overall risk of the portfolio can be reduced. This is because different asset classes tend to have different risk and return characteristics, and by combining them in a portfolio, the negative impact of individual asset class fluctuations can be mitigated. Therefore, the theory emphasizes the importance of diversification in managing portfolio risk.

Technical analysts focus on past price movements of a firm's stock rather than on the underlying determinants of future profitability. They use various tools and techniques such as chart patterns, trend lines, and technical indicators to analyze historical price data and identify potential future price movements. Unlike fundamental analysts who analyze financial statements and economic factors, technical analysts believe that all relevant information about a stock is already reflected in its price and focus solely on price patterns and trends. Therefore, the correct answer is Technical analysts.

The debate over whether markets are efficient will probably never be resolved because of the lucky event issue, the magnitude issue, and the selection bias issue. The lucky event issue refers to the possibility that market outcomes may be influenced by random events, making it difficult to determine if market efficiency is the cause. The magnitude issue suggests that even if markets are efficient on a small scale, they may not be on a larger scale due to various factors. The selection bias issue implies that studies on market efficiency may be biased towards certain outcomes, leading to inconclusive results. Therefore, all of these issues contribute to the ongoing debate on market efficiency.

When a distribution is positively skewed, standard deviation overestimates risk.

13 = 4 + β (13 – 4); β = 1.0.

In a well diversified portfolio, unsystematic risk is negligible. Unsystematic risk refers to the risk that is specific to a particular company or industry and can be reduced through diversification. By holding a variety of different investments across different sectors and asset classes, the impact of any one company or industry's performance on the overall portfolio is minimized. This means that the portfolio is less vulnerable to the risks associated with individual companies or industries, and therefore unsystematic risk is negligible.

If you believe in the semistrong form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. This means that all publicly available information is already incorporated into stock prices, and it is not possible to consistently outperform the market by analyzing this information.

Charles Dow is considered the grandfather of technical analysis because he was one of the pioneers who developed the concept of analyzing stock market trends and patterns. Dow created the Dow Jones Industrial Average and the Dow Theory, which laid the foundation for technical analysis. His theories and principles are still widely used today in the field of technical analysis to predict future price movements and make investment decisions.

Skewness is a measure of the normality of a distribution.

When interest rates decrease, it becomes cheaper for businesses to borrow money for investment purposes. This incentivizes businesses to increase their investment expenditures, leading to an increase in business investment. On the other hand, when interest rates decrease, it also becomes cheaper for consumers to borrow money for purchasing durable goods. This encourages consumers to increase their spending on durable goods, resulting in an increase in consumer durable expenditures. Therefore, both business investment expenditures and consumer durable expenditures will increase when interest rates decrease.

Ceteris paribus refers to the assumption that all other factors remain constant. In the context of bond prices and yields, when the price of a bond increases, the yield decreases and vice versa. This inverse relationship is due to the fact that as the price of a bond increases, the fixed interest payments it provides become relatively smaller compared to the price paid for the bond. Therefore, investors demand a lower yield to compensate for the higher price. Conversely, when the price of a bond decreases, the yield increases to attract investors. Hence, the price and yield on a bond are negatively related.

Investment bankers perform both roles mentioned in the options. They design securities with desirable properties, such as bonds or stocks, to attract investors. Additionally, they provide advice to firms on market conditions, pricing strategies, and other financial aspects. Therefore, the correct answer is "All of them."

Diversification is most effective when securities' returns are negatively correlated. This means that when one security's return is high, the other security's return is low, and vice versa. By investing in negatively correlated securities, the risk of the portfolio is reduced as losses in one investment can be offset by gains in another. This helps to achieve a more stable and consistent return on the overall portfolio.

The correct answer is "A and C." Correlation and covariance are both statistics that measure the relationship between the returns of two risky assets. Correlation measures the strength and direction of the linear relationship, while covariance measures the extent to which the returns vary together. Therefore, both A (correlation) and C (covariance) are correct answers to the question.

The multifactor APT is the correct answer because it does not provide any guidance on how to determine the risk premium on factor portfolios. Unlike the CAPM, which provides a specific formula to calculate the expected return of an asset based on its beta, the multifactor APT does not specify how to determine the risk premium for each factor. Therefore, it does not provide any guidance on the determination of the risk premium on factor portfolios.

A long-term movement of prices, lasting from several months to years, is referred to as a primary trend. This trend represents the overall direction of the market over an extended period and can help investors and analysts make long-term investment decisions. The primary trend is significant as it provides insights into the overall market sentiment and helps identify potential opportunities for profit.

The Dow theory suggests that the primary trend, intermediate trend, and minor trend are the three forces that simultaneously affect stock prices. These trends refer to the long-term, medium-term, and short-term movements in stock prices, respectively. The momentum trend, contrarian trend, and other options mentioned are not considered as part of the three forces according to the Dow theory.

Fundamental analysts aim to identify securities whose intrinsic value is higher than their market price. This means they search for investments that are undervalued by the market, offering potential for future price appreciation. By analyzing various factors such as financial statements, economic conditions, and industry trends, fundamental analysts assess the true value of a security and make investment decisions based on the gap between intrinsic value and market price. This approach allows them to potentially profit from buying undervalued securities and selling them when their market price catches up with their intrinsic value.

The correct answer is "is limited to the difference between the values of the fixed rate and floating rate obligations." This means that the credit risk in the swap market is only the potential loss that can occur if there is a difference between the fixed rate and floating rate obligations. It is not equal to the total value of the payments or extensive.

The APT (Arbitrage Pricing Theory) differs from the CAPM (Capital Asset Pricing Model) because it recognizes multiple systematic risk factors. Unlike the CAPM, which only considers the market risk factor, the APT acknowledges that there can be multiple factors that affect the returns of an investment. These factors can include macroeconomic variables such as interest rates, inflation, or exchange rates. By recognizing multiple systematic risk factors, the APT provides a more comprehensive and flexible framework for pricing assets and assessing their risk.

The M-squared measure is a performance evaluation tool that takes into account the risk-adjusted return when evaluating mutual funds. It considers not only the return generated by the fund but also the level of risk taken to achieve that return. This measure is useful for comparing the performance of different mutual funds as it provides a more comprehensive assessment of their overall performance, taking into consideration both returns and risks.

6% + 1.2(4%) + 0.8((3%) = 13.2%.

The proponents of the Efficient Market Hypothesis (EMH) typically advocate for investing in an index fund and adopting a passive investment strategy. Investing in an index fund involves buying a diversified portfolio of stocks that mirror a specific market index, such as the S&P 500. This approach aligns with the EMH belief that it is difficult to consistently outperform the market through active trading strategies. A passive investment strategy involves buying and holding investments for the long term, rather than trying to time the market or make frequent trades. This approach is also consistent with the EMH, which suggests that it is not possible to consistently beat the market by actively trading.