some review questions... only, efficient, statements, following

slackeranalyst

1-1 If you can make money by examining the pattern in the past stock prices, this would
be evidence of:
(a) efficient markets in the strong form.
(b) inefficient markets in the weak form.
(c) efficient markets in the semi-strong form.
(d) inefficient markets only in the semi-strong forms.

1-2 Which of the following statements is correct?
(a) Both the holder and the writer of an option can make money at the same time.
(b) A call option gives you the obligation to buy certain stock at a specified price.
(c) The price of a call option will increase with the number of days to expiration.
(d) The call option value will increase when the underlying stock price drops

1-3 Suppose there is an overpriced stock P. It will lie ____ the security market line.
And eventually it will lie ___ the security market line.
(a) below, above
(b) above, below
(c) below, on
(d) above, on
(e) on, on

1-4 Which of the following statement is correct with respect to the sensitivity of a bond
price to interest rate changes, other things being equal?
(a) Bonds with large coupon rates are more sensitive to interest change than those
with low coupon rates.
(b) Both long-term and short-term bonds have the same sensitivities.
(c) Bond prices are insensitive to interest changes.
(d) Long-term bond prices are more sensitive to interest change than short term
bonds.

1-5 Which of the following statement is correct with respect to the duration of a bond,
other things being equal?
(a) The longer the maturity, the larger the duration.
(b) The longer the maturity, the smaller the duration.
(c) The lower the coupon rate, the lower the duration.
(d) The larger the YTM, the larger the duration.

1-6 Which of the following is NOT a correct statement about stock market efficiency?
(a) In general, the U.S. stock market is efficient in a week form
(b) In general, the U.S. stock market is efficient in a semi-strong form
(c) In general, one can make money on insider information, that is why we have a
law which prohibits such a practice.
(d) If the market is not in semi-strong form efficiency, it can still be weak-form
efficient.
(e) If the market is not strong form efficient, it cannot be weak-form efficient.

1-7 It is better to hold a portfolio than to hold individual stocks because
(a) it is cheap
(b) you can diversify away all the risks
(c) market risk can be dramatically reduced if not eliminated
(d) forming stocks into a portfolio guarantees a positive real return on investment
(e) firm specific risks tend to cancel out with each other in a portfolio

1-8 The CAPM implies that
(a) all portfolios are on the SML
(b) only efficient portfolios are on the SML
(c) inefficient portfolios are above the SML
(d) inefficient portfolios are below the SML
(e) none of the above

1-9 Generally speaking, the duration of a bond is a function of the bond's
(a) coupon rate.
(b) yield to maturity.
(c) time to maturity.
(d) spot rate.
(e) none of the above.

1-10 If a bond portfolio manager believes
(a) in market efficiency, he or she is likely to be a passive portfolio manager
(b) that he or she can accurately predict interest rate changes, he or she is likely to
be an active portfolio manager
(c) that he or she can identify bond market anomalies, he or she is likely to be a
passive portfolio manager
(d) (a) and (b)
(e) (a), (b), and (c)

1-11 The ______ is a measure of the average rate of return an investor will earn if the
investor buys the bond now and holds until maturity with coupon reinvested.
(a) current yield
(b) yield to maturity
(c) dividend yield
(d) P/E ratio
(e) spot rate

1-12 The term structure of interest rates
(a) is usually upward sloping.
(b) is the relationship between the spot interest rate and the corresponding time to
maturity.
(c) recorded at two different dates will be different in general
(d) all of the above
(e) none of the above

1-13 According to the expectations hypothesis, a normal yield curve implies that
(a) one period sport rates are expected to remain stable in the future
(b) one period sport rates are expected to decline in the future
(c) one period sport rates are expected to increase in the future
(d) one period sport rates are expected to decline first, then increase
(e) one period sport rates are expected to increase first, then decrease

1-14 According to the liquidity premium hypothesis, a normal yield curve implies that
(a) the liquidity premium is negative and the spot rates are expected to remain stable
in the future.
(b) the liquidity premium is positive and the spot rates are expected to remain
stable in the future.
(c) the liquidity premium is negative and the spot rates are expected to decline in the
future.
(d) the liquidity premium is negative and the spot rates are expected to increase first,
then decrease.

1-15 Which of the following statement regarding option is correct
(a) An option holder has the obligation to exercise her option at the expiration date.
(b) The more volatile of the underlying stock, the less valuable of the option.
(c) It is always optimal to exercise an American call option at the expiration
date.
(d) It is always optimal to exercise an American put option at the expiration date.
(e) The higher the interest, the lower the option value.

1-16 Active portfolio management consists of __________.
(a) market timing
(b) security analysis
(c) “top-down” or “bottom up” approach
(d) indexing
(e) (a), (b), and (c)

1-17 Active portfolio managers try to construct a risky portfolio with __________.
(a) a higher Sharpe measure than a passive strategy
(b) a lower Sharpe measure than a passive strategy
(c) the same Sharpe measure as a passive strategy
(d) very few securities
(e) none of the above

1-18 A purely passive strategy
(a) is one that uses only index funds.
(b) uses weights that change in response to market conditions.
(c) uses only risk-free assets.
(d) is useful if abnormal returns are available.
(e) is useful if the market is inefficient.

1-19 A zero-investment portfolio with a positive expected return arises when _________.
(a) an investor has downside risk only
(b) the law of prices is not violated
(c) the opportunity set is not tangent to the capital allocation line
(d) a risk-free arbitrage opportunity exists
(e) none of the above

kamara5

1)b
2)c
3)c
4)d
5)a
6)e
7)e
8)e
9)e
10)d
11)b
12)b
13)c
14)b
15)e
16)d
17)a
18)a
19)d

The options available look awfully disgusting!

rgonzalez

1) b
2) c
3) c
4) d
5) a
6) e
7) e
8) b
9) e
10) d
11) b
12) b
13) c
14) b
15) c
16) e
17) a
18) a
19) d

evolsteevol

1)b
2)c
3)b
4)d
5)a
6)e
7)e
8)e
9)d
10)d
11)b
12)b
13)c
14)b
15)e
16)c
17)a
18)a
19)d

amqata

b
c
c
d
a
e
e
a
c
d
b
d
c
b
c
e
a
a
d

draz

I don't understand 8, 9, and 15.

8) Shouldn't this be the CML and not the SML? When all of the answers dealt with portfolios, I just assumed they were all wrong because the CML refers to efficient portfolios and the SML refers to the pricing of securities.

9) The duration of a bond is really a combination of a, b, and c. I don't think there is one that is better than the others. A bond that pays a coupon of 50% is not going to have a significantly higher duration if it matures in 50 years; a bond like this will NOT be very sensitive at all to changes in the YTM because the coupon is so high, even though the TTM is very long. My point is that there isn't one of these options that is more important than the others. Can someone explain why I am wrong?

15) C can't possibly be right. C says it is always optimal to exercise an American call option at the expiration date. If I'm out of the money, there's no way I'm exercising my option at the expiration date!

smartpants

And 11 is not a good question for the reasons I described in my first post.

I'm not nitpicking OP; just trying to learn from some discussion here! Thanks again for the questions, where did you get them? Or did you just make them up yourself?

disiz64

1. B
2. C
3. C
4. D
5. A
6. E
7. E
8. E
9. E
10. D
11. B
12. B
13. C
14. A
15. D
16. E
17. A
18. A
19. D

Mechanic

these questions are from a class I'm taking, they are written by the professor, some of the question materials might not be in lvl 1, so take what you will

thisisbrianly

For #15, I think it is D rather than C.

Consider being long a call and put on a stock that pays dividends monthly. All other things equal, you will want to hold onto the stock as long as possible and get those cash flows then sell at the last possible date. With a call, you would want to purchase ASAP to get those cash flows all other things equal.