All of the following statements about an efficient market are correct EXCEPT: a. All financial transactions have an NPV of equal to zero b. A skilled individual may have sustainable above market returns c. The investor is compensated properly for risk borne d. The investor does not receive abnormal returns consistently

All of the following statements about an efficient market are correct EXCEPT: a. All financial transactions have an NPV of equal to zero b. A skilled individual may have sustainable above market returns c. The investor is compensated properly for risk borne d. The investor does not receive abnormal returns consistently

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 3MC

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You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: Suppose a risk-free asset has an expected return of 5%. By definition, its standard deviation is zero, and its correlation with any other asset is also zero. Using only Asset A and the risk-free asset, plot the attainable portfolios.
You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: What is the Capital Asset Pricing Model (CAPM)? What are the assumptions that underlie the model? What is the Security Market Line (SML)?
Your friend’s portfolio consistently plots above the Security Market Line. As a result, your friend claims to know how to earn abnormal returns. Thus, your friend tries to convince you that the market is not efficient. How should you respond? A) You should totally agree; this is direct evidence against market efficiency B) Tell your friend that this should be expected due to the Momentum effect C) Tell your friend that it is hard to measure risk (Joint Hypothesis Problem); maybe the market is efficient, or maybe risk is being measured improperly
Which of the following statements about the Efficient Market Hypothesis (EMH) is incorrect? Group of answer choices a)If the market is strong-form efficient, investors can not earn abnormal returns using inside information. b) If the investment in small firms earns a positive abnormal return, the stock market is not semi-strong form efficient. c) If a market is efficient, investors tend to follow a passive investment strategy. d) If the future stock price change depends on its history, the market is not weak-form efficient. e) If a market is weak-form efficient, fundamental analysis can not earn a positive abnormal return.
Which of the following is not a characteristic of an efficient market? Investors can frequently make profits by predicting asset market prices that are different from intrinsic values. The market value of all securities at any one instant in time fully reflect all available information. Investors act rationally. The forces of demand and supply work to maintain that the security's market price and its intrinsic value are in equilibrium.
In the strong form of the market accoarding to the Efficient Market Hypothesis investor can earn excess returns by usin the available information. Select one: a. False b. True
Give typing answer with explanation and conclusion The market risk premium: Decreases with the risk aversion of investors in the market Increases with the risk aversion of investors in the market Decreases with the egree of risk of the average potential risky investment Could be negative
Which of the following statements are true if the efficient market hypothesis holds?a. It implies that future events can be forecast with perfect accuracy.b. It implies that prices reflect all available information.c. It implies that security prices change for no discernible reason.d. It implies that prices do not fluctuate.
What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed
Which of the following statements is most correct? Why?* a. If a market is weak-form efficient, this means that prices rapidly reflect all available public information. b. If a market is weak-form efficient, this means that you can expect to beat the market by using technical analysis that relies on the charting of past prices. c. If a market is strong-form efficient, this means that all stocks should have the same expected return. d. All of the statements above are correct. c. None of the statements above is correct.
Which of the following statements is false? A. A short sale allows investors to generate additional profits from a decline in a security’s price. B. One of underlying assumptions of technical analysis is that supply and demand are driven by both rational andirrational investor behavior. C. Investors get a margin call if the equity in a margin account rises above the required maintenance level. D. Technical analysis cannot modify price manipulations.
Which of the following statements is TRUE about risk-free investment? a. Return in risk-free investment is high, but the investment manager charges a fee for the guarantee. b. It always provides inconsistent return as consistent return requires higher risk c. It provides lower returns as higher return requires higher risk.