Assess the following statements: I. If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve. II. The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. III. Based on the expectations theoly of the term structure of interest rates, a flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near future. IV. The forward rate is commonly used to represent the market's forecast of the future interest rate. All statements are correct. Only one statement is correct. Two statements are correct. Only one statement is incorrect.

Assess the following statements: I. If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve. II. The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. III. Based on the expectations theoly of the term structure of interest rates, a flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near future. IV. The forward rate is commonly used to represent the market's forecast of the future interest rate. All statements are correct. Only one statement is correct. Two statements are correct. Only one statement is incorrect.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 7MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...

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You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the value of diversification or why stocks with the biggest standard deviations dont always have the highest expected returns. Your assignment is to address the clients concerns by showing the client how to answer the following questions: d. Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a particular portfolio efficient? Dont worry about specific values when constructing the graphmerely illustrate how things look with reasonable data.
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: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the plotted CML. Now add a set of indifference curves and illustrate how an investor’s optimal portfolio is some combination of the risky portfolio and the risk-free asset. What is the composition of the risky portfolio?
Which of the following is correct with regards to Theories of Term Structure? When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.
Which one of the following statements about the term structure of interest rates is true?a. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates.b. The expectations hypothesis contends that the long-term rate is equal to the anticipated short-term rate.c. The liquidity premium theory indicates that, all else being equal, longer maturities will have lower yields.d. The liquidity preference theory contends that lenders prefer to buy securities at the short end of the yield curve.
Which of the following statements is true? A. Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares. B. All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases. C. Security market line (SML) plots return against total risk which is measured by the standard deviation of returns. D. Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.
Which of the following statements is CORRECT about the yield curve? A) The yield curve shows the behaviour of interest rate forecasts. B) When short-term rates are lower than long-term rates, there is a downward-sloping yield curve. C) A downward-sloping yield curve shows that investors demand an additional risk premium for lending money over the long term. D) A downward-sloping yield curve indicates that the market expects a future rise in interest rates.
Assess the following statements: The traditional liquidity premium theory states that long term interest rates are greater than the average of expected future interest rates. According to the market segmentation theory short term investors will not normally switch to intermediate or long term investments. The liquidity premium theory of interest rates states that the term structure must always be upward sloping. The liquidity premium theory of interest rates states that investors are indifferent between different maturities if the long term spot rates are equal to the average of current and expected future short term rates. a. Two statements are correct. b. Three statements are correct. c. Only one statement is correct. d. Four statements are correct.
Which one of the following statements about the term structure of interest rates is true? A) The expectations hypothesis predicts a flat yield curve if anticipated future short-term rates exceed current short-term rates. B) The liquidity premium theory contends that lenders prefer to buy securities at the ghort-term end of the curve. C) The expectations hypothesis contends that the long-term spot rate is equal to the short-term rate. D) The liquidity premium theory indicates that, all else being equal, longer maturity bonds will have lower yields.
Consider the following scenario analysis A. Is it reasonable to assume that treasury bonds will provide higher returns in recessions than in booms? B. Calculate the expected rate of return and standard deviation for each investment. C. What investment would you prefer?
Arbitrage is the idea that one can (select the best answer): Group of answer choices Buy and Sell different assets or packages of assets at different prices such you can earn a riskless profit without investing any capital. Earn rates of return greater than the average for the market by successfully “picking” stocks. Earn abnormal returns above what CAPM would predict for a particular security.
Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant makes the following arguments:a. Both the CAPM and APT require a mean-variance efficient market portfolio.b. Neither the CAPM nor the APT assumes normally distributed security returns.c. The CAPM assumes that one specific factor explains security returns but APT does not.State whether each of the consultant’s arguments is correct or incorrect. Indicate, for each incorrect argument, why the argument is incorrect.
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