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- Which of the following statements regarding arbitrage is the most correct? A) Any situation in which it is possible to make a profit without taking any risk is known as an arbitrage opportunity. B) Any situation in which it is possible to make a profit without making any investment is known as an arbitrage opportunity. C) We call a competitive market in which there are no arbitrage opportunities an arbitrage market. D) The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage.Which of the following is NOT true? In risk-neutral valuation the risk-free rate is used to discount expected cash flows Options can be valued based on the assumption that investors are risk neutral Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rateQUESTION Hedging is a risk management strategy that is used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. REQUIRED: Discuss the importance of hedging to the financial risk manager Are there any downside to hedging?
- Carefully explain the Arbitrage Pricing Theory (APT). What is the main assumption the APT is built on? (b) With regard to market efficiency, what is meant by the term "anomaly"? Give two examples of market anomalies and explain why each is considered as an anomaly.Riskless, costless arbitrage is the cornerstone of the efficient market hypothesis. However, multiple unavoidable risks in securities markets inhibit arbitrage as defined in financial theory (and investment textbooks) from successfully eliminating mispricing. Please list two of these unavoidable risks and briefly explain how each limits arbitrage in practice. Use an example to make your case for each risk. View keyboard shortcutsWhich 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.
- Which of the statements about the Arbitrage Pricing Theory MUST BE TRUE. I. There is only one systematic risk, the market risk. II. The market risk factor must be one of many systematic risk factors. III. Individual assets may have a positive or negative alpha A. I only B. II only C. III only D. None of the aboveBehavioural finance is arguably most useful in explaining asset prices when there are significant numbers of “noise traders” and limits to arbitrage. Why is this so?True or False A.) An advantage of the discounted cashflow valuation method is that it is less exposed to market moods and perceptions .B.)A disadvantage of the discounted cashflow valuation method is that it requires more inputs and information compared to other valuation techniques. C.)Fundamental analyst uses the discounted cashflow method and the price multiples to value firms. D.) Market timers focus on using overall market trends as a basis for predicting when to buy or sell investments. However, they can use valuation techniques on specific financial instruments to support their decision. E.) An entity bought a warehouse in an auction. It paid P400,000 for the unit. The unit included several high-value assets. The entity would need a valuation for purchase price allocation. F.) A old couple decided to give away some of their assets to their children throughout their senior years. This couple may need to use valuation for estate distribution purposes during their living years.
- Rigorously define the rather vague idea of ‘beating the market’ with reference to the Efficient Markets Hypothesis and the standard techniques used to try to ‘beat the market’.Commodity-backed money is money that can exchange for a commodity at a fixed rate, and it solves transportation problem of using commodity money. Select one: True FalseWhat is weak-form EMH? What would you expect to see/not see if markets where weak form efficient? In other words, can you think of market events that would serve as evidence that market is or isn’t weak-form efficient?