Practice Final 2013 Financiad Economics ECN134 Multiple Choice Questions There are 22 MC questions each worth 2 points 1 The weak form of the efficient market hypothesis contradicts A technical analysis but supports fundamental analysis as valid B fundamental analysis but supports technical analysis as valid C both fundamental analysis and technical analysis D technical analysis but is silent on the possibility of successful fundamental analysis E none of the above Answer D 2 Matthews Corporation has a beta of 1 2 The annualized market return yesterday was 13 and the risk free rate is currently 5 You observe that Matthews had an annualized return yesterday of 17 Assuming that markets are efficient this suggests that A bad news about Matthews was announced yesterday B good news about Matthews was announced yesterday C no news about Matthews was announced yesterday D interest rates rose yesterday E interest rates fell yesterday Answer B 3 The Food and Drug Administration FDA just announced yesterday that they would approve a new cancer fighting drug from King You observe that King had an abnormal return of 0 yesterday This suggests that A the market is not efficient B King stock will probably rise in value tomorrow C King stock will probably fall in value tomorrow D the approval was already anticipated by the market E none of the above Answer D 4 If you believe in the reversal effect you should A sell bonds in this period if you held stocks in the last period B sell stocks in this period if you held bonds in the last period C sell stocks this period that performed well last period D go long E C and D Answer C 5 The expected return beta relationship is used A by regulatory commissions in determining the costs of capital for regulated firms B in court rulings to determine discount rates to evaluate claims of lost future incomes C to advise clients as to the composition of their portfolios D all of the above E none of the above Answer D 6 If a market proxy portfolio consistently beats all professionally managed portfolios on a risk adjusted basis it may be concluded that A the CAPM is valid B the market proxy is mean variance efficient C the CAPM is invalid D A and B E B and C Answer D 7 Malkiel 1995 calculated that the average alphas or abnormal returns on a large sample of mutual funds between 1972 and 1991 were A significantly positive B significantly negative C statistically indistinguishable from zero D positive before 1981 and negative thereafter E negative before 1981 and positive thereafter Answer C 8 Proponents of the EMH think technical analysts A should focus on relative strength B should focus on resistance levels C should focus on support levels D should focus on financial statements E are wasting their time Answer E 9 In an efficient market A security prices react quickly to new information B security prices are seldom far above or below their justified levels C security analysts will not enable investors to realize superior returns consistently D one cannot make money E A B and C Answer E 10 Other things equal diversification is most effective when A securities returns are uncorrelated B securities returns are positively correlated C securities returns are high D securities returns are negatively correlated E B and C Answer D 11 The unsystematic risk of a specific security A is likely to be higher in an increasing market B results from factors unique to the firm C depends on market volatility D cannot be diversified away E none of the above Answer B 12 If a 7 coupon bond is trading for 975 00 it has a current yield of percent A 7 00 B 6 53 C 7 24 D 8 53 E 7 18 Answer E Rationale 70 975 7 18 13 Which of the following statement s is are true regarding the selection of a portfolio from those that lie on the Capital Allocation Line A Less risk averse investors will invest more in the risk free security and less in the optimal risky portfolio than more risk averse investors B More risk averse investors will invest less in the optimal risky portfolio and more in the risk free security than less risk averse investors C Investors choose the portfolio that maximizes their expected utility D A and C E B and C Answer E Rationale All rational investors select the portfolio that maximizes their expected utility for investors who are relatively more risk averse doing so means investing less in the optimal risky portfolio and more in the risk free asset 14 A zero coupon bond has a yield to maturity of 9 and a par value of 1 000 If the bond matures in 8 years the bond should sell for a price of today A 422 41 B 501 87 C 513 16 D 483 49 E none of the above Answer B Rationale 1 000 1 09 8 501 87 15 Suppose that the average P E multiple in the oil industry is 16 Mobil Oil is expected to have an EPS of 4 50 in the coming year The intrinsic value of Mobil Oil stock should be A 28 12 B 35 55 C 63 00 D 72 00 E none of the above Answer D Rationale 16 X 4 50 72 00 16 The market capitalization rate on the stock of Flexsteel Company is 12 The expected ROE is 13 and the expected EPS are 3 60 If the firm s plowback ratio is 50 the P E ratio will be A 7 69 B 8 33 C 9 09 D 11 11 E none of the above Answer C Rationale g 13 X 0 5 6 5 5 12 065 9 09 17 In the 1972 empirical study by Black Jensen and Scholes they found that the riskadjusted returns of high beta portfolios were the risk adjusted returns of low beta portfolios A greater than B equal to C less than D unrelated to E more information is necessary to answer this question Rationale These results are inconsistent with what would be predicted with the CAPM 18 Fama and French in their 1992 study found that A firm size had better explanatory power than beta in describing portfolio returns B beta had better explanatory power than firm size in describing portfolio returns C beta had better explanatory power than book to market ratios in describing portfolio returns D macroeconomic factors had better explanatory power than beta in describing portfolio returns E none of the above is true Rationale Fama and French found that firm size and book to market ratios had significant explanatory power for portfolio returns while beta did not 19 Studies of positive earnings surprises have shown that there is A a positive abnormal return on the day positive earnings surprises are announced B a positive drift in the stock price on the days following the earnings surprise announcement C a negative drift in the stock price on the days following the earnings