QF5213 QUIZ3

QUIZ2 https://chatkit.app/s/KiD8zlzNHU-OtoHMXmRBf

https://chatkit.app/s/BH2lXyD5Up_mhbt001EUd

1. You purchased 100 shares of stock at a price of $42 per share. Over the last year, you have received a total dividend income of $122. The current price is $48. What is the dividend yield? 1. A. 2.9% 2. B. 2.5% 3. C. 14.3% 4. D. None of the choices are correct.

   The dividend yield is calculated by dividing the annual dividends per share by the price per share. In this case, you received a total dividend income of $122 for 100 shares, so the annual dividend per share is
   $122 / 100 = $1.22. Given that the current price per share is $48, the dividend yield is therefore
   $1.22 / $48 = 0.0254, or 2.54%
   when expressed as a percentage. So, the closest answer is B. 2.5%.

2. user: A stock had returns of 6%, 13%, -11%, and 17% over the past four years. What is the geometric average return for this time period? A. 1.06 B. 5.7% C. 42% D. 1.42

assistant: The geometric mean is the average rate per period on an investment that is compounded over multiple periods. It's calculated by taking the Nth root of the product of N numbers. For this question, the returns are 6%, 13%, -11%, and 17%, which we convert to decimal form (1.06, 1.13, 0.89, and 1.17, respectively) for the calculation. The geometric average return is calculated as follows: ((1.06 _ 1.13 _ 0.89 * 1.17) ^ (1/4)) - 1 Doing the math, we get approximately 0.0567 or 5.67% when expressed as a percentage. So, the closest answer is B. 5.7%.

user: Which form of the efficient market hypothesis implies that security prices reflect only information contained in past prices? A. Weak form B. Semi-strong form C. Strong form D. Past form

assistant: The Efficient Market Hypothesis (EMH) is a theory in financial economics that states that asset prices fully reflect all available information. The EMH exists in various degrees: weak, semi-strong, and strong, which differ in their views on what kind of information is reflected in the current price. The Weak Form of the Efficient Market Hypothesis asserts that current stock prices fully incorporate information contained in the history of past prices, or past trading information. This implies that no investor would be able to achieve consistently higher than average returns by analyzing historical prices or using trading rules based on historical prices. So, the answer to your question is A. Weak form.

user: Q4. An investor discovers that for a certain group of stocks, large positive price changes are always followed by large negative price changes. The investor makes a huge abnormal profit from this finding. Which of the following is true? A. It supports the moderate form of the efficient market hypothesis. B. It supports the semi-strong form of the efficient market hypothesis. C. None of the choices are correct. D. It violates the weak form of the efficient market hypothesis.

assistant: The investor's ability to make abnormal profits from observed patterns in stock prices contradicts the Efficient Market Hypothesis (EMH). According to the EMH, all available information should already be incorporated into stock prices, making it impossible to consistently achieve above-average profits. In particular, the Weak Form of the EMH posits that all past market prices and data are fully reflected in current stock prices. Therefore, if an investor is able to consistently profit from patterns in past price movements, this would violate the Weak Form of the EMH. So, the correct answer is D. It violates the weak form of the efficient market hypothesis.

user: Q5. The market price of a stock moves or fluctuates daily. This fluctuation is: A. inconsistent with the semi-strong efficient market hypothesis because prices should be stable. B. inconsistent with the weak form efficient market hypothesis because all past information should be priced in. C. consistent with the semi-strong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it. D. consistent with the strong form because prices are controlled by insiders.

assistant: The correct answer is C. The semi-strong form of the Efficient Market Hypothesis (EMH) suggests that all publicly available information is incorporated into the price of a stock. This includes past trading information (as covered by the weak form of EMH), as well as all public announcements and news. Therefore, when new information becomes available, the market price of a stock would adjust to reflect this new information, causing daily price fluctuations. This is entirely consistent with the semi-strong form of the EMH. The other options aren't correct: A. The semi-strong form of the EMH doesn't imply that prices should be stable. In fact, it suggests the opposite: prices should adjust quickly to reflect all publicly available information. B. The weak form of the EMH suggests that all past trading information is priced in, but it doesn't imply that prices should be stable. Prices can still fluctuate in response to new information. D. The strong form of the EMH suggests that all information, public and private, is incorporated into stock prices. It doesn't suggest that prices are controlled by insiders. In fact, it suggests that even insiders can't consistently achieve abnormal profits, because all their private information is already reflected in the price.

user: Q6. Which of the following would be indicative of inefficient markets? A. Overreaction and reversion B. Delayed response C. Immediate and accurate response D. Both A and B

assistant: The correct answer is D. Both A and B. A. Overreaction and reversion: If the market overreacts to news or information, it means that prices swing more dramatically than the information warrants. Later, when the market corrects or "reverts" back to a price more reflective of the fundamental value of the security, this demonstrates inefficiency. B. Delayed response: An efficient market should respond quickly to new information. If there is a delay in the response, it suggests that the market is not incorporating information into prices as efficiently as it should. C. Immediate and accurate response: This would actually be indicative of an efficient market, not an inefficient one. In an efficient market, prices adjust quickly and accurately to new information. So, both overreaction and reversion (A) and delayed response (B) would be indicative of inefficient markets.

user: Q7. In an efficient market, the price of a security will: A. always rise immediately upon the release of new information with no further price adjustments related to that information B. react to new information over a two-day period after which time no further price adjustments related to that information will occur. C. rise sharply when new information is first released and then decline to a new stable level by the following day. D. react immediately to new information with no further price adjustments related to that information.

assistant: D. react immediately to new information with no further price adjustments related to that information. The efficient market hypothesis suggests that at any given time, prices fully reflect all available information. Therefore, when new information becomes available, the price should adjust immediately to reflect this new information, and there should not be further price adjustments related to that information afterward. This is because the efficient market has already incorporated the new information into the price.

user: 08. A portfolio contains four assets. Asset 1 has a beta of.8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%, what is the beta of the portfolio? A. 0.80 B. 1.10 C. 1.19 D. 1.25

assistant: The beta of a portfolio is the weighted sum of the individual asset betas, where the weights are the proportions of the portfolio that each asset represents. In this case, the beta of the portfolio can be calculated as follows: (0.3 _ 0.8) + (0.3 _ 1.1) + (0.2 _ 1.5) + (0.2 _ 1.6) = 0.24 + 0.33 + 0.3 + 0.32 = 1.19 So, the beta of the portfolio is 1.19. The correct answer is C. 1.19.

user: Q9. You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock? A. 5.00% B. 6.45% C. 7.30% D. 7.65%

assistant: The expected rate of return on an investment is calculated by multiplying each possible return by the probability of that return occurring, and then summing these results. In this case, the expected rate of return on the stock can be calculated as follows: (0.12 _ 0.15) + (0.08 _ 0.75) + (-0.05 * 0.10) = 0.018 + 0.06 - 0.005 = 0.073 So, the expected rate of return on the stock is 7.3%. The correct answer is C. 7.30%.

user: Q10: A risk that affects a large number of assets, each to a greater or lesser degree is called: A. total risk. B. systematic risk. C. unsystematic risk. D. economic risk.

assistant: The risk that affects a large Qnumber of assets, each to a greater or lesser degree, is called systematic risk. Systematic risk, also known as market risk or non-diversifiable risk, is associated with market-wide risks that cannot be avoided through diversification. These risks include interest rate changes, inflation, recessions, or political instability, which can affect all businesses and investments. So, the correct answer is B. Systematic risk.