Investment Theory and Portfolio Development - Review Questions 1 - 6
- Market phenomena that would appear to contradict the efficient market hypothesis would include all of the following except:
- The fact that stock prices rebound in the first month of the new year.
- The fact that all information about a company available in the public domain would seem to preclude the opportunity to outperform the market.
- That firms generate higher returns, ceteris paribus, if they happen to have a lower price/earnings multiple.
- That a dearth of analyst coverage would tend to represent a opportunity for stock pickers to exploit a mispricing.
- One may define the efficient frontier as:
- The asset allocation with the lowest return for the level of risk assumed.
- That point on the risk/return continuum where one assumes the lowest level of risk for the amount of return generated.
- Where on the risk spectrum the allocation of assets would generate the greatest return for the level of risk assumed.
- Both b. & c.
- Behavioral finance:
- Further refines the notion of market efficiency.
- Posits that investors are given to traits such as overconfidence, a myopic view of the markets and a tendency to overreact to market events.
- Assumes risk and return are positively correlated.
- Could explain why seemingly different markets' and assets classes' correlations tend to approach 1 in times of uncertainty and turbulence.
- Both b & d
- The strong form of the Efficient Market Hypothesis indicates that stock prices fully reflect:
- All publicly available information.
- Public, market, insider and future information.
- Market only.
- Markets and fundamental company data.
- According to the Efficient Market Hypothesis:
- Portfolio managers' role decreases the likelihood that investors can add alpha.
- The pursuit of diversification is worthwhile.
- Active management adds little value overall.
- All of the foregoing.
- With respect to the security market line (SML) and the capital market line (CML):
- The security market line uses standard deviation as the risk measure while the capital market line uses beta as the risk measure.
- The capital market line provides a big picture view of risk and return, whereas the SML is used to price portfolios and individual securities.
- SML involves the risk premium concept, but CML does not.
- None of the foregoing.
ProfessionalsCFA Level 1 - The Security Market Line (SML). Learn how the security market line relates risk to return. Provides an example diagram and explanations for possible shifts in the SML.
ProfessionalsModern Portfolio Theory (MPT)
ProfessionalsCFA Level 1 - The Efficient Market Hypothesis. Learn the basics of the efficient market hypothesis. Includes the assumptions and expectations behind this theory on capital markets.
Fundamental AnalysisThe capital market line (CML) depicts the level of additional return above the risk-free rate for each change in the level of risk.
ProfessionalsEfficient Market Hypothesis (EMH)
ProfessionalsThis approach to risk will help you better understand business and investing decisions.
Active TradingMarket efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
Active Trading FundamentalsDeciding whether it's possible to attain above-average returns requires an understanding of EMH.
ProfessionalsCFA Level 1 - The Capital Market Line. Learn how the capital market line relates expected return to a security's standard deviation. Differentiates systematic and unsystematic risk.
A line that graphs the systematic, or market, risk versus return ...
A line used in the capital asset pricing model to illustrate ...
The premise that asset prices are efficient, to the extent that ...
A theory, which moves beyond the definition of the efficient ...
A market hypothesis stating that investors and traders react ...
The difference between the expected return on a market portfolio ...
Find out how to interpret stocks and portfolios through a security market line, or SML, graph as part of the Capital Asset ... Read Answer >>
Learn about security market line analysis, how it is used and how the beta and systematic risk of a stock affect an investment ... Read Answer >>
Learn about the capital asset pricing model and the security market line and how the model is used in the calculation and ... Read Answer >>
Explore the efficient market hypothesis and understand the extent to which this theory and its conclusions are correct or ... Read Answer >>
Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
When people talk about market efficiency they are referring to the degree to which the aggregate decisions of all the market's ... Read Answer >>