Investment Theory and Portfolio Development - Review Answers

  1. "B". All of the other statements describe market anomalies.
  2. "D". Both assertions characterize an efficient portfolio.
  3. "E". The first statement describes the basic premise of behavioral finance; the second a possible application of it.
  4. "B". The strong form of the efficient market hypothesis is the most robust.
  5. "D". All statements are consistent with the concept of market efficiency.
  6. "B". This describes a key difference between the security market line and the capital market line.
  7. "A". This fact pattern requires the candidate to utilize the SML formula and compare the result to the investor's actual return in order to answer the question.
  8. "B". The quick ratio is a measure of a company's short-term liquidity.
  9. "C". Increased government spending is a tool of fiscal rather than monetary policy.
  10. "D". All of the elements described would ensue from an investment policy statement.
  11. "B". The Sharpe ratio uses total risk, or standard deviation whereas the Treynor ratio uses beta, or market risk.
  12. "B". Efficiency is not a characteristic of a benchmark.
  13. "B". This is a basic definition of the information ratio.
  14. "B". The avoidance of high taxes would be the most compelling reason to pursue a strategy using municipal bonds.
  15. "D". Relative strength is not a contrarian indicator, but rather one of market structure.
  16. "D". EMH is the most significant challenge to the validity of technical analysis.
  17. "B". Inventory turnover is an activity ratio measuring the company's ability to convert inventory into cash.
  18. "B". Tax increases are a fiscal measure that could tighten the money supply and slow growth.
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