Investment Theory and Portfolio Development - Review Answers
- "B". All of the other statements describe market anomalies.
- "D". Both assertions characterize an efficient portfolio.
- "E". The first statement describes the basic premise of behavioral finance; the second a possible application of it.
- "B". The strong form of the efficient market hypothesis is the most robust.
- "D". All statements are consistent with the concept of market efficiency.
- "B". This describes a key difference between the security market line and the capital market line.
- "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.
- "B". The quick ratio is a measure of a company's short-term liquidity.
- "C". Increased government spending is a tool of fiscal rather than monetary policy.
- "D". All of the elements described would ensue from an investment policy statement.
- "B". The Sharpe ratio uses total risk, or standard deviation whereas the Treynor ratio uses beta, or market risk.
- "B". Efficiency is not a characteristic of a benchmark.
- "B". This is a basic definition of the information ratio.
- "B". The avoidance of high taxes would be the most compelling reason to pursue a strategy using municipal bonds.
- "D". Relative strength is not a contrarian indicator, but rather one of market structure.
- "D". EMH is the most significant challenge to the validity of technical analysis.
- "B". Inventory turnover is an activity ratio measuring the company's ability to convert inventory into cash.
- "B". Tax increases are a fiscal measure that could tighten the money supply and slow growth.