Chapter 2: Question 7B (page 258)
In an efficient market, professional portfolio management can offer all of the following benefits except which of the following?
a. Low-cost diversification.
b. A targeted risk level
c. Low-cost record keeping.
d. A superior risk-return trade-off.
The correct answer is d.
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Which of the following statements about the security market line (SML) are true?
a. The SML provides a benchmark for evaluating expected investment performance.
b. The SML leads all investors to invest in the same portfolio of risky assets.
c. The SML is a graphic representation of the relationship between expected return and beta.
d. Properly valued assets plot exactly on the SML.
Consider the following data for a one-factor economy. All portfolios are well diversified.
Suppose another portfolio E is well diversified with a beta of 2/3 and expected return of 9%. Would an arbitrage opportunity exist? If so, what would the arbitrage strategy be?
Growth and value can be defined in several ways. Growth usually conveys the idea of a portfolio emphasizing or including only companies believed to possess above-average future rates of per-share earnings growth. Low current yield, high price-to-book ratios, and high price-to-earnings ratios are typical characteristics of such portfolios. Value usually conveys the idea of portfolios emphasizing or including only issues currently showing low price-to-book ratios, low price-to-earnings ratios, above-average levels of dividend yield, and market prices believed to be below the issues’ intrinsic values.
a. Identify and provide reasons why, over an extended period of time, value-stock investing might outperform growth-stock investing.
b. Explain why the outcome suggested in ( a ) should not be possible in a market widely regarded as being highly efficient.
Which of the following statements about the standard deviation is/are true? A standard deviation:
a. Is the square root of the variance.
b. Is denominated in the same units as the original data.
c. Can be a positive or a negative number.
What do you think would happen to the expected return on stocks if investors perceived an increase in the volatility of stocks?
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