Reference no: EM133006733

Questions -

Q1. The historical returns for the past three years for Stock B and the stock market portfolio were Stock B: 24 percent, 0 percent, 24 percent; market portfolio: 10 percent, 12 percent, 20 percent. Calculate the observed covariance of returns between Stock B and the market portfolio. (Ignore the correction for the loss of a degree of freedom set out in the text.)

a. 16

b. 28

c. 36

d. 292

Q2. Weak-form efficiency implies that past stock returns

a. form patterns that tend to repeat.

b. are major inputs to investors for forming trading strategies.

c. do not help to predict future returns.

d. are difficult to explain.

Q3. The statement that stock prices follow a random walk implies that

a. the correlation coefficient between successive price changes (auto correlation) is not significantly different from zero.

b. successive price changes are positively related.

c. successive price changes are positively related and are negatively related.

d. the autocorrelation coefficient is positive.

Q4. Which of the following observations would provide evidence against the strong form of efficient market theory?

a. Mutual fund managers do not on average make superior returns.

b. In any year, approximately 50 percent of all pension funds outperform the market.

c. Managers who trade in their own firm's stocks make superior returns.

d. Mutual fund managers do not on average make superior returns and,In any year, approximately 50 percent of all pension funds outperform the market.

Q5. A project has an expected risky cash flow of $500 in year 2. The risk-free rate is 4 percent, the expected market rate of return is 14 percent, and the project's beta is 1.20. Calculate the certainty equivalent cash flow for year 2, CEQ2.

a. $622.04

b. $164.29

c. $401.90

d. $416.13