1) If you believe in the _____ form of the EMH, you believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest. 2) If you believe in the _____ form of EMH, you believe that stock prices reflect all available information including information that is available only to insiders 3) A common strategy for passive management is

4) Researchers have found that most of the small firm effect sources 5) A market decline of 23% on a day when there is no significant macroeconomic event ____ consists with the EMH because_______ 6) A weather report says that a devastating and unexpected freeze is expected to hit Florida tonight during the peak of the citrus harvest. In an efficient market one would expect the price of Florida Orange’s stock to 7) Nicholas Manufacturing just announced yesterday that its 4th quarter earnings will be 10% higher than last year’s 4th quarter. You observe that Nicholas had an abnormal return of -1.2% yesterday. This suggests that 8) Tracking error is defined as

9) IF a portfolio manager consistently obtains a high Sharpe ratio measure, the manager’s forecasting ability _____ 10) Active portfolio management consists of _____
11) To improve future analyst forecasts using the statistical properties of past forecasts, a regression model can be fitted to past forecasts. The intercept of the regression is a ______ coefficient, and the regression beta represents a 12) Suppose two portfolios have the same average return, the same standard deviation of returns but portfolio A has a lower beta than portfolio B according to the Treynor measure, the performance of portfolio A ______ 13) Suppose two portfolios have the same average return, the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Sharpe measure, the performance of Aggie Fund 14) The Sharpe, Treynor, and Jensen portfolio...

...RISK & CAPITALASSETPRICINGMODEL | |
|Every financial investment contains some | |To see how the risk matrix (see below) described in this tutorial is used, please |
|level of financial risk. This risk is | |take a look at FinanceIsland's ROI analysis tool. You can try it out
|usually expressed through the discount rate | |by subscribing for a free trial.
|used in the financial analysis. Since the | |
|risk varies from investment to investment, | |[pic]
|the discount rate needs to vary as well. | |
| | |
|FinanceIsland's ROI analysis tool with Monte| |
|Carlo simulation enhances your typical net | |
|present value (NPV) analysis not only by | |...

...Running head: PRICINGMODELSPricingModels
Adam F. Thornton
FIN 501 – 3
TUI University
Dr. William Anderson
Chipotle Mexican Grill (CMG) is one of the fastest growing restaurant chains in the United States. Self proclaimed as “fast-casual,” CMG offers a dining experience that is unique, organic, and which draws from the local economy. For the investor, CMG is a wise investment for the aggressive and fast growing portion of a portfolio. When determining an appropriate model to evaluate CMG’s potential, the CapitalAssetPricingModel (CAPM) is the best choice. This model offers the best amount detail while maintaining the simplicity needed for a model outlining investment decisions in CMG.
The PricingModels
There are three pricingmodels to discuss when evaluating CMG: dividend growth, CAPM, and the Arbitrage Pricing Theory (APT). Each of these models has both advantages and disadvantages, easily tailoring one model to different situations. However, the CAPM is best suited for this case with CMG. Below is a further review on each of models’ advantages and disadvantages, and applicability to CMG’s market position and financial situation.
The Gordon...

...CapitalAssetPricingModel
The CapitalAssetPricingModel otherwise know as CAPM defines the relationship between risk and return for individual securities. William Sharpe published the capitalassetpricingmodel in 1964. CAPM extended Harry Markowitz's portfolio theory to introduce the notions of systematic and specific risk. For his work on CAPM, Sharpe shared the 1990 Nobel Prize in Economics with Harry Markowitz and Merton Miller
CAPM assumes the concept of a logical investor, assumes a perfect market, and uses a measure of investment risk known as a Beta. When CAPM assumes these three concepts above there has to be a definition to describe the assumptions.
Therefore when we assume a logical investor we are actually referring to an investor that makes his or her investments based upon the expectation of a return. Investors will anticipate their return by analyzing the stock market's average rate of return and that will be their expectation when looking into a specific security. If they are not going to anticipate their return to equal the markets average rate of return then there will be no reason to invest. You invest to make a profit. Investors invest to make a profit. Furthermore a logical investor accepts the...

...undiversifiable risk. Please consider the issues from the viewpoint of investors. Explain your reasoning
Undiversifiable (market )risk:
Market risk is the variability in all risky assets caused by macroeconomic variables. This risk cannot be avoided, regardless of the amount of diversification. Systematic risk (Market risk) factors are those macroeconomic variables that affect the valuation of all risky assets such as variability in the growth of the money supply, interest rate volatility, variability in aggregate industrial production, and natural shocks like drought, earth quake, hurricane, etc.
Diversifiable (unique )risk:
Many of the risks faced by an individual company are peculiar to its activity, its management, etc. These are the unique risks and can be diversified away. Examples of unique risks are a company winning a large contract, wildcat strikes hitting a company, litigation hitting a company or the company facing a governmental investigation.
a. A large fire severely damages three major U.S. cities.
Diversifiable risk
The entire economy will not be affected by a large fire in three major US cities. In fact some companies in cities not affected by fire will benefit as they...

...Chapter 9: Multifactor Models of Risk and Return. (QUESTIONS)
1. Both the capitalassetpricingmodel and the arbitrage pricing theory rely on the proposition that a no-risk, no-wealth investment should earn, on average, no return. Explain why this should be the case, being sure to describe briefly the similarities and differences between CAPM and APT. Also, using either of these theories, explain how superior investment performance can be establish.
Answer:
Both the CapitalAssetPricingModel and the Arbitrage PricingModel rest on the assumption that investors are reward with non-zero return for undertaking two activities:
(1) committing capital (non-zero investment); and (2) taking risk. If an investor could earn a positive return for no investment and no risk, then it should be possible for all investors to do the same. This would eliminate the source of the “something for nothing” return.
In either model, superior performance relative to a benchmark would be found by positive excess returns as measured by a statistically significant positive constant term, or alpha. This would be the return not explained by the variables in the model.
2. You are the lead manager of a large mutual fund. You...

...each of the scenarios below, explain whether or not it represents a diversifiable or an undiversifiable risk. Please consider the issues from the viewpoint of investors. Explain your reasoning
a. There's a substantial unexpected increase in inflation.
b. There's a major recession in the U.S.
c. A major lawsuit is filed against one large publicly traded corporation.
2. Use the CAPM to answer the following questions:
a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 12%, the Risk-FreeRate is 4%, and the Beta (b) for Asset "i" is 1.2.
b. Find the Risk-FreeRate given that the Expected Rate of Return on Asset "j" is 9%, the Expected Return on the Market Portfolio is 10%, and the Beta (b) for Asset "j" is 0.8.
c. What do you think the Beta (β) of your portfolio would be if you owned half of all the stocks traded on the major exchanges? Explain.
3. In one page explain what you think is the main 'message' of the CapitalAssetPricingModel to corporations and what is the main message of the CAPM to investors?
1. For each of the scenarios below, explain whether or not it represents a diversifiable or an un-diversifiable risk....

...CapitalAssetPricingModel (CAPM): Pros and Cons.
CAPM defines the relationship between risk and return. The premise of the model is that the expected investment return varies in direct proportion to its risk, i.e., the riskier the investment - the higher the return you should expect.
Shows:
• how much risk you are taking when investing in an instrument?
• whether the instrument is rightly priced
• whether you are getting sufficient return for the risk you are taking
CAPM calculates the risk-adjusted discount rate with the risk-freerate, the market risk premium, and beta (mathematical formula):
Return (R) = Rf + beta x (Rm - Rf)
Rf is the rate of risk-free investments
Beta - the risk of loss associated with your investments.
Rm is the expected market return.
(Rm-Rf) – market risk premium
beta x (Rm - Rf) – risk premium of specific company
Investments are good if the expected return from the investment equals/exceeds required return.
Market Risk Premium [Rm-Rf]
The additional return over the risk-freerate needed to compensate investors for assuming an average amount of risk
Its size...

...CAPITALASSETPRICINGMODEL
The CapitalAssetPricingModel deals with independent investor problems that needs to undergo the procedure of selection of securities involving risks. The investors need to select the most advantageous security that produces the best possible outcome. This model deals with the estimation of securities as well as it links the risk and return (the expected shares). There is a direct relationship and risk and return provides higher expected return from that security. CAPM is considered the key model for helping in decision making regarding the selection of securities and also helps in planning the strategies.
Types Of Risks – The unsystematic or the diversifiable risk is related to the haphazard causes which can be eradicated or removed with the help of diversification. Similarly the systematic or the non-diversifiable risk is related to the factors of the market which cannot be removed with the help of diversification. The permutation of both the risks is the total risk. The investors choose the systematic risk over the unsystematic as it helps the investors in the selection of the assets.
The derivation of the CapitalAsset...

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