Cross-sectional returns studies contend that:
A. all securities should have equal risk-adjusted returns because security prices should reflect all public information that would influence the security’s risk.
B. all securities should have equal risk-adjusted returns because security prices should not reflect all public information that would influence the security’s risk.
C. securities should not have equal risk-adjusted returns because security prices should not reflect all public information that would influence the security’s risk.
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Which of the following statements best describes the limits of arbitrage in correcting market anomalies
A. When fundamentals indicate that a stock is overvalued or undervalued, trading based on this information will be immediately profitable.
B. Arbitrage is not always risk-less as was shown during the internet stock bubble of the 1990s, when traders were short a stock and had to cover their positions at a much higher takeover price.
C. There is no limitation to arbitrage in correcting market anomalies because it is a risk-less trading activity and once there is a mispricing it will be exploited to its fullest.
Which of the following statements about arbitrage and market anomalies is most accurate
A. Investors of the funds that arbitrageurs and traders use are generally too patient and fail to remove funds in a timely manner when trades go against them.
B. Arbitrageurs have more capital at their disposal than they require enabling them to pursue any security mispricing.
C. In pairs trading, where an arbitrageur purchases the underpriced security and shorts the overpriced security, stock-specific risk remains.
Which of the following statements best describes the investment assumption used to calculate an unweighted price indicator series
An equal dollar investment is made in each stock in the index.
B. A proportionate market value investment is made for each stock in the index.
C. A proportionate market capitalization is made for each stock in the index.
With regard to stock market indexes, it is least likely that:
A. the use of a geometric mean produces a downward bias on an equal-weighted index compared to the use of an arithmetic mean.
B. the use of price weighting versus market value weighting produces a downward bias on the index.
C. a value-weighted index must be adjusted for stock splits but not for dividends.
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