Indicate the following statements are Valid or invalid? Explain why?

Question 1:

Primary markets are more important than secondary markets, since firms raise capital only in primary markets.

Question 2:

Interest rate spread is a good performance measure for investment banks.

Question 3:

An investor with a Euroyen account in Japan earns the European interest rate.

Question 4:

According to the CAPM model, the only source of risk for investors is the volatility of the

asset return.

Question 5:

Hedging is irrelevant in the absence of market frictions.

Question 6:

Passive investors mainly rely on market timing ability to generate returns.

Question 7:

Entering into a fixed for floating interest rate swap always makes sense if the short rate (e.g., 3 months) is below the long-term interest rate (e.g., 10 years)

Question 8: There is no credit risk in futures.

Question 9:

The BDT model is particularly suitable to price derivatives in a low interest rate environment where short rates are close to the zero lower bound.

Question 10:

The value of a senior tranche in a CDO is increasing with the average default correlations of the underlying names.

Question 11:

In a carry trade you borrow in low interest rate currencies and invest in high interest rate currencies. Returns are exclusively due to the interest rate differential.

Question 12: 

The presence of noise traders may increase the required return on an asset.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below Validity of Statements 1 Invalid While ... View the full answer