1. The difference between the fair and actually expected rate of return on a stock is called the stock's _____.
   1. beta
   2. gamma
   3. alpha
   4. delta

2. The expected return on a stock with a beta of 1.5 is 15%. If the expected risk-free rate of return is 3%, what should be the market risk premium?
   1. 16%
   2. 8%
   3. 12%
   4. 15%

3. All of the following are areas in which the capital asset pricing model (CAPM) can be used except:
   1. investment management.
   2. capital budgeting decisions in which the CAPM can provide the return the project needs to yield to be acceptable to investors.
   3. utility rate-making cases.
   4. predicting relationships among actual returns on a portfolio.

4. A stock has an estimated rate of return of 15.5% and a beta of 1.5. The market expected rate of return is 10% and the risk-free rate is 3%. The alpha of the stock is ______________.
   1. -2%
   2. 0%
   3. 2%
   4. 3%

5. Which of the following is an empirical rule concerning betas?
   1. They appear to regress toward mean.Multiple Choice Quiz
   2. They are constant over time.
   3. They are always near zero.
   4. They are always positive.

6. According to the CAPM, overvalued securities should have ____________.
   1. large betas
   2. positive alphas
   3. zero alphas
   4. negative alphas

7. The mutual fund theorem states that __________________.
   1. the presence of mutual funds preclude arbitrage opportunities in well-functioning capital markets
   2. it is difficult for the actual returns of a mutual fund to closely mirror the initial investor expectations in any particular holding period
   3. all investors desire the same portfolio of risky assets and can be satisfied by a single mutual fund composed of that portfolio
   4. it is impossible to create a portfolio to represent all the relevant systematic factors in the economy

8. In Fama and French's three-factor model, ______________ and ______________ are added to the market index to explain average returns.
   1. firm size; firm revenues
   2. firm size; book value to market value ratio
   3. firm sales; market value to book value ratio
   4. firm sales; firm cost of capital

9. Which of the following is a valid comparison between the CAPM and the APT?
   1. The CAPM applies only to well-diversified portfolios.
   2. The CAPM dominates the APT and econometric concerns appear to favor it.
   3. The APT gets us to the expected returnbeta relationship without requiring many of the unrealistic assumptions of the CAPM.
   4. Both theories differ on the expected returnbeta relationship.

10. In an efficient market, portfolio management:
    1. plays an important role in terms of diversification and risk management.
    2. is relevant only for high-tax-bracket investors.
    3. is relevant only in the management of bond portfolios.
    4. does not require emphasis on diversification.

11. The small-firm-in-January effect refers to the phenomenon that portfolios of small-firm stocks (compared to portfolios of large-firm stocks) have:
    1. a tendency to underperform the stock market.
    2. high returns in December and January.
    3. abnormal positive returns, primarily in January.
    4. returns in January that are positively correlated with returns in December.
12. Some researchers have found that portfolios of stocks with low P/E ratios ______________.
    1. outperform stocks with high P/E ratios
    2. underperform stocks with high P/E ratios
    3. tend to have the same returns as stocks with high P/E ratios
    4. are uncorrelated with returns for high P/E stocks

13. The reversal effect:
    1. is the tendency of poorly performing and well-performing stocks in one period to experience continued performance in the same direction during the following period.
    2. B) is one in which losers fade back and winners rebound.
    3. C) suggests that the stock market overreacts to relevant news, so that extreme investment performance is reversed.
    4. D) indicates that long-term overreaction may lead to short-term reversals as investors recognize and correct past pricing errors.

14. The efficient market hypothesis suggests that investors should:
    1. adopt an active portfolio management strategy.
    2. adopt a passive portfolio management strategy.
    3. use technical analysis as the basis for investment decisions.
    4. use fundamental analysis as the basis for investment decisions.

15. Which of the following is a source of bias that leads to investor errors in information processing?
    1. Framing
    2. Regret avoidance
    3. Conservatism
    4. Prospect theory

16. Closed-end funds ______________ net asset value.
    1. often sell at substantial discounts from or premiums above
    2. always sell for
    3. always sell at a premium above
    4. always sell at a discount from

17. The finding that men trade far more actively than women is consistent with the notion of ______________.
    1. market inefficiency
    2. conservatism
    3. mental accounting
    4. overconfidence

18. Behavioral finance models explain investor's preference for cash dividends as a consequence of ______________.
    1. taxation issues
    2. overreaction
    3. mental accounting
    4. overconfidence

19. _______________ maintains that the level of an investor's utility depends mostly on the investor's change in wealth rather than his level of wealthy.
    1. The Law of One Price
    2. Prospect theory
    3. Investor sentiment
    4. Mental accounting

20. When a stock's market price breaks through its moving average line from below, a technical analyst interprets this as ______________.
    1. a bullish signal
    2. a bearish signal
    3. a hold recommendation
    4. an uncertain signal requiring confirmation