Question 1

Several studies have looked at the effect of analyst recommendations on stock prices.These studies have concluded that the recommendations are not useful to investors interested in making excess returns.

Accepted Answer

The statement is true. Several studies have found that analyst recommendations do not lead to excess returns for investors.

Question 2

Mutual funds are subject to a single set of tax rules.To avoid taxes,mutual funds must distribute by December 31^st 98% of all ordinary income earned during the calendar year and 98% of all realized net capital gains earned during the previous 12 months ending October 31^st.

Accepted Answer

This statement is true. Mutual funds are required by law to distribute their income and capital gains to their shareholders at least once a year. To avoid taxation at the fund level, mutual funds must distribute at least 98% of their income and realized capital gains to shareholders by December 31. This is known as the "90% rule" or the "dividend distribution requirement."

Question 3

Explain how Betas of Index funds result below one under a passive strategy.

Accepted Answer

There is no such index fund that has a performance that exactly matches the performance of the index it tracks on a month-by-month or year-by-year basis.Cash inflows from investors,the payment of dividends,and the response to changes in the composition of the index cause the cash position to change and transaction costs to be incurred.Index funds available to individual investors also maintain a cash position to smooth out cash flows.This results in Betas to be slightly below one with respect to the index being tracked.It means that the index funds generally do slightly better when markets are down and slightly worse when markets go up.

Question 4

List the methods that are employed to determine the "I's" in the literature of performance measurement,where the "I's" represent influences that systematically affect returns.

Accepted Answer

The answer of List the methods that are employed to...

Question 5

Past fund performance is correlated with future fund performance,such as,poor fund performance predicts future poor performance.

Accepted Answer

The answer of Past fund performance is correlated with future...

Question 6

One of the techniques adopted by managers to improve performance through market timing is to:
A) maintain a constant percentage of amount invested in bonds and stock.
B) adjust the expected return on the portfolio in anticipation of changes in market.
C) adjust the unsystematic risk in anticipation of changes in market.
D) adjust the average beta on the portfolio in anticipation of changes in market.

Accepted Answer

Adjusting the average beta on the portfolio in anticipation of changes in the market is a market timing strategy. By changing the beta, managers can increase or decrease the portfolio's sensitivity to market movements, thus potentially improving performance based on market forecasts.

Question 7

A perfect forecasting ability implies that:
A) the predicted change in earnings are higher than the realized change in earnings.
B) the forecaster outperforms the naive no-change model.
C) the value of Thiel's inequality coefficient will be more than 1.
D) the predicted change in earnings equals difference between actual earnings and forecasted level of earnings.

Accepted Answer

A perfect forecasting ability implies that the predicted change in earnings equals the difference between actual earnings and forecasted level of earnings, which is option D. Option A is incorrect because if the predicted change is higher than the realized change, it would mean that the forecast was inaccurate. Option B is incorrect because outperforming the naive no-change model is not the same as having perfect forecasting ability. Option C is incorrect because if Thiel's inequality coefficient is more than 1, it would mean that the forecast is biased and has a tendency to overestimate or underestimate the actual values.

Question 8

While money managers,on average,have not done as well as the market,larger money managers have generally done much better than smaller money managers.

Accepted Answer

Studies and data generally show that the size of a money manager does not consistently correlate with better performance. In many cases, larger money managers face scalability issues that can hinder their ability to outperform the market, and there are instances where smaller money managers have achieved superior results due to their agility and ability to invest in smaller, potentially more lucrative opportunities.

Question 9

An active strategy utilized for common stocks
A) involves less diversifiable risk than an index fund.
B) involves a lower cost of paying the forecasters either in form of salaries or in the management fees than a passive strategy.
C) requires higher turnover as opposed to the very low turnover of the buy and hold strategies of an index fund.
D) requires lower transaction cost as compared to passive management.

Accepted Answer

Active strategies typically require higher turnover as opposed to the low turnover of a passive buy and hold index fund strategy. This is because active strategies attempt to outperform the market through constant buying and selling of stocks based on market trends and analysis. Therefore, the correct choice is C.

A is incorrect because an active strategy typically involves more diversifiable risk as compared to an index fund, which is well-diversified across multiple stocks.

B is incorrect because the cost of paying forecasters or fund managers is usually higher in active strategies than in passive strategies like index funds, which have low management fees.

D is incorrect because active management typically incurs higher transaction costs than passive management, which buys and holds a diversified group of stocks.

Question 10

Explain how a fund manager may improve the portfolio's performance through market timing.Also discuss the limitation of using such strategies.

Accepted Answer

The answer of Explain how a fund manager may improve...

Question 11

The tremendous growth in assets under management of open-end funds was fuelled by two sources: a high rate of return in the capital markets and huge inflows of new capital due in large part to the growth in the private pension market in the U.S.

Accepted Answer

The statement correctly explains the sources that fueled the growth in assets under management of open-end funds.

Question 12

Explain the steps involved in evaluating the valuation process of an output.

Accepted Answer

The answer of Explain the steps involved in evaluating the...

Quiz 5: Evaluating the Investment Process

Several studies have looked at the effect of analyst recommendations on stock prices.These studies have concluded that the recommendations are not useful to investors interested in making excess returns.

Mutual funds are subject to a single set of tax rules.To avoid taxes,mutual funds must distribute by December 31st 98% of all ordinary income earned during the calendar year and 98% of all realized net capital gains earned during the previous 12 months ending October 31st.