CAIA - Chapter 6 Questions & Answers 100% Correct

Jane studies past prices and volume of trading in major public equities and establishes equity market neutral positions based on her forecasts of prices. Jane consistently outperforms market indices of comparable risk. Does Jane's investment strategy and performance indicate: - ANSWER-The underlying equity market is informationally inefficient at the weak level? • The underlying equity market is informationally inefficient at the semi-strong level, both, or neither? The underlying equity market is informationally inefficient at both the weak level and the semistrong level since any inefficiency at a "lower" level indicates inefficiency at a "higher" level because the underlying information sets are cumulative moving from weak to strong List two major factors that drive informational market efficiency through facilitating better investment analysis - ANSWER-Assets will also tend to trade at prices closer to their informationally efficient values when there is easier access to better information. • Assets will also tend to trade at prices closer to their informationally- efficient values when there is less uncertainty about their valuation. In other words, when there are better valuation methods. What is the term used to describe a framework for specifying the return or price of an asset based on its risk, as well as future cash flows and payoffs? - ANSWER-Asset pricing model What is the market portfolio, and what is a market weight? - ANSWER-The market portfolio is a hypothetical portfolio containing all tradable assets in the world. • The market weight of an asset is the proportion of the total value of that asset to the total value of all assets in the market portfolio. What is an ex post excess return? - ANSWER-A realized return (an observed historical return) expressed as an excess return by subtracting the riskless return from the asset's total return What factor is contained in the Fama-French Carhart model that is not contained in the Fama-French model? - ANSWER-Momentum Is the Black-Scholes option pricing model a relative pricing model or an absolute pricing model? - ANSWER-Relative pricing model since it describes an option price relative to the given underlying asset price. Wh