FIN 470 FINAL EXAM QUESTIONS WITH ACCURATE
ANSWERS
(BL) Black-Litterman Model correct answer •Optimal portfolio weights and
performance are highly sensitive to the degree of confidence in the views
•The validity of the BL model rests largely upon the way in which the confidence
about views is developed
•Use the BL model for asset allocation
•Views about relative performance are useful even when the degree of
confidence is inaccurately estimated
(TB) Treynor-Black Model correct answer •TB model is not applied in the field
because it results in "wild" portfolio weights
•The extreme weights are a consequence of failing to adjust alpha values to
reflect forecast precision
•Use the TB model for the management of security analysis with proper
adjustment of alpha forecasts
•Affect and feelings correct answer •Investors tend to choose stocks with high
affect, driving up prices while simultaneously driving down returns
,•Bankers' acceptance correct answer •An order to a bank by a customer to pay a
sum of money at a future date
•Breadth correct answer •Measure of the extent to which movement in a market
index is reflected widely in the price movements of all the stocks in the market
•Most common measure is the spread between the number of stocks that
advance and decline in price
•Call option correct answer •Gives holder the right to purchase an asset for a
specified price, called the exercise or strike price, on or before a specified
expiration date
•Capital gains correct answer •Amount by which the sale price of a security
exceeds the purchase price
•Commercial paper correct answer Short-tern unsecured debt notes, often issued
by large, well-known companies and backed by a bank line of credit
•Confidence index correct answer •Ratio of the average yield on 10 top-rated
corporate bonds divided by the average yield on 10 intermediate-grade corporate
bonds
•Ratio will always be below 1
•Higher values are bullish signals
•Dividend yield correct answer •Annual dividend payment expressed as a percent
of the stock price
, •Expected shortfall (ES) correct answer •Expected loss on a security conditional
on returns being in the left tail of the probability distribution
•Federal funds correct answer •Funds in a bank's reserve account at the Federal
Reserve Bank
•Framing correct answer •Decisions affected by how choices are described, such
as whether uncertainty is posed as potential gains from a low baseline levels, or
as losses from a higher baseline value
•Fundamental risk correct answer •Markets can remain irrational longer than you
can remain solvent" -- Keynes
•Intrinsic value and market value may take too long to converge
•Futures contract correct answer •Calls for delivery of an asset (or cash value) at
a specified delivery or maturity date for an agreed-upon price, called the futures
price, to be paid at contract maturity
•Long position held by the trader who commits to purchasing the asset on the
delivery date
•Short position held by trader who commits to delivering the asset at contract
maturity
•Limited attention, underreaction, and overreaction correct answer •Reliance on
heuristics due to limited time/attention
•Limited liability correct answer •Most shareholders can lose in the event of
failure of the corporation is their original investment
ANSWERS
(BL) Black-Litterman Model correct answer •Optimal portfolio weights and
performance are highly sensitive to the degree of confidence in the views
•The validity of the BL model rests largely upon the way in which the confidence
about views is developed
•Use the BL model for asset allocation
•Views about relative performance are useful even when the degree of
confidence is inaccurately estimated
(TB) Treynor-Black Model correct answer •TB model is not applied in the field
because it results in "wild" portfolio weights
•The extreme weights are a consequence of failing to adjust alpha values to
reflect forecast precision
•Use the TB model for the management of security analysis with proper
adjustment of alpha forecasts
•Affect and feelings correct answer •Investors tend to choose stocks with high
affect, driving up prices while simultaneously driving down returns
,•Bankers' acceptance correct answer •An order to a bank by a customer to pay a
sum of money at a future date
•Breadth correct answer •Measure of the extent to which movement in a market
index is reflected widely in the price movements of all the stocks in the market
•Most common measure is the spread between the number of stocks that
advance and decline in price
•Call option correct answer •Gives holder the right to purchase an asset for a
specified price, called the exercise or strike price, on or before a specified
expiration date
•Capital gains correct answer •Amount by which the sale price of a security
exceeds the purchase price
•Commercial paper correct answer Short-tern unsecured debt notes, often issued
by large, well-known companies and backed by a bank line of credit
•Confidence index correct answer •Ratio of the average yield on 10 top-rated
corporate bonds divided by the average yield on 10 intermediate-grade corporate
bonds
•Ratio will always be below 1
•Higher values are bullish signals
•Dividend yield correct answer •Annual dividend payment expressed as a percent
of the stock price
, •Expected shortfall (ES) correct answer •Expected loss on a security conditional
on returns being in the left tail of the probability distribution
•Federal funds correct answer •Funds in a bank's reserve account at the Federal
Reserve Bank
•Framing correct answer •Decisions affected by how choices are described, such
as whether uncertainty is posed as potential gains from a low baseline levels, or
as losses from a higher baseline value
•Fundamental risk correct answer •Markets can remain irrational longer than you
can remain solvent" -- Keynes
•Intrinsic value and market value may take too long to converge
•Futures contract correct answer •Calls for delivery of an asset (or cash value) at
a specified delivery or maturity date for an agreed-upon price, called the futures
price, to be paid at contract maturity
•Long position held by the trader who commits to purchasing the asset on the
delivery date
•Short position held by trader who commits to delivering the asset at contract
maturity
•Limited attention, underreaction, and overreaction correct answer •Reliance on
heuristics due to limited time/attention
•Limited liability correct answer •Most shareholders can lose in the event of
failure of the corporation is their original investment
