Copenhagen Business School

FINANCE Corporate

Quiz 1 Risk Management and Corporate Finance

1)Which of the following statements are equivalent to having an investment that is 'beating the market', i.e., an investment making an abnormal return?

• • The return of the investment is higher than that of a diversified portfolio with similar risk characteristics.
  • The return of the investment is higher than what is expected from an efficient market model, i.e., the CAPM.
  • The NPV of the investment is positive.
  • None of the above.

2. According to the efficient market theory, it is NOT possible to:
   • Experience bubbles in the financial markets
   • See some investors beating the market 10 years in a row.
   • Make an abnormal profit by using information on historical stock prices.
   • None of the above.

3. "In an efficient market all information should already be reflected in the current market price of a stock. The price of the stock will therefore only increase if the company exceeds the expectations. If the company performs as expected the stock price will never increase".
   • True - only if the risk free rate is 0
   • False - the stock price can increase simply if the company only meets expectations.
   • True - if the expected return is negative
   • None of the above.

4. "The efficient market hypothesis (EMH) is one of the defining ideas of our age. The wider ethos of "the market knows best" has infiltrated virtually every area of life under neo- liberalism. And yet a succession of financial bubbles and crashes has made the efficient market hypothesis appear empirically untenable."
   • True - financial bobbles are inconsistent with the EMH.
   • True - all tests of the EMH will by definition fail.
   • True - a crash can never happen in an efficient market.
   • None of the above.

5. "There are two primary methods used to analyze securities and make investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves analyzing a company's financial statements to determine the fair value of the business, while technical analysis assumes that a security's price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements." - How does this statement relate to the EMH?
   • Fundamental analysis should not add value according to the EMH.
   • Technical analysis should not add value according to EMH.
   • Any stock market analysis should not add value according to the EMH.
   • None of the above.