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1.Book-to-market ratios across industries are usually below one. This observation implies that

A. The market values are too high and therefore stocks are overpriced.

B. Value strategies such as buying high book-to-market (value) stocks and selling low book-to-market (growth) stocks are profitable.

C. Market sentiment drives prices to grow faster than book values.

D. Conservative accounting principles downward bias the asset values.

2.The "Fed model" advocates the following logic: "Let Y represent the yield on 10-year Treasuries and E/P represent aggregate earnings to price ratio or earnings yield adjusted for risk premiums. Then stocks and bonds are competing investments. As a result, stocks are cheap when E/P exceeds Y, expensive when Y exceeds E/P, and fairly value when Y and E/P are equal". Which of the following statements is mostly correct?

A. Stocks and bonds are not competing investments due to different preferences for risk. While investors in equity markets are a mixture of retail and institutional, investors in bond markets are mostly institutional.

B. Y should be the yield of perpetual bonds to be comparable with equity, which has indefinite claims in the future.

C. Y should be the yield of inflation-adjusted bonds (TIPS) as aggregate E/P is a real quantity.

D. Y should be the yield of shorter-term bonds because long-term bonds are much less liquid than equity.

3.Which of the following combinations will result in a sharply-increasing yield curve?

A. Increasing future expected short rates and increasing liquidity premiums.

B. Decreasing future expected short rates and increasing liquidity premiums.

C. Increasing future expected short rates and decreasing liquidity premiums.

D. Increasing future expected short rates and constant liquidity premiums.

E. Constant future expected short rates and increasing liquidity premiums. 

4.You aim to immunize a portfolio of $1mil in today's term, with a target duration of 10 years, using a zero-coupon bond with maturity of 4 years and a perpetuity, each currently yields 6%. How much of the zero-coupon bond and the perpetuity will you hold in your portfolio?

A. $560,000 and $440,000 for zeros and perpetuity, respectively.

B. $330,000 and $670,000 for zeros and perpetuity, respectively.

C. $700,000 and $300,000 for zeros and perpetuity, respectively.

D. $500,000 and $500,000 for zeros and perpetuity, respectively.

5.Profitable momentum trading strategy is a direct evidence against the notion of:

A. Weak-form market efficiency.

B. Semi-strong form market efficiency.

C. Strong-form market efficiency.

D. All of the above.

6.Which of the following statements is true?

A. Empirically, the market implied volatility is higher than the market realised volatility.

B. Empirically, the market implied volatility is lower than the market realised volatility.

C. Empirically, the market implied volatility is higher (lower) than the market realised volatility during normal (bad) times.

D. None of the above.

7.The profitability of momentum trading strategy can be economically explained by

A. Disposition effect.

B. Fama-French-Cahart four-factor models.

C. Limits to arbitrage.

D. None of the above

8.The low-beta-bias phenomenon can be explained by

A. Market sentiment.

B. Market risk.

C. Limits to arbitrage.

D. All of the above. 

9.Which of the following statements is correct?

A. Investor returns are generally lower than reported fund returns due to transaction costs and management fees.

B. Investor returns are generally lower than reported fund returns because fund performances are not persistent and suffer from decreasing return to scale.

C. Investor returns are generally lower than reported fund returns because funds generate negative alphas after accounting for risk.

D. A and B are correct.

E. All of the above are correct.

10.A bond's yield to call will receive more attention if

A. the bond's yield to maturity is insufficient.

B. the firm has called some of its bonds in the past.

C. the investor only plans to hold the bond until its first call date.

D. interest rates are expected to rise.

E. interest rates are expected to fall.

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