Martingale Asset Management -Jaimin

Suppose that the price of an asset equals its fundamentalvalue. What behavioral features might then ensure that investors continue totrade? Answer this question specifically in the context of the models that havebeen taught in your course.

Financial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long. Is this advice consistent with the basic M-V model? Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not? Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?

Select all that are true with respect to the theory of market efficiency. Group of answer choices If markets are efficient, investors cannot earn positive returns If markets are efficient, it means prices are always "right" in that the reflect perfect foresight into what will happen in the future Strong form market efficiency suggests that all information, public or private, is reflected in current prices in an unbiased way Market efficiency suggests that relevant information is quickly impounded into prices If transaction costs are high, then prices are less likely to reflect all available information

Asset allocation is performed to A) reduce the load that intermediaries charge maximize the earning potential of an B) investment vehicle C) maximize the earning potential of a portfolio protect against significant declines in any D) one investment vehicle O E) maximize the returns from any one vehicle

True or False Investment bankers and other valuation professionals often utilize relative valuation method   Liquidity has an impact on value. The greater the liquidity, the greater the value.

Which of the following statements describing the elements of intrinsic valuation is most accurate? A.) When the present value of the cashflows is discounted with the appropriate rate and this present value is positive, then the asset providing these cashflows has a value to the investor. B.) The risk-free rate is the lowest rate that an investor can earn from short-term investments. C.) Cashflows may include depreciation expenses and amortization costs. D.) A simple calculation of present values of expected cashflows of different investments using the risk free rate would be enough to determine which asset is best.

Benefits of diversification.   What is the expected return of investing in asset M​ alone?

1. How to compare different assets in investment selection process? 2. What are the quantitative characteristics of the assets and how to measure them? 3. How does one asset in the same portfolio influence the other one in the same portfolio? 4. And what could be the influence of this relationship to the investor’s portfolio? 5. What is relationship between the returns on an asset and returns in the whole market (market portfolio)?

Explain what is meant by the internal rate of return of an investment and discuss its relationship to the NPV of an investment. Explain the problems posed for the use of the IRR when it is necessary (i) to choose between two investments and when (ii) investments are characterised by negative net cash flows at the end of their lives. Discuss and evaluate the use of the payback period as an investment criterion.

Which one of the following could be considered as an advantage of using the payback method of investment appraisal? Select one: O A. Cash flows rising after the payback period is reached are ignored O B. It is easy to understand and simple to calculate O C. Does not take risk fully into account O D. Not related to wealth maximisation objective

Which of the following statements describing the elements of intrinsic valuation is most accurate?  a. A simple calculation of present values of expected cashflows of different investments using the risk free rate would be enough to determine which asset is best.  b. The risk-free rate is the lowest rate that an investor can earn from short-term investments.c. When the present value of the cashflows is discounted with the appropriate rate end this present value is positive, then the asset providing these cashflows have a value to the investor. d.Cashflows may include depreciatipon expenses and amortization costs.

Current Attempt in Progress Describe how investing in more than one asset can reduce risk through diversification. B I U T₂ T² T = = || E

An investor wants to determine if his investment in Bulldogs Inc. gives him a good return. Which of the following is the most appropriate to use? a. Times interest earned ratio b. Dividend yield c. Total asset turnover d. Operating profit margin

Relative Valuation links an asset's value to its inherent qualities, such as its ability to produce cash flows and the risk associated with those cash flows.    Value is futuristic. Equivalent to the present worth of all expected future benefits from ownership.    A company's liquidation value is determined by its future cash flows.    The Cost Approach Model adjusted the anticipated cash flows by discounting them to the valuation date using time value of money principles and a risk-adjusted discount rate that represents the asset's risk.   The greater the size of an asset's cash flows, the lower the asset's value.

An investor wants to determine if his investment in Bulldogs Inc. gives him a good return. Which of the following is the most appropriate to use?     Total asset turnover Operating profit margin Times interest earned ratio Dividend yield

True or False   Relative Valuation links an asset's value to its inherent qualities, such as its ability to produce cash flows and the risk associated with those cash flows.    Value is futuristic. Equivalent to the present worth of all expected future benefits from ownership.    A company's liquidation value is determined by its future cash flows.    The Cost Approach Model adjusted the anticipated cash flows by discounting them to the valuation date using time value of money principles and a risk-adjusted discount rate that represents the asset's risk.   The greater the size of an asset's cash flows, the lower the asset's value.

Which of the following decision criteria is the easiest to use and very popular among investors? O Payback period. O Internal rate of return. O Average accounting return. Net present value. O Discounted return on investment.

Which of the following best explains the role of diversification as part of an investment strategy?   a.Choosing investment vehicles with varying levels of risk/reward   b.Spreading investments out over time   c.Balancing investment amounts with debt amounts   d.Soliciting the opinions of multiple financial planners

True or false   DCF Approach Model examines the price of "similar" assets in relation to a common variable, such as profits, cash flows, book value, and sales, to determine the asset's worth.   In most cases, a company's book value and its market value are the same.    The Cost Approach Model adjusted the anticipated cash flows by discounting them to the valuation date using time value of money principles and a risk-adjusted discount rate that represents the asset's risk. We only need to know the future cash flows in order to value an investment A company's resources must be worth the same as the contractual claims on those resources.

In general, the the correlation between asset returns, the the risk reduction that investors can achieve by diversifying. O a. lower; lower O b. greater; greater O c. lower; greater d. greater; lower

Explain what’s wrong with the following logic to construct multifactor asset pricing models. Start with a simple asset pricing model, e.g. CAPM Consider which patterns are explained by it and which are left unexplained. If some firm characteristic “X” is unexplained, construct and include a new factor on the basis of this characteristic. By definition your new model (with new factor would explain “X”) Repeat steps 2 and 3 until all/most important anomalies are accounted for

explain the unique characteristics of the asset class, their associated risks and potential returns. Foreach asset class, you should use one or two examples to support your explanation. Asset Class           Characteristics Risk Potential Returns ExampleCash Products Fixed Income Equities CurrenciesDerivatives

According to Wald's criterion, which investment is decided by looking at the profitability of three investments such as S1, S2 and S3 in the following economic environments? Economic Conditions S1 S2 S3 Vivid Economic Situation 13 6 7 Normal Economic Condition 10 9 8 Stagnant Economic Condition 7 14 4 Recession Condition 8 7 15

Technically, the required return of an investment can be determined by determining the investments risk profile. However, many intangible factors influence an investor’s decision to invest. Discuss the intangible factors that may come into play in the investment decision process.

Do normal valuation metrics work like P/E, P/B etc., in tech companies or do investment bankers advocate other metrics?

Economic conditions impact all asset prices.  If we can accurately determine where we are at in the business cycle, then we can potentially shift our asset allocation to take advantage of changing conditions.  As we enter the early part of an expansion, we would want to underweight ___________ stocks and overweight _____________ stocks.   A. cyclical; defensive  B. cheap; expensive  C. expensive; cheap  D. high quality; junk  E. defensive; cyclical

“Explain the reasons why the net present value (NPV) method of investment appraisal is likely to be more reliable than the accounting rate of return method (ARR).”

Which approach to investment analysis is "best" in terms of accounting for both the timing and amount of revenue streams from a potential investment? A.  the payback period B.  the simple rate of return C.   the net present value D. the internal rate of return

The following are investment criteria: net present value, payback, profitability index, average accounting return, and the internal rate of return. Question: Which one of these is the most valuable from a financial point of view, and why? (Answer the question correctly and in-depth.)