Page 221 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 7.12 Review Questions

1. Do you think that the capital markets be efficient? Why/Why not?
2. What do you think was the reason behind insider's trading being legal in Switzerland till
recent past? Analyse the causes for Swiss government to illegalise the practice.
3. Is the stock market semi strong form efficient? Why/Why not?
4. Prove that volatility increases your risk of loss of principal.

5. Do you think that the markets are efficient today?
6. When combined with the risk-free asset, the market portfolio will produce a return rate
above the efficient frontier. Comment.

7. Currently, China is seeking to limit access to global financial information in Shanghai
(site of its major stock exchange). The government wishes to keep certain kinds of
information from market participants. Is this desirable? Will this be possible?

8. Examine the concept of efficient frontier with the riskless asset.
9. Through example, show that the mean and the standard deviation can be used to plot the
relative risk and return for any selection of securities.

10. The efficient market theory is a good first approximation for characterizing how prices in
a liquid and free market react to the disclosure of information. How?
11. While impressive theoretically, modern portfolio theory has drawn severe criticism from
many quarters. What do you think as the reason behind it?

Answers: Self Assessment

1. Capital Asset Pricing Model, or CAPM 2. Beta
3. optimization 4. efficiency

5. Arbitrageurs 6. semi-strong
7. information 8. curved
9. positive, negative 10. weak
11. leverage 12. market portfolio

13. three 14. up, lower down
15. stock price

7.13 Further Readings

Books Mayo, Herbert B., Basic Investments, the Dryden Press; Hinsdale; Ill: 1980.
Melcher, B., Stockholder Equity, N.Y., AICPA, 1973.

Newlyn, W.T., Theory of money, Clarendon Press, Oxford, 1971.
Parek, H.T., The Future of Joint Stock Companies in India, Jaico Publishing House,
Bombay, 1958.

Sudhindhra Bhatt, Security Analysis and Portfolio Management, Excel Books

216 LOVELY PROFESSIONAL UNIVERSITY