Which of the Following Statements Is FALSE

question 61

Multiple Choice

Which of the following statements is FALSE?

• A)A momentum strategy is one where you buy stocks that have had low past returns and (short)sell stocks that have had high past returns.
• B)Over the years since the discovery of the CAPM,it has become increasingly clear to researchers and practitioners alike that when forming portfolios based on market capitalization,book-to-market ratios,and past returns,one can construct trading strategies that have a positive alpha.
• C)In one study,portfolios containing firms with the highest realized returns over the previous 6-12 months had positive alphas over the next 3-12 months.
• D)If the market portfolio is not efficient,then a portfolio of small stocks will likely have positive alphas.

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Definitions:

Financial Distress

A situation where a company struggles to meet or has difficulty paying off its financial obligations to creditors.

Agency Costs

Expenses, either direct or indirect, that are borne by a principal as a result of having delegated authority to an agent. An example is the costs borne by shareholders to encourage managers to maximize a firm’s stock price rather than act in their own self-interests. These costs may also arise from lost efficiency and the expense of monitoring management to ensure that debtholders’ rights are protected.

Bankruptcy Costs

Expenses and fees associated with the process of declaring bankruptcy, including legal, administrative, and any potential asset liquidation costs.

Business Risk

The risk inherent in the operations of the firm, prior to the financing decision. Thus, business risk is the uncertainty inherent in a total risk sense, future operating income, or earnings before interest and taxes. Business risk is caused by many factors. Two of the most important are sales variability and operating leverage.