Which of the following statement is FALSE? A. If you ignore a margin call when you...

Which of the following statement is FALSE?

	A.	If you ignore a margin call when you are using margins account, your broker immediately may sell some of your securities to repay the margin loan.
	B.	When forecasting future returns, geometric average will have pessimistic view for short-term period forecasts.
	C.	Geometric average will always be greater than the arithmetic average returns as long as the returns each year are not the same.
	D.	On a short sale, your maximum loss is unlimited.
	E.	Research shows that about 90% of portfolio performance stems from asset allocation.

Solutions

Expert Solution

Answer - Option C is false

Explaination-

Option A is accurate. The broker does have the right to sell securities to take care of the liabilities if you do not pay attention to a margin call.

Option B is also correct, though the difference in short term is not very high. Note that Option C is incorrect as AM or arithmatic mean is always greater than or equal to geometric mean.

Theoretically, you have unlimited loss potential on short sale. Thus, Option D is correct.

Option E is correct according to Portfolio Performance research (Brinson, Hood, Beebower, 1986)

jeff jeffy answered 2 years ago

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