Archives

Chapter 01 – The Investment Environment 1-12 33. Important trends changing the contemporary investment environment are A. globalization. B. securitization. Difficulty: Easy 34. The means by which individuals hold their claims on real assets in a well-developed economy are A. […]

Chapter 01 – The Investment Environment 1-1 Chapter 01 The Investment Environment Multiple Choice Questions 1. In 2007, ____________ was the most significant real asset of U.S. households in terms of total value. A. consumer durables Difficulty: Easy 2. In […]

Chapter 01 – The Investment Environment 1-1 CHAPTER 1: THE INVESTMENT ENVIRONMENT PROBLEM SETS 1. Ultimately, it is true that real assets determine the material well being of an economy. Nevertheless, individuals can benefit when financial engineering creates new products […]

Chapter 10 – Arbitrage Pricing Theory and Multifactor Models of Risk and Return CHAPTER 10: ARBITRAGE PRICING THEORY AND MULTIFACTOR MODELS OF RISK AND RETURN PROBLEM SETS 1. The revised estimate of the expected rate of return on the stock […]

Chapter 10 – Arbitrage Pricing Theory and Multifactor Models of Risk and Return 10-1 Chapter 10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return Multiple Choice Questions 1. ___________ a relationship between expected return and risk. A. APT […]

Chapter 10 – Arbitrage Pricing Theory and Multifactor Models of Risk and Return 10–19 44. Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? I) the expected return-beta relationship is maintained for all but […]

Chapter 11 – The Efficient Market Hypothesis 11-1 Chapter 11 The Efficient Market Hypothesis Multiple Choice Questions 1. If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock […]

Chapter 11 – The Efficient Market Hypothesis 11-1 CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS PROBLEM SETS 1. The correlation coefficient between stock returns for two non-overlapping periods 2. No. Microsoft’s continuing profitability does not imply that stock market investors who […]

Chapter 11 – The Efficient Market Hypothesis 11–16 41. The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight, during the peak of the citrus harvest. In an efficient market one would expect the […]

Chapter 12 – Behavioral Finance and Technical Analysis CHAPTER 12: BEHAVIORAL FINANCE AND TECHNICAL ANALYSIS PROBLEM SETS 1. Technical analysis can generally be viewed as a search for trends or patterns in market prices. Technical analysts tend to view these […]

Chapter 12 – Behavioral Finance and Technical Analysis 12-1 Chapter 12 Behavioral Finance and Technical Analysis Multiple Choice Questions 1. Conventional theories presume that investors ____________ and behavioral finance presumes that they ____________. A. are irrational; are irrational Difficulty: Easy […]

Chapter 12 – Behavioral Finance and Technical Analysis 12–14 31. The put/call ratio is computed as ____________ and higher values are considered ____________ signals. D. the number of outstanding call options divided by outstanding put options; bullish E. the number […]

Chapter 13 – Empirical Evidence on Security Returns 13-1 CHAPTER 13: EMPIRICAL EVIDENCE ON SECURITY RETURNS PROBLEM SETS 1. Even if the single-factor CCAPM (with a consumption-tracking portfolio used as the index) performs better than the CAPM, it is still […]

Chapter 13 – Empirical Evidence on Security Returns 13-1 Chapter 13 Empirical Evidence on Security Returns Multiple Choice Questions 1. The expected return/beta relationship is used ___________. A. by regulatory commissions in determining the costs of capital for regulated firms […]

Chapter 13 – Empirical Evidence on Security Returns 13–14 34. Fama and French, in their 1992 study, found that D. macroeconomic factors had better explanatory power than beta in describing portfolio returns. E. none of the above is true. Fama […]

Chapter 14 – Bond Prices and Yields 14-1 Chapter 14 Bond Prices and Yields Multiple Choice Questions 1. The current yield on a bond is equal to ________. D. the internal rate of return E. none of the above A […]

Chapter 14 – Bond Prices and Yields CHAPTER 14: BOND PRICES AND YIELDS PROBLEM SETS 1. The bond callable at 105 should sell at a lower price because the call provision is more valuable to the firm. Therefore, its yield […]

Chapter 14 – Bond Prices and Yields 14–21 53. A coupon bond pays interest semi-annually, matures in 5 years, has a par value of $1,000 and a coupon rate of 12%, and an effective annual yield to maturity of 10.25%. […]

Chapter 14 – Bond Prices and Yields 14–37 92. Three years ago you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year […]

Chapter 15 – The Term Structure of Interest Rates CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS. 1. In general, the forward rate can be viewed as the sum of the market’s expectation of the future short rate […]

Chapter 15 – The Term Structure of Interest Rates 15-1 Chapter 15 The Term Structure of Interest Rates Multiple Choice Questions 1. The term structure of interest rates is: A. The relationship between the rates of interest on all securities. […]

Chapter 15 – The Term Structure of Interest Rates 15–17 40. What would the yield to maturity be on a four-year zero coupon bond purchased today? A. 5.80% B. 7.30% Difficulty: Moderate 41. Calculate the price at the beginning of […]

Chapter 16 – Managing Bond Portfolios 16–21 50. Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2 percent decrease in yield would cause the price to increase by 21.2%, according to […]

Chapter 16 – Managing Bond Portfolios 16-1 Chapter 16 Managing Bond Portfolios Multiple Choice Questions 1. The duration of a bond is a function of the bond’s A. coupon rate. B. yield to maturity. Difficulty: Easy 2. Ceteris paribus, the […]

Chapter 16 – Managing Bond Portfolios 16-1 CHAPTER 16: MANAGING BOND PORTFOLIOS PROBLEM SETS 1. While it is true that short-term rates are more volatile than long-term rates, the longer 2. Duration can be thought of as a weighted average […]

Chapter 17 – Macroeconomic and Industry Analysis 17-1 Chapter 17 Macroeconomic and Industry Analysis Multiple Choice Questions 1. A top down analysis of a firm starts with ____________. A. the relative value of the firm Difficulty: Easy 2. An example […]

Chapter 17 – Macroeconomic and Industry Analysis CHAPTER 17: MACROECONOMIC AND INDUSTRY ANALYSIS PROBLEM SETS 1. Expansionary (looser) monetary policy to lower interest rates would stimulate both investment and expenditures on consumer durables. Expansionary fiscal policy (i.e., lower taxes, increased […]

Chapter 17 – Macroeconomic and Industry Analysis 17–21 54. The life cycle stage in which industry leaders are likely to emerge is the A. start-up stage. B. maturity stage. Difficulty: Easy 55. Investment manager Peter Lynch refers to firms that […]

Chapter 18 – Equity Valuation Models Chapter 18 Equity Valuation Models Multiple Choice Questions 1. ________ is equal to the total market value of the firm’s common stock divided by (the replacement cost of the firm’s assets less liabilities). A. […]

Chapter 18 – Equity Valuation Models CHAPTER 18: EQUITY VALUATION MODELS PROBLEM SETS 1. Theoretically, dividend discount models can be used to value the stock of rapidly growing companies that do not currently pay dividends; in this scenario, we would […]

Chapter 18 – Equity Valuation Models 18–21 50. High Tech Chip Company is expected to have EPS in the coming year of $2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm […]

Chapter 18 – Equity Valuation Models 18–53 122. Smart Draw Company is expected to have per share FCFE in year 1 of $1.20, per share FCFE in year 2 of $1.50, and per share FCFE in year 3 of $2.00. […]

Chapter 18 – Equity Valuation Models 91. The dividend discount model A. ignores capital gains. B. incorporates the after-tax value of capital gains. C. includes capital gains implicitly. D. restricts capital gains to a minimum. E. none of the above. […]

Chapter 19 – Financial Statement Analysis 19-1 Chapter 19 Financial Statement Analysis Multiple Choice Questions 1. A firm has a higher quick (or acid test) ratio than the industry average, which implies. A. the firm has a higher P/E ratio […]

Chapter 19 – Financial Statement Analysis 19-1 CHAPTER 19: FINANCIAL STATEMENT ANALYSIS PROBLEM SETS 1. The major difference in approach of international financial reporting standards and U.S. GAAP accounting stems from the difference between ‘principles’ and ‘rules.’ U.S. GAAP accounting […]

Chapter 19 – Financial Statement Analysis 19–21 51. Given the following firm and market information, determine the value of the firm. Difficulty: Difficult 52. Firms will not have both relatively high profit margins and total asset turnover for long periods […]

Chapter 19 – Financial Statement Analysis 19–33 80. Proceeds from a company’s sale of stock to the public are included in ________. Difficulty: Easy 81. Which of the financial statements recognizes only transactions in which cash changes hands? A. Balance […]

Chapter 02 – Asset Classes and Financial Instruments CHAPTER 2: ASSET CLASSES AND FINANCIAL INSTRUMENTS PROBLEM SETS 1. Preferred stock is like long-term debt in that it typically promises a fixed payment each year. In this way, it is a […]

Chapter 02 – Asset Classes and Financial Instruments 2-1 Chapter 02 Asset Classes and Financial Instruments Multiple Choice Questions 1. Which of the following is not a characteristic of a money market instrument? A. liquidity B. marketability Difficulty: Easy 2. […]

Chapter 02 – Asset Classes and Financial Instruments 2-19 48. Which of the following are characteristics of preferred stock? I) It pays its holder a fixed amount of income each year, at the discretion of its managers. II) It gives […]

Chapter 20 – Options Markets: Introduction Chapter 20 Options Markets: Introduction Multiple Choice Questions 1. The price that the buyer of a call option pays to acquire the option is called the A. strike price B. exercise price C. execution […]

Chapter 20 – Options Markets: Introduction 20–21 59. Call options on IBM listed stock options are Difficulty: Moderate 60. Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. […]

Chapter 20 – Options Markets: Introduction 20-1 CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk is investing in […]

Chapter 20 – Options Markets: Introduction 20–33 89. The put-call parity theorem Difficulty: Moderate 90. Some more “traditional” assets have option-like features; some of these instruments include A. callable bonds. B. convertible bonds. C. warrants. D. A and B. E. […]

Chapter 21 – Option Valuation 21–20 55. Lower dividend payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put. Difficulty: Moderate 56. A one dollar decrease in a […]

Chapter 21 – Option Valuation 21-1 Chapter 21 Option Valuation Multiple Choice Questions 1. Before expiration, the time value of an in the money call option is always A. equal to zero. Difficulty: Easy 2. Before expiration, the time value […]

Chapter 21 – Option Valuation CHAPTER 21: OPTION VALUATION PROBLEM SETS 1. The value of a put option also increases with the volatility of the stock. We see this from the put-call parity theorem as follows: P = C – […]

Chapter 22 – Futures Markets 22-1 Chapter 22 Futures Markets Multiple Choice Questions 1. A futures contract Difficulty: Easy 2. The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized. A. are; are B. are […]

Chapter 22 – Futures Markets CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support the futures market would […]

Chapter 22 – Futures Markets 22–20 54. Open interest includes Difficulty: Moderate 55. The process of marking-to-market A. posts gains or losses to each account daily. B. may result in margin calls. C. impacts only long positions. D. all of […]

Chapter 23 – Futures, Swaps, and Risk Management 23-1 CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT PROBLEM SETS 1. In formulating a hedge position, a stock’s beta and a bond’s duration are used similarly to determine the expected percentage gain […]

Chapter 23 – Futures, Swaps, and Risk Management 23-1 Chapter 23 Futures, Swaps, and Risk Management Multiple Choice Questions 1. Which one of the following stock index futures has a multiplier of $250 times the index value? Difficulty: Easy 2. […]

Chapter 23 – Futures, Swaps, and Risk Management 23–14 32. The value of a futures contract for storable commodities can be determined by the _______ and the model __________ consistent with parity relationships. Difficulty: Moderate 33. In the equation Profits […]

Chapter 24 – Portfolio Performance Evaluation 24-1 Chapter 24 Portfolio Performance Evaluation Multiple Choice Questions 1. Trading activity by mutual funds just prior to quarterly reporting dates is known as Difficulty: Moderate 2. Window dressing is A. also known as […]

Chapter 24 – Portfolio Performance Evaluation CHAPTER 24: PORTFOLIO PERFORMANCE EVALUATION PROBLEM SETS 1. As established in the following result from the text, the Sharpe ratio depends on both alpha for the portfolio ( P) and the correlation between the […]

Chapter 24 – Portfolio Performance Evaluation 24–34 67. The Value Line Index is an equally weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of 3 stocks where […]

Chapter 24 – Portfolio Performance Evaluation 24–21 39. What is the Treynor measure of performance evaluation for Sooner Stock Fund? Difficulty: Moderate 40. Calculate the Jensen measure of performance evaluation for Sooner Stock Fund. A. 2.6% B. 4.00% C. 8.67% […]

Chapter 25 – International Diversification 25-1 Chapter 25 International Diversification Multiple Choice Questions 1. Shares of several foreign firms are traded in the U.S. markets in the form of Difficulty: Easy 2. __________ refers to the possibility of expropriation of […]

Chapter 25 – International Diversification CHAPTER 25: INTERNATIONAL DIVERSIFICATION PROBLEM SETS 1. “International Investing Raises Questions” was published in the Wall Street Journal in 1997. Some of the arguments presented in the article may no longer be compelling more than […]

Chapter 25 – International Diversification 25–12 30. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be __________. Difficulty: Moderate 31. If you […]

Chapter 26 – Hedge Funds 26-1 Chapter 26 Hedge Funds Multiple Choice Questions 1. ______ are the dominant form of investing in securities markets for most individuals and ______ have enjoyed far greater growth rate in the last decade. Difficulty: […]

Chapter 26 – Hedge Funds 26-1 CHAPTER 26: HEDGE FUNDS PROBLEM SETS 1. No, a market-neutral hedge fund would not be a good candidate for an investor’s entire retirement portfolio because such a fund is not a diversified portfolio. The […]

Chapter 27 – The Theory of Active Portfolio Management 27–12 29. A purely passive strategy is defined as Difficulty: Easy 30. Consider these two investment strategies: Strategy ___ is the dominant strategy because __________. A. 1, it is riskless B. […]

Chapter 27 – The Theory of Active Portfolio Management 27-1 CHAPTER 27: THE THEORY OF ACTIVE PORTFOLIO MANAGEMENT PROBLEM SETS 1. Views about the relative performance of bonds compared to stocks can have a significant impact on how security analysis […]

Chapter 27 – The Theory of Active Portfolio Management 27-1 Chapter 27 The Theory of Active Portfolio Management Multiple Choice Questions 1. In the Treynor-Black model Difficulty: Moderate 2. Absent research, you should assume the alpha of a stock A. […]

Chapter 28 – Investment Policy and the Framework of the CFA Institute 28-1 CHAPTER 28: INVESTMENT POLICY AND THE FRAMEWORK OF THE CFA INSTITUTE PROBLEM SETS 1. You would advise them to exploit all available retirement tax shelters, such as […]

Chapter 28 – Investment Policy and the Framework of the CFA Institute 28-1 Chapter 28 Investment Policy and the Framework of the CFA Institute Multiple Choice Questions 1. The CFA Institute divides the process of portfolio management into 3 main […]

Chapter 28 – Investment Policy and the Framework of the CFA Institute 28–17 44. Which of the following investments allows the investor to choose how to allocate assets? Difficulty: Moderate 45. Pension funds I) accept contributions from employers, which are […]

Chapter 03 – How Securities are Traded 3-1 Chapter 03 How Securities are Traded Multiple Choice Questions 1. The trading of stock that was previously issued takes place E. B and C. Secondary market transactions consist of trades between investors. […]

Chapter 03 – How Securities are Traded 3-1 CHAPTER 3: HOW SECURITIES ARE TRADED PROBLEM SETS 2. The SuperDot system expedites the flow of orders from exchange members to the specialists. It allows members to send computerized orders directly to […]

Chapter 03 – How Securities are Traded 3-18 46. In a typical underwriting arrangement the investment banking firm I) sells shares to the public via an underwriting syndicate. II) purchases the securities from the issuing company. III) assumes the full […]

Chapter 04 – Mutual Funds and other Investment Companies 4-17 42. A mutual fund had year-end assets of $521,000,000 and liabilities of $63,000,000. If the fund NAV was $26.12, how many shares must have been held in the fund? D. […]

Chapter 04 – Mutual Funds and Other Investment Companies 4-1 CHAPTER 4: MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES PROBLEM SETS 1. The unit investment trust should have lower operating expenses. Because the investment trust portfolio is fixed once the trust […]

Chapter 04 – Mutual Funds and other Investment Companies 4-1 Chapter 04 Mutual Funds and other Investment Companies Multiple Choice Questions 1. Which one of the following statements regarding open-end mutual funds is false? A. The funds redeem shares at […]

Chapter 05 – Learning About Return and Risk from the Historical Record 5-1 CHAPTER 5: LEARNING ABOUT RETURN AND RISK FROM THE HISTORICAL RECORD PROBLEM SETS 1. The Fisher equation predicts that the nominal rate will equal the equilibrium real […]

Chapter 05 – Learning about Return and Risk from the Historical Record 5-1 Chapter 05 Learning about Return and Risk from the Historical Record Multiple Choice Questions 1. Over the past year you earned a nominal rate of interest of […]

Chapter 05 – Learning about Return and Risk from the Historical Record 5-17 42. A year ago, you invested $2,500 in a savings account that pays an annual interest rate of 2.5%. What is your approximate annual real rate of […]

Chapter 06 – Risk Aversion and Capital Allocation to Risky Assets 6-1 CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS PROBLEM SETS 2. (b) A higher borrowing is a consequence of the risk of the borrowers’ default. In […]

Chapter 06 – Risk Aversion and Capital Allocation to Risky Assets 6-1 Chapter 06 Risk Aversion and Capital Allocation to Risky Assets Multiple Choice Questions 1. Which of the following statements regarding risk-averse investors is true? A. They only care […]

Chapter 06 – Risk Aversion and Capital Allocation to Risky Assets 6-18 39. What would be the dollar values of your positions in X and Y, respectively, if you decide to hold 40% percent of your money in the risky […]

Chapter 07 – Optimal Risky Portfolios 7-19 42. For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks? A. +1.00. B. +0.50. Difficulty: Moderate 43. In a two-security minimum variance portfolio where the correlation between […]

Chapter 07 – Optimal Risky Portfolios 7-1 Chapter 07 Optimal Risky Portfolios Multiple Choice Questions 1. Market risk is also referred to as A. systematic risk, diversifiable risk. Difficulty: Easy 2. Systematic risk is also referred to as A. market […]

Chapter 07 – Optimal Risky Portfolios CHAPTER 7: OPTIMAL RISKY PORTFOLIOS PROBLEM SETS 1. (a) and (e). 2. (a) and (c). After real estate is added to the portfolio, there are four asset classes in the portfolio: stocks, bonds, cash […]

Chapter 08 – Index Models 8-1 Chapter 08 Index Models Multiple Choice Questions 1. As diversification increases, the total variance of a portfolio approaches ____________. A. 0 B. 1 Difficulty: Easy 2. As diversification increases, the standard deviation of a […]

Chapter 08 – Index Models CHAPTER 8: INDEX MODELS PROBLEM SETS 1. The advantage of the index model, compared to the Markowitz procedure, is the vastly reduced number of estimates required. In addition, the large number of estimates required for […]

Chapter 08 – Index Models 8-32 70. The index model for stock A has been estimated with the following result: RA = 0.01 + 0.94RM + eA If M = 0.30 and R2A = 0.28, the standard deviation of return […]

Chapter 08 – Index Models 8-21 47. The index model has been estimated for stocks A and B with the following results: RA = 0.01 + 0.8RM + eA RB = 0.02 + 1.2RM + eB M = 0.20 (eA) […]

Chapter 09 – The Capital Asset Pricing Model 9-18 45. According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio increases: A. directly with alpha. B. inversely with alpha. Difficulty: Easy 46. What […]

Chapter 09 – The Capital Asset Pricing Model CHAPTER 9: THE CAPITAL ASSET PRICING MODEL PROBLEM SETS 1. E(rP) = rf +  P [E(rM ) – rf ] 18 = 6 +  P(14 – 6)   P […]

Chapter 09 – The Capital Asset Pricing Model 9-1 Chapter 09 The Capital Asset Pricing Model Multiple Choice Questions 1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A. unique risk. Difficulty: […]