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The P/E ratio can be expected to change as the expected dividend payout ratio changes. One of the major benefits of employing a buy and hold strategy is the savings on trading costs. Answer: T Standard deviation, beta and coefficient […]

An investor has the alternative of buying 100 shares of XYZ at $50 per share or investing the same amount of money in XYZ 6-month calls priced at $5. Calculate the profit or loss from each strategy if the price […]

An environmentally-friendly balanced mutual fund began the year with a net asset value (NAV) of $12.25 per share. During the year it received $00 dividend and interest income, $0.25 in realized capital gains, and $0.50 in unrealized capital gains. Ninety […]

Reinvestment risk represents the possibility that future payments cannot be reinvested at the assumed rate. Risk is defined as the possibility of loss. Answer: False Both 401(k) plans and IRAs are self-directed retirement plans. Answer: True For a zero coupon […]

You calculate the intrinsic value of a stock to be $27. You check The Wall Street Journal and find the actual price to be $30. What could differ in your analysis and the market’s valuation? If you are confident about […]

Explain what is efficient about the efficient frontier. In the expansion stage, products become more standardized. Answer: F When should companies in cyclical industries be bought? Answer: An investor would like to buy cyclical stocks in a recession when earnings […]

An earnings announcement effect would not be considered a good test of the weak form of the EMH. If a preferred stock issue is cumulative, this means: a . unpaid preferred stock dividends are paid at the end of the […]

Concerning index options, which of the following statements is FALSE? a. Index options appeal to speculators due to the leverage they offer. b. Investors can write index options. c. If exercised the holder of an index option receives the strike […]

Explain the characteristic line in excess return form for the Jensen alpha measure. The characteristic line is the regression fitting total returns for a stock against total returns for the market, and is sometimes calculated using excess returns. Answer: T […]

If a market is inefficient, as new information is received about a security: a. nothing will happen. b. the stock price will fall at first and then later rise. c. there will be a lag in the adjustment of the […]

The standard option contract is for: 10 shares of stock50 shares of stock100 shares of stock1 share of stock In the case of a corporate bankruptcy, bondholders are paid before any distributions are paid to preferred or common stockholders. Answer: […]

Who benefits from a futures contract, a call contract, and a put contract, if prices fall? Regardless of its maturity date, it is very unusual for a coupon-paying bond to have duration greater than: a. 3 years. b. 5 years. […]

Which of the following would not be considered a capital market security? a. a 20-year corporate bond b. a common stock c. a 6-month Treasury bill d. a mutual fund share The following information is to be used to answer […]

Most analysts today agree that using money as an indicator of future economic activity is accurate. Mr. Baker, a single person in early retirement, owns a house, a well-used car, and minimal life insurance. He has pension assets of about […]

A portfolio is said to be immunized if: a. the present value of the cashflows equals the principal. b. the duration of the portfolio is equal to the term. c. the present value of the cashflows is greater than the […]

Portfolio performance evaluation is an important determinant of your success in financial planning. What is a hedge ratio? Answer: The hedge ratio for a call is N(d1) from the Black-Scholes model. It is commonly called delta. It shows the change […]

What are support and resistance levels? If an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the Markowitz model, the assumption is that past relationships will continue in the future. Answer: T […]

The geometric mean for the S&P 500 for the period 1920-2005 was between 15 and 20 percent. Calculate the future value of $100,000 at the end of 64 years given an interest rate of 10.38 percent. Answer: Future Value = […]

Other things equal, a. the higher the expected growth rate, the lower the P/E ratio. b. if the risk-free rate rises, the required rate will decline. c. as the required rate rises, the P/E ratio declines. d. if the risk […]

In private placements, new securities issues are sold directly to financial institutions. On the other side of every futures transaction is: a. the dealer. b. the futures exchange. c. the commodity producer. d. the clearinghouse. Answer: d What is the […]

What is the best measure of risk for returns of a sole proprietorship? Compare the obligation entered into in a futures contract to the obligation in an options contract. Answer: The buyer in an options contract has the choice of […]

How does the prudent man rule affect asset allocation? As a measure of market risk, the beta for the S&P 500 is generally considered to be: a. -1.0 b. 1.0 c. 0 d. impossible to determine Answer: b The par […]

Most investors should keep a watch on the Federal Reserve because of the effect of the money supply on interest rates. What impact does the increasing amount of institutional investing have on securities markets today and what role do you […]

The Markowitz Model does not depend on the assumption of normally distributed security returns. Present value is based on the concept of: compoundingsystematic riskdurationdiscounting Answer: d A 25-year old college graduate is participating in a 401(k) retirement plan and wishes […]

The most important decision to make when building a diversified stock portfolio is: a. individual security analysis. b. asset allocation. c. minimization of market risk. d. maximization of expected return. A change in the correlation coefficient of the returns of […]

Open orders, if not cancelled or renewed, remain in effect for: a. one week. b. one month. c. six months d. twelve months. Jensen’s measure of performance is based on the CAPM. Answer: T The major attraction of municipal bonds […]

Which of the following types of funds tends to keep 25% of its assets in the securities of U.S. companies?. emerging markets fundssingle-country fundsinternational fundsglobal funds A belief in the size-effect anomaly should encourage investors to buy large-firm stocks. Answer: […]

If investors in the market become more pessimistic, it is expected that the required return will ———-. a. decrease. b. increase. c. stay the same. d. there is not enough information to answer the question. _____ governs employer-sponsored retirement plans.: […]

If an investor buys a stock when its price has increased 15 percent from its previous low, the investor is employing: a. a contrarian indicator. b. a filter rule. c. a sentiment indicator. d. relative strength analysis. The type of […]

Which of the following is true regarding Modigliani-squared? a. It compares Treasury bills to the S&P 500 Index. b. It states its results in both percentage and graphical form. c. It equates the volatility of a portfolio with the market. […]

The interest rate charged on margin accounts is determined by: a. adding a percentage to the broker call rate. b. adding a percentage to the margin interest rate. c. subtracting a percentage to the broker call rate. d. subtracting a […]

An index fund that uses futures to hold the S&P 500 Index and invests the remainder in bonds would be an example of: a. a value index fund. b. a derivatives index fund. c. an enhanced index fund. d. an […]

The _________ is a plot of __________. a. CML . . . individual stocks and efficient portfolios b. CML . . . both efficient and inefficient portfolios, only c. SML . . . individual securities and efficient portfolios d. SML […]

If the risk free lending rate is lower than the borrowing rate, what would the shape of the CML and efficient frontier look like? Answer: The CML would go from the risk-free rate on the Y intercept to the point […]

How does the increased globalization of business and finance affect business cycles and the leading, lagging, and coincident economic indicators? Spreads are used to: a. increase the return potential b. circumvent option commissions c. reduce risk in an option position. […]

In a portfolio consisting of two perfectly negatively correlated securities, the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return. What are the appropriate uses of the Sharpe and the […]

An analyst determined that for the past two quarters the risk-free rate has exceeded the return on the market portfolio. Does this information disprove the CML? A negative correlation coefficient indicates that the returns of two securities have a tendency […]

Time-weighted as opposed to dollar-weighted return captures rate of return actually earned by the portfolio manager. None of the asset-pricing models assume that the market is perfect. Answer: F All asset management accounts offer automatic reinvestment of credit balances in […]

What are the advantages to investors’ of keeping their securities in street name? If interest rates are expected to rise, you would expect: bond prices to fall more than stock pricesbond prices to rise more than stock pricesstock prices to […]

The return relative solves the problem of: a. inflation b negative returns c. interest rates d. tax differences According to Jensen’s differential return measure, what is alpha? a. The intercept of the SML line b. The intercept of the CML […]

The S&P 500 comprises approximately ________________ percent of the market capitalization of all U.S. publicly traded companies. What are the implications of the article “Overcoming the Bear Market Blues” for investors? Answer: Two points emerge: The first is that the […]

Under the P/E model, stock price is a product of: a. EPS and DPS b. P/E ratio and EPS c. EPS and required return d. P/E ratio and required return The disposition effect relates to the fact that: a. investors […]

Which of the following statements regarding the short interest ratio is true? a. It is calculated by the total shares sold short divided by total shares outstanding b. It indicates the dollar amount needed to cover all short positions c. […]

Some companies, for example Apple, tend to provide low guidance, contributing toward consistently positive earnings surprises. Charles Schwab, Fidelity and Vanguard are examples of premium discount brokers. Answer: T The single index model requires (3n+2) total pieces of data to […]

In today’s world, investor’s time horizons have lengthened. At a given point in time the SML dictates that a security with a beta of 1.10 should require a return of 18 percent. Analysts determine that a particular stock with an […]

The consolidation phase of the life cycle begins when the investor reaches retirement. In order to determine the expected return of a portfolio, all of the following must be known, except: probabilities of expected returns of individual assetsweight of each […]

One of the most famous investment advisory services since 1965 is: a. The Wall Street Journal b. Standard and Poor’s Corporate Records c. Moody’s d. Value Line Investment Survey Which of the following is not true regarding money market funds? […]

The major problem with Markowitz diversification model is that it requires a full set of ________________________ between the returns of all securities being considered in order to calculate portfolio variance. The ———– is 1 plus the total return. arithmetic meanreturn […]

If a mutual fund holds a substantial amount of Treasury bills, it is probably a tax-exempt fund.conservative bond fund.bond income fundmoney market mutual fund. Betas of individual securities are unstable over time. What are some characteristics that could cause a […]

Infinite growth is a problem with the dividend discount model because: a. The expected stream of dividends is infinite b. At reasonably high discount rates, such as 12 percent, dividends received in the distant future (40 or 50 years from […]

A lady bought 100 shares of a leading diamond mining company with an expected return of 20 percent per year. The following day the company’s president announced a major new discovery in Arkansas. The stock price immediately doubled. This scenario […]

The expected value is the: inverse of the standard deviationcorrelation between a security’s risk and return.weighted average of all possible outcomes.same as the discrete probability distribution. What is the major drawback of the total return measure? Why is it the […]

An example of indirect investing would be buying shares in a mutual fund. Investors always seek to minimize their risk of investing. Answer: False Holding maturity constant, a decrease in rates will raise bond prices on a percentage basis more […]

Unlike discounted cash flow techniques, relative valuation does not require comparatively strong assumptions about the inputs that lead to an estimate of stock value. S&P’s Outlook reports intrinsic value for stocks based on a combination of relative valuation and discounted […]

The advance estimate of GDP predicts direction of quarterly change in real GDP growth approximately what percent of the time? a. 10%. b. 25%. c. 75%. d. 90%. Approximately what percentage of futures contracts is closed by offset before the […]

Portfolio risk can be reduced by reducing portfolio weights for assets with positive correlations. The two basic spreads are the: time spread and price spreadput spread and call spreadtime spread and money spreadmoney spread and rate spread Answer: c Based […]

Indifference curves: a. always curve to the left b. have a positive slope c. cannot intersect d. are convex Strategic asset allocation is usually done: a. once every few years, establishing a long-run or strategic asset mix. b. using Monte […]

The zero-growth dividend model: a. gives the highest value for a common stock. b. is the most accurate model to use. c. is equivalent to the valuation model for preferred stock. d. assumes the highest required return possible. On a […]

Given the following information, calculate the expected return of Portfolio ABC. Expected return of stock A = 10%, Expected return of stock B = 15%, Expected return of stock C = 6%. 40 percent of the portfolio is invested in […]

An efficiently diversified portfolio still has _____________________ risk. Most short sales are executed by the broker acting as the ‘lender’ of the security sold. Answer: T Under new SEC rules adopted in 2002, price targets for stocks are to be […]

Survivorship bias occurs when mutual funds are merged or liquidated and only surviving funds’ performance is reported. With the introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into […]

The CML states that all investors should invest in the same portfolio of risky assets. When returns are perfectly positively correlated, the risk of the portfolio is: zerothe weighted average of the individual securities riskequal to the correlation coefficient between […]

Which of the following statements concerning index funds and actively managed funds is true? a. Their performance is about equal. b. They tend to have an inverse relationship. c. Actively managed funds tend to outperform index funds. d. Index funds […]

An investor who believes in the strong form of the EMH should be an active investor. Calendar market anomalies include day-of-the-week, turn-of-the-month, day preceding a holiday effect. Answer: T What is the difference between the insurance offered by the Securities […]

A less restrictive form of the Single Index Model is the: a. Risk-free Model. b. CAPM. c. CML. d. Market Model. The expected return on the market for next period is 11 percent. The risk free rate of return is […]

Nonmarketable investments would include savings accounts at banks and Treasury bills. Portfolio diversification often focuses on cross-industry diversification to pick up correlation coefficients and risk-expected return characteristics that create the portfolio effect. Suggest a realignment of “industry” classifications to reflect […]

What economic functions are fulfilled by futures? What are the assumptions in the CAPM? Can these be relaxed without destroying the conclusions of the model? Answer: (1) homogeneous expectations, (2) one-period time horizon, (3) borrow-lend at RF, (4) no transactions […]

What is the advance-decline line? What does it tell the technician? Should an investor seek companies with low P/Es or high P/Es? Answer: Investors differ in their philosophies. Investors who seek low P/E companies are “value” investors. They think that […]

Most full-service stockbrokers derive over 80% of their income from customer commissions. You invested $10,000 10 years ago into Fly-By-Night Fund which has reported performance (average annual total return) of 11.12% over this 10-year period. What would your ending wealth […]

Index funds tend to have lower expenses than other funds because they don ‘t incur the costs of professional portfolio management. Which of the following is NOT true regarding bond maturities? a. Short maturities sacrifice price appreciation opportunities. b. Longer […]

Standard & Poor’s industry analysis has been shown to be less accurate in predicting expected performance than the Value Line Investment Survey. Which of the following is a characteristic of the short interest ratio: It is: a. calculated daily as […]

Give several examples of government effects on industries. What makes the risk-expected return profile attractive to speculators who purchase put and call options? What is the risk-expected return profile for writers of naked put and call options? Answer: Put and […]

Which of the following statements regarding duration is INCORRECT? a. Yield to Maturity is inversely related to duration, holding coupon and maturity constant. b. Coupon is inversely related to duration, holding maturity and YTM constant. c. For all coupon-paying bonds, […]

A block trade is defined as a transaction involving at least: a. 1,000 shares b. 5,000 shares c. 10,000 shares d. 1 million share If the dividend growth rate increases for a firm, its P/E will ———, other things the […]

Treasury bonds generally have maturities of: a. 5 to 15 years b. 5 to 30 years c. 10 to 20 years d. 10 to 30 years Which of the following is the best definition of “realized compound yield”? a) The […]

No-load funds charge a one-time expense fee to cover all operating expenses. Answer: F If interest rates rose, you would expect ———— to also rise. business riskfinancial riskliquidity riskinflation risk Answer: d A number of companies that formerly experienced rapid […]

Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate. Why have dividends historically been important in the valuation of common stock? Answer: Dividends are the only cash payments a stockholder receives directly from a […]

The CML indicates the required return for each portfolio risk level. Under the weak form of the EMH, technical analysis relying on the history of price information is of no value in trying to outperform the future market. Answer: T […]

What is the difference between a price-weighted index and a market-value index? Using the separation theorem, it is necessary to match each investor’s indifference curves with a particular efficient portfolio. Answer: F The use of stock certificates, compared to book-entry […]

One form of interest rate forecasting is: a. horizon analysis, which requires projections of bond performance over a planned investment period. b. yield-to-maturity analysis, which requires expectations about reinvestment rates and future market rates to be calculated in expected returns. […]

An investor using the buy-and-hold strategy will receive dividends to reinvest. What dividend option do many companies offer that would make this strategy even more passive? Value investing implies investors should always buy stocks with the lowest P/E ratios. Answer: […]

The dollar-weighted rate of return is equivalent to the internal rate of return. Orders on Nasdaq come from market makers, ECNs and on-line brokers. Answer: T Calendar market anomalies include the neglected firm effect, which means few analysts follow the […]

A filter rule specifies a breakpoint for a stock or average and trades are made when the price is greater than the filter. Buying Treasury securities through the Treasury Direct Program eliminates all brokerage commissions and other fees. Answer: F […]

In the model P/E = (D1/E1)/(k – g), the P/E should increase if the dividend payout rate increases, other things the same. If the payout rate was intentionally increased by the board of directors, other things are likely not to […]

Which of the U.S. Treasury securities is always sold at a discount? a. Treasury bills b. Treasury notes c. Treasury bonds d. Treasury inflation protected securities (TIPS) One approach to style analysis which uses the stocks in a portfolio to […]

A company’s founders, friends and family are typically the main investors in the pioneering stage of any company. A well diversified portfolio will typically consist of a mix of small, mid and large cap stocks, both U.S. and foreign, as […]

NASDAQ tends to list stocks concentrated in this industry: to be concentrated in these two industries: a. aerospace. b. energy. c. technology. d. telecommunications. Assume you are a U. S. citizen who purchases $20,000 worth of bonds of the Deep […]

What are the major advantages of a private placement for the issuer of securities? Why was the Markowitz model impractical for commercial use when it was first introduced in 1952? What has changed by the 1990s? Answer: The volume of […]