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CHAPTER 1: THE INVESTMENT ENVIRONMENT CHAPTER 1: THE INVESTMENT ENVIRONMENT PROBLEM SETS 1. While it is ultimately true that real assets determine the material well-being of an economy, financial innovation in the form of bundling and unbundling securities 2. Securitization […]

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 would […]

CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS PROBLEM SETS 1. The correlation coefficient between stock returns for two nonoverlapping periods 2. No. Microsoft’s continuing profitability does not imply that stock market investors who purchased Microsoft […]

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 trends […]

24. In order to create the relative strength measure, we converted the weekly returns for the Fidelity Banking Fund and for the S&P 500 to weekly index values, using a base of 100 for a. The following graph summarizes the […]

CHAPTER 13: EMPIRICAL EVIDENCE ON SECURITY RETURNS CHAPTER 13: EMPIRICAL EVIDENCE ON SECURITY RETURNS PROBLEM SETS 1. Using the regression feature of Excel with the data presented in the text, the first-pass (SCL) estimation results are: Stock: A B C […]

CHAPTER 14: BOND PRICES AND YIELDS CHAPTER 14: BOND PRICES AND YIELDS PROBLEM SETS 1. a. Catastrophe bond—A bond that allows the issuer to transfer “catastrophe risk” from the firm to the capital markets. Investors in these bonds receive a […]

CHAPTER 14: BOND PRICES AND YIELDS 29. a. The floating rate note pays a coupon that adjusts to market levels. Therefore, it b. Floating rate notes may not sell at par for any of several reasons: (i) The yield spread […]

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 plus […]

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 17. a. We obtain forward rates from the following table: Maturit y YTM Forward Rate Price (for parts c, d) 1 year 10% $1,000/1.10 = $909.09 b., c. We obtain next year’s […]

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

Zero-coupon bond: Actual % loss %09.111109.0 84.374$ 84.374$28.333$    loss The percentage loss predicted by the duration-with-convexity rule is: Predicted % loss     %06.111106.001.03.1505.001.0)81.11( 2 loss Coupon bond: Actual % loss $691.79 $774.84 0.1072,or10.72% $774.84 […]

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., 3. This exercise is […]

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 be […]

CFA PROBLEMS 1. a. This director is confused. In the context of the constant growth model [i.e., P0 = D1/ k – g)], it is true that price is higher when dividends are higher holding b. (i) An increase in […]

CHAPTER 19: FINANCIAL STATEMENT ANALYSIS CHAPTER 19: FINANCIAL STATEMENT ANALYSIS PROBLEM SETS 1. a. Inventory Turnover Ratio: $2,850,000 5.88 ($480, 000 $490, 000) / 2 Average COGS Inventory = = + b. 2017 2017 Debt/Equity Ratio in 2017: $3,340,000 3.48 […]

5. a. ROE = Operating margin  Interest burden  Asset turnover  Leverage  Tax burden ROE for Eastover (EO) and for Southampton (SHC) in 2013 is found as follows: Profit margin = EBIT Sales EO: 795/7,406 = 10.7% […]

CHAPTER 20: OPTIONS MARKETS: INTRODUCTION 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 an ‘all […]

S T 145 150 Payof Write call Write put 20. a. Position S T < 145 145  S T  150 S T > 150 b. Proceeds from writing options: Call: $4.10 Put: $ 3.60 Total: $7.70 If IBM […]

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: Given a value for S […]

38. The two possible stock prices and the corresponding put values are: uS 0 = 120  Pu = 0 dS 0 = 80  Pd = 20 The hedge ratio is 0 0 0 20 1 120 80 2 […]

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 2. The ability […]

CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT 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 or loss […]

b. Buy the relatively cheap futures, sell the relatively expensive stock and lend the proceeds of the short sale: CF Now CF in 6 months Buy futures 0 ST  1,914 Sell shares 1,900 ST  40 Lend $1,900 1,900 […]

CHAPTER 24: PORTFOLIO PERFORMANCE EVALUATION CHAPTER 24: PORTFOLIO PERFORMANCE EVALUATION PROBLEM SETS 1. The dollar-weighted average will be the internal rate of return between the initial and final value of the account, including additions and withdrawals. Using Excel’s XIRR function, […]

21. a. Miranda S&P .102 .02 .225 .02 .2216 .5568 σ .37 .44 P f P r r S S –– – – ® = = = = b. To compute 2 M measure, blend the Miranda Fund with a […]

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 a […]

CHAPTER 26: HEDGE FUNDS 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 2. The […]

CHAPTER 27: THE THEORY OF ACTIVE PORTFOLIO MANAGEMENT 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 is conducted. […]

CHAPTER 28: INVESTMENT POLICY AND THE FRAMEWORK OF THE CFA INSTITUTE 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 403b, 401k, […]

CONSTRAINTS Time Horizon. Two-time horizons are applicable to Fairfax’s life. The first time horizon represents the period during which Fairfax should set up her financial situation in preparation for the balance of the second time horizon, her retirement period of […]

CHAPTER 3: HOW SECURITIES ARE TRADED CHAPTER 3: HOW SECURITIES ARE TRADED PROBLEM SETS 1. Stop-loss order: allows a stock to be sold if the price falls below a predetermined 2. In response to the potential negative reaction to large […]

CHAPTER 5: INTRODUCTION TO RISK, RETURN, AND THE HISTORICAL RECORD CHAPTER 5: INTRODUCTION TO RISK, RETURN, AND THE HISTORICAL RECORD PROBLEM SETS 1. The Fisher equation predicts that the nominal rate will equal the equilibrium real rate plus the expected […]

CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS PROBLEM SETS 1. (d) While a higher or lower Sharpe ratios are not an indication of an investor’s 2. (b) […]

24. For y to be less than 1.0 (that the investor is a lender), risk aversion (A) must be large enough such that: 1 σ  2 M fM A r)E(r y  1.28 0.25 0.050.13 2   A […]

CHAPTER 7: OPTIMAL RISKY PORTFOLIOS CHAPTER 7: OPTIMAL RISKY PORTFOLIOS PROBLEM SETS 1. (a) and (e). Short-term rates and labor issues are factors that are common to all 2. (a) and (c). After real estate is added to the portfolio, […]

CHAPTER 7: OPTIMAL RISKY PORTFOLIOS 17. The correct choice is (c). Intuitively, we note that since all stocks have the same expected rate of return and standard deviation, we choose the stock that will result in lowest risk. This is […]

CHAPTER 8: 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 2. The trade-off entailed […]

CHAPTER 8: INDEX MODELS 17. a. Alpha (α) Expected excess return αi = ri – [rf + βi × (rM – rf ) ] E(ri ) – rf αA = 20% – [8% + 1.3 × (16% – 8%)] = […]

CHAPTER 9: THE CAPITAL ASSET PRICING MODEL CHAPTER 9: THE CAPITAL ASSET PRICING MODEL PROBLEM SETS 1. 2. If the security’s correlation coefficient with the market portfolio doubles (with all other variables such as variances unchanged), then beta, and therefore […]

Freddie Mac and Ginnie Mae were organized to provide A. a primary market for mortgage transactions. B. liquidity for the mortgage market. C. a primary market for farm loan transactions. D. liquidity for the farm loan market. E. a source […]

Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk-free interest rate is 5.5%. What is the price of a one-year put with strike price of $58? A. […]

You purchased shares of a mutual fund at a price of $20 per share at the beginning of the year and paid a front-end load of 5.75%. If the securities in which the fund invested increased in value by 11% […]

________ is a risk measure that indicates vulnerability to extreme negative returns. A. Value at risk B. Lower partial standard deviation C. Expected shortfall D. None of the options E. None of the options are correct. The spread between the […]

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is A.the offsetting short trader. B. the corn farmer. C. the clearinghouse. D. […]

Calculate the price at the beginning of year 1 of a 10% annual coupon bond with face value $1,000 and 5 years to maturity. A. $1,105 B. $1,132 C. $1,179 D. $1,150 E. $1,119 “ADRs” stands for ___________, and “WEBS” […]

Consider the multifactor APT with two factors. The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%, respectively. Stock A has a beta of 1.2 on factor-1, and a beta of 0.7 on factor-2. The […]

If covered interest arbitrage opportunities exist, A. interest rate parity does not hold. B. interest rate parity holds. C. arbitragers will be able to make risk-free profits. D. interest rate parity does not hold, and arbitragers will be able to […]

Kahneman and Tversky (1973) reported that __________ give too much weight to recent experience compared to prior beliefs when making forecasts. A. young men B. young women C. people D. older men E. older women In the mean-standard deviation graph, […]

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) (A/2)s2. Which value of A makes this investor indifferent […]

Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 5-year, 0% coupon bond B. 5-year, 12% coupon bond C. 5 year, 14% coupon bond D. 5-year, 10% coupon bond E. Cannot tell from […]

Fiscal policy is difficult to implement quickly because A. it requires political negotiations. B. much of government spending is nondiscretionary and cannot be changed. C. increases in tax rates affect consumer spending gradually. D.-it requires political negotiations, and much of […]

The growth in per share FCFE of CBS, Inc. is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years. After this five-year period, the growth in […]

A coupon bond that pays interest of $40 semi-annually has a par value of $1,000, matures in four years, and is selling today at a $36 discount from par value. The yield to maturity on this bond is A. 8.69%. […]

Tracking error is defined as A.the difference between the returns on the overall risky portfolio versus the benchmark return. B. the variance of the return of the benchmark portfolio. C. the variance of the return difference between the portfolio and […]

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future. A. long; decrease B. short; decrease C. short; stay the same D. short; increase E. long; stay the same Which […]

Which of the inputs in the Black-Scholes option pricing model are directly observable? A. The price of the underlying security B. The risk-free rate of interest C. The time to expiration D. The variance of returns of the underlying asset […]

Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%, and the risk-free rate is currently 4%. You observe that Music Doctors had an annualized return yesterday of 15%. Assuming that markets are efficient, this suggests […]

Subordination clauses in bond indentures A. may restrict the amount of additional borrowing the firm can undertake. B. are always bad for investors. C. provide higher priority to senior creditors in the event of bankruptcy. D. may restrict the amount […]

Active portfolio management consists of A. market timing. B. security analysis. C. indexing. D.market timing and security analysis. E. None of the options are correct. You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your […]

Suppose the 1-year risk-free rate of return in the U.S. is 4% and the 1-year risk-free rate of return in Britain is 6%. The current exchange rate is 1 pound = U.S. $1.67. A 1-year future exchange rate of __________ […]

Collateralized bonds A. rely on the general earning power of the firm for the bond’s safety. B. are backed by specific assets of the issuing firm. C. are considered the safest variety of bonds. D. are backed by specific assets […]

Suppose that the average P/E multiple in the oil industry is 16. Shell Oil is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Shell Oil stock should be A. $28.12. B. $35.55. C. […]

A trader who has a __________ position in oil futures believes the price of oil will __________ in the future. A. short; increase B. long; increase C. short; stay the same D. long; stay the same Dividend discount models and […]

Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders’equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market […]

Studies of Siamese twin companies find __________, which __________ the EMH. A. correct relative pricing; supports B. correct relative pricing; does not support C. incorrect relative pricing; supports D. incorrect relative pricing; does not support You purchased shares of a […]

Security X has expected return of 14% and standard deviation of 22%. Security Y has expected return of 16% and standard deviation of 28%. If the two securities have a correlation coefficient of 0.8, what is their covariance? A. 0.038 […]

An example of a ______ strategy is the mispricing of a futures contract that must be corrected by contract expiration. A. market neutral B. directional C. relative value D. divergence E. convergence Consider the Treynor-Black model. The alpha of an […]

Commodity futures pricing A. must be related to spot prices. B. includes cost of carry. C. converges to spot prices at maturity. D. All of the options are correct. E. None of the options. Par-value bond XYZ has a modified […]

The risk that can be diversified away in a portfolio is referred to as ___________. I) diversifiable risk II) unique risk III) systematic risk IV) firm-specific risk A. I, III, and IV B. II, III, and IV C. III and […]

The financial statements of Black Barn Company are given below. Note: The common shares are trading in the stock market for $40 each. Refer to the financial statements of Black Barn Company. The firm’s leverage ratio for 2009 is A. […]

The financial statements of Midwest Tours are given below. Note: The common shares are trading in the stock market for $36 each. Refer to the financial statements of Midwest Tours. The firm’s P/E ratio for 2009 is A. 4.74. B. […]

Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality. When alphaforecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes ____________. A. shrunk; shrunk; far less moderate B.shrunk; shrunk; far more moderate C. grossed up; […]

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond’s A. term to maturity is lower. B. coupon rate is higher. C. yield to maturity is lower. D. current yield is higher. E. None […]

If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration date and exercise price as the call would be A. 0.30. B. 0.50. C. −0.60. D. −0.50. E. −0.17. A […]

The duration of a perpetuity with a yield of 10% is A. 13.50 years. B. 11 years. C. 6.66 years. D. Cannot be determined Suppose you own two stocks, A and B. In year 1, stock A earns a 2% […]

You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was A. $4,800. B. $12,000. C. $2,250. D. $7,200. If a portfolio had a return of 12%, the risk-free asset […]

Alpha-seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure. A. bet on; bet on B. hedge; hedge C. hedge; bet on D. bet on; hedge E. None of the options are correct. A 7% […]

The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US $0.78. The 1-year forward rate is C$ = US $0.76. The return (denominated in U.S. $) that a U.S. investor can earn […]

To determine whether portfolio performance is statistically significant requires A. a very long observation period due to the high variance of stock returns. B. a short observation period due to the high variance of stock returns. C. a very long […]

Which of the following statement(s) is(are) true? I) The real rate of interest is determined by the supply and demand for funds. II) The real rate of interest is determined by the expected rate of inflation. III) The real rate […]

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the company unexpectedly announces it will pay its first-ever dividend three months […]

Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is A. regret avoidance. B. framing. C. mental accounting. D. overconfidence. E. obnoxicity. You are […]

A debt security pays A. a fixed level of income for the life of the owner. B. a variable level of income for owners on a fixed income. C. a fixed or variable income stream at the option of the […]

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum potential profit of your strategy is ________, if both options are exercised. A. $600 B. $500 C.$200 […]

If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A. V0 = (Expected dividend yield in year 1)/k. B. V0 = (Expected EPS in year 1)/k. C. V0 = (Treasury bond yield in […]

A mutual fund had average daily assets of $3.0 billion in 2016. The fund sold $600 million worth of stock and purchased $700 million worth of stock during the year. The fund’s turnover ratio is A. 27.5%. B. 12%. C. […]

The first step a pension fund should take before beginning to invest is to A. establish investment objectives. B. develop a list of investment managers with superior records to interview. C. establish asset allocation guidelines. D. decide between active and […]

Before expiration, the time value of an at-the-money put option is always A. equal to zero. B. equal to the stock price minus the exercise price. C. negative. D. positive. E. None of the options are correct. Unique risk is […]

Low Tech Company has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends. A. 6.0% B. 4.8% C. 7.2% D. 3.0% […]

Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The beta of a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-diversified portfolio is approximately A. 3.6%. B. 6.0%. C. […]

The largest component of the fixed-income market is _______ debt. A. Treasury B. asset-backed C. corporate D. tax-exempt E. mortgage-backed If the yield on mortgage-backed securities was abnormally high compared to Treasury bonds, a hedge fund pursuing a relative value […]

Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen’s measure of portfolio performance, you would calculate the return on the market portfolio […]

According to the expectations theory, what is the expected forward rate in the third year? The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. A. 7.23% B. 9.37% C. 9.00% D. […]

Which one of the following stock index futures has a multiplier of 50 Hong Kong dollars times the index? A. FTSE 100 B. Hang Seng C. Nikkei D. DAX-30 E. FTSE 100 and Hang Seng The critical variable in the […]

Barber and Odean (2001) report that men __________ women. A. earn higher returns than B. earn lower returns than C. earn about the same returns as D. generate lower trading costs than If a firm has a positive tax rate, […]

Two basic assumptions of technical analysis are that security prices adjust A. rapidly to new information, and market prices are determined by the interaction of supply and demand. B. rapidly to new information, and liquidity is provided by security dealers. […]

Which statement is not true regarding the capital market line (CML)? A. The CML is the line from the risk-free rate through the market portfolio. B. The CML is the best attainable capital allocation line. C. The CML is also […]

A hedge ratio of 0.70 implies that a hedged portfolio should consist of A. long 0.70 calls for each short stock. B. short 0.70 calls for each long stock. C. long 0.70 shares for each short call. D. long 0.70 […]

Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 50%. What would be the maintenance margin if a margin call is made at a stock price of $85? A. 40.5% B. 20.5% […]

Metals and energy currency futures contracts are actively traded on A. copper. B. platinum. C. weather. D. copper and platinum. E. All of the options are correct. If the interest rate on debt is lower than ROA, then a firm […]

The price that the writer of a call option receives to sell the option is called the A. strike price. B. exercise price. C. execution price. D. acquisition price. E. premium. The following data are available relating to the performance […]

The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities. A. APT; CAPM B. APT; OPM C. CAPM; APT […]

All else equal, call option values are higher A. in the month of May. B.for low dividend-payout policies. C. for high dividend-payout policies. D. in the month of May and for low dividend-payout policies. E. in the month of May […]