Reinvestment risk represents the possibility that future payments cannot be reinvested
at the assumed rate.
Risk is defined as the possibility of loss.
Both 401(k) plans and IRAs are self-directed retirement plans.
For a zero coupon bond, duration is the same as time to maturity.
A 401(k) plan is an example of a defined benefit retirement plan.
The money market security most often used a benchmark for the risk-free rate is money
market deposit account rate.
Financial planners must pass a standardized test and possess certain credentials.
Security analysts are typically employed only at brokerage houses.
The NYSE regulatory triad consists of: _____________________________,
_________________, and _______________________________________.
The minimum actual return necessary to induce investors to invest is known as the
expected return.
A financial crisis or an accounting scandal can just as easily cause yield spreads to
widen as weak earnings at a company.
Investors unwilling to assume risk should be satisfied with the rate of inflation as their
investment return.
Convexity is used to correct the approximate percentage change in bond value,
calculated using modified duration.
Many Wall Street jobs tend to be cyclical in nature..
As interest rates increase, long bonds will decrease in price more slowly than shorter
bonds.
The vast majority of corporate bonds pay floating rate interest on a quarterly basis.
Bond traders use the term “basis point” to mean one percentage point in interest rate.
An investor desiring a bond investment that changes as little as possible as interest rates
change should seek a bond with long duration rather than a strip.
Both stocks and bonds are valued by summing the discounted future flows of interest
(or dividends), and the repayment of principal (or sale of the stock).
The risk-free rate of return (RFR) equals:
a. 3.5%
b. the return on long-term Treasury bonds
c. the average of the last 3 years’ inflation rate
d. the return on short-term Treasury bills
If an investor states that Intel is overvalued at 65 times, he is referring to:
a. earnings per share
b. dividend yield
c. book value
d. P/E ratio
Based on the research related to market anomalies, investors should prefer
a. low standardized unexpected earnings (SUE) and high P/E ratios.
b. low SUE, low P/E stocks.
c. high SUE, low P/E stocks.
d. high SUE, high P/E stocks.
Treasury bills are traded in the ——————— .
a. money market.
b. capital market.
c. government market.
d. regulated market.
Asset allocation is one of the most widely used applications of:
a. the Capital Asset Pricing Model.
b. random diversification.
c. passive portfolio approach.
d. modern portfolio theory.
According to the weak form of the EMH,
a. successive price changes are biased.
b. successive price changes are dependent.
c. specified trading rules can prove to be extremely useful in generating
excess returns.
d. successive price changes are independent.
The investment advisory service best known for evaluating mutual funds in the United
States is:
a. Standard & Poor’s
b. Moody’s Industrial Manuals
c. Morningstar
d. Value Line Investment Survey
Select the correct statement regarding the market portfolio. It:
a. is readily and precisely observable.
b. is a risky portfolio.
c. is the lowest point of tangency between the risk-free rate and the efficient
frontier.
d. should be composed of stocks or bonds.
Company specific risk is also known as:
a. market risk
b. systematic risk
c. non-diversifiable risk
d. idiosyncratic risk
The required rate of return for a common stock is defined as the:
a. expected return given an assumed set of probabilities and expected cash flows on the
stock.
b. maximum expected return based on estimates of expected cashflows from the stock.
c. minimum expected return necessary to induce an investor to purchase the stock.
expected return after evaluation of the risk on the stock has been taken.
The annual average compound rate of return for stocks from the period 1926-2007 was:
a. 8.50%
b. 9.55%
c. 10.05%
d. 12%
Different investors will estimate the inputs to the Markowitz model differently because:
a. every investor has his/her own risk/return preferences
b. every investor has access to different information about securities
c. there is an inherent uncertainty in security analysis
d. there is a random selection process used by individual investors
Yield spreads tend to____ during recessions and ________ during times of economic
prosperity.
a. narrow . . . widen
b. widen . . . narrow
c. stay constant . . . widen
d. widen . . . stay constant
Yield spreads between corporates and Treasuries will not widen as a result of:
a. accounting scandals, such as those involving WorldCom, Enron, and Tyco in 2002.
b. changes in maturity.
c. financial crisis, such as occurred in 2008.
d. litigation, such as that involving Halliburton and other companies with asbestos
exposure.
Active bond management strategies include:
a. Forecasting changes in interest rates, identifying abnormal yield spreads between
bond sectors, and identifying relative mispricing between fixed income securities.
b. Passive bond index investing.
c. Buy-and-hold bond investing.
d. Ladder investing.
A bear market is one characterized by a decline of:
a. 10% or more.
b. 15% or more.
c. 20% or more.
d. 25% or more.
Low P/E stocks are generally associated with
a. mature companies.
b. cyclical companies.
c. young fast-growing companies.
d. defensive companies.
Over the past 30 years, the average P/E ratio for the S&P 500 has been 23.
As evidence about the efficiency of stocks markets has grown, so have index funds.
What is the chief advantage of a market order?
If there is less efficiency in emerging markets than in developed markets, there should
be higher performance in emerging markets than in developed markets.
Compare and contrast the functions and responsibilities of a NYSE specialist with those
of an OTC dealer.
The NAICS puts companies into industries based on the activity in which they are
primarily engaged.
Rank (lowest to highest) the following securities in terms of the risk-expected return
tradeoff from the investors’ viewpoint: common stock, corporate bonds, U. S. Treasury
bonds, options, preferred stock..
Give an example of how individual investors’ preferences are taken into account by
institutional investors?
Discuss the difference in beliefs about price adjustments toward equilibrium in
technical analysis and the Efficient Market Hypothesis.
Suppose you interview two different portfolio managers about their efficient sets of
portfolios. Is it possible, or even probable, that they would have two different efficient
sets? Why?