Suppose that in 2012 the expected dividends of the stocks in a broad market index
equaled $240 million when the discount rate was 8% and the expected growth rate of
the dividends equaled 6%. Using the constant-growth formula for valuation, if interest
rates increase to 9%, the value of the market will change by _____.
A. -10%
B. -20%
C. -25%
D. -33%
Building a zero-investment portfolio will always involve _____________.
A. an unknown mixture of short and long positions
B. only short positions
C. only long positions
D. equal investments in a short and a long position
The five-star Morningstar rating implies
A. superior returns compared to risk.
B. superior risk compared to return.
C. lowest turnover compared to peers.
D. lowest fees compared to peers.
A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years
has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has
a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp.
has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued
by High Country Marketing Corp. are, respectively, __________ and _________.
A. .4%; .3%
B. .4%; .5%
C. .5%; .5%
D. .5%; .8%
The practice of trying to buy life insurance upon diagnosis of a terminal illness is an
example of __________.
A. estate planning
B. profit maximization
C. adverse selection
D. insurance fraud
A long hedge is a simultaneous __________ position in the spot market and a
__________ position in the futures market.
A. long; long
B. long; short
C. short; long
D. short; short
Tax shelters __________________.
A. postpone payment of tax liabilities
B. decrease investment risk
C. increase the pretax rate of return earned
D. benefit the government more than the investor
Which combination of stock, exercise, and option prices are most likely associated with
an American call option?
A.stock = $60, exercise = $65, option = $5
B.stock = $65, exercise = $60, option = $5
C.stock = $65, exercise = $60, option = $7
D.stock = $60, exercise = $65, option = $7
Because of convexity, when interest rates change, the actual bond price will
____________ the bond price predicted by duration.
A. always be higher than
B. sometimes be higher than
C. always be lower than
D. sometimes be lower than
An index computed from a simple average of returns is a/an _____.
A. equal weighted index
B. value weighted index
C. price weighted index
D. share weighted index
Ace Frisbee Corporation produces a good that is very mature in the firm’s product life
cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a
dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are
expected to decline at the rate of 2% per year. An appropriate required return for the
stock is 8%. Using the multistage DDM, the stock should be worth __________ today.
A. $13.07
B. $13.58
C. $18.25
D. $18.78
In 2011, U.S. securities represented ______ of the world market for equities.
A. less than 25%
B. more than two-thirds
C. between 30% and 40%
D. a consistent 50%
Of the following, which is the most commonly used international index?
A. DJIA
B. EAFE
C. Russell 2000
D. S&P 500
Everything else equal, if you expect a larger interest rate increase than other market
participants, you should _________.
A. buy long-term bonds
B. buy short-term bonds
C. buy common stocks
D. buy preferred stocks
Contributions to a _____________ are not tax deductible.
A. traditional retirement plan
B. Roth retirement plan
C. 401k plan
D. 403b plan
You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year
Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the
following should you do?
A. Short the Canon bond, and buy the Xerox bond.
B. Buy the Canon bond, and short the Xerox bond.
C. Short both the Canon bond and the Xerox bond.
D. Buy both the Canon bond and the Xerox bond.
On Monday morning you sell one June T-bond futures contract at 97:27, that is, for
$97,843.75. The contract’s face value is $100,000. The initial margin requirement is
$2,700, and the maintenance margin requirement is $2,000 per contract. Use the
following price data to answer the following questions.
At the close of day on Tuesday your cumulative rate of return on your investment is
_____.
A. 16.2%
B. -5.8%
C. -.16%
D. -2.2%
You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the
beginning of the year. The fund deducted a front-end load of 4%. The securities in the
fund increased in value by 10% during the year. The fund’s expense ratio is 1.3% and is
deducted from year-end asset values. What is your rate of return on the fund if you sell
your shares at the end of the year?
A. 4.35%
B. 4.23%
C. 6.45%
D. 5.63%
______ are partnerships of investors with portfolios that are larger than most individual
investors but are still too small to warrant managing on a separate basis.
A. Commingled funds
B. Closed-end funds
C. REITs
D. Mutual funds
An active asset allocation strategy involves _________.
A. investing in the stock of companies that are price takers
B. maintaining approximately the same proportions of a portfolio in each asset class
over time
C. varying the proportions of a portfolio in each asset class in response to changing
market conditions
D. selecting individual securities in different sectors that are believed to be undervalued
Deposits of commercial banks at the Federal Reserve are called _____.
A. bankers’ acceptances
B. federal funds
C. repurchase agreements
D. time deposits
Everything else equal, an increase in the government budget deficit would:
I. Increase the government’s demand for funds
II. Shift the demand curve for funds to the left
III. Increase the interest rate in the economy
A. II only
B. I and II only
C. I and III only
D. I, II, and III
If you believed in the reversal effect, you should __________.
A. buy bonds this period if you held stocks last period
B. buy stocks this period that performed poorly last period
C. buy stocks this period that performed well last period
D. do nothing if you held the stock last period
A support level is ___________________.
A. a level beyond which the market is unlikely to rise
B. a level below which the market is unlikely to fall
C. an equilibrium price level justified by characteristics such as earnings and cash flows
D. the peak of a market wave or cycle
Specialists try to maintain a narrow bid-ask spread because:
I. If the spread is too large, they will not participate in as many trades, losing
commission income.
II. The exchange requires specialists to maintain price continuity.
III. Specialists are nonprofit entities designed to facilitate market transactions rather
than make a profit.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the
annual coupon payment is $5, what is the accrued interest? (Assume 182 days in the
6-month period.)
A. $13.21
B. $12.5
C. $15.44
D. $16.32
If the quote for a Treasury bond is listed in the newspaper as 98:2812 bid, 98:4062 ask,
the actual price at which you can purchase this bond given a $10,000 par value is
_____________.
A.$9,828.12
B. $9,809.38
C. $9,840.62
D. $9,813.42
Consider the Sharpe and Treynor performance measures. When a pension fund is large
and well diversified in total and it has many managers, the __________
measure is better for evaluating individual managers while the __________ measure is
better for evaluating the manager of a small fund with only one manager responsible for
all investments, which may not be fully diversified.
A. Sharpe; Sharpe
B. Sharpe; Treynor
C. Treynor; Sharpe
D. Treynor; Treynor
Which one of the following best describes the purpose of derivatives markets?
A. Transferring risk from one party to another.
B. Investing for a short time period to earn a small rate of return.
C. Investing for retirement.
D. Earning interest income.
Which of the following possible provisions of a bond indenture is designed to ease the
burden of principal repayment by spreading it out over several years?
A. callable feature
B. convertible feature
C. subordination clause
D. sinking fund
Investors who want to liquidate their holdings in a closed-end fund may
___________________.
A. sell their shares back to the fund at a discount if they wish
B. sell their shares back to the fund at net asset value
C. sell their shares on the open market
D. sell their shares at a premium to net asset value if they wish
The risk premium for exposure to aluminum commodity prices is 4%, and the firm has
a beta relative to aluminum commodity prices of .6. The risk premium for exposure to
GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate
is 4%, what is the expected return on this stock?
A. 10%
B. 11.5%
C. 13.6%
D. 14%