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 expected return on stock A is 17%. If no arbitrage
opportunities exist, the risk-free rate of return is
A. 6.0%.
B. 6.5%.
C. 6.8%.
D. 7.4%.
If a professionally managed portfolio consistently outperforms the market proxy on a
risk adjusted basis and the market is efficient, it should be concluded that
A. the CAPM is invalid.
B. the proxy is inadequate.
C. either the CAPM is invalid or the proxy is inadequate.
D. the CAPM is valid and the proxy is adequate.
E. None of the options are correct.
You have been given this probability distribution for the holding-period return for a
stock:
What is the expected variance for the stock?
A. 142.07%
B. 189.96%
C. 177.04%
D. 128.17%
E. None of the options are correct.
A form of short-term borrowing by dealers in government securities is (are)
A. reserve requirements.
B. repurchase agreements.
C. bankers’acceptances.
D. commercial paper.
E. brokers’calls.
Consider the one-factor APT. The variance of returns on the factor portfolio is 11%. The
beta of a well-diversified portfolio on the factor is 1.45. The variance of returns on the
well-diversified portfolio is approximately
A. 23.1%.
B. 6.0%.
C. 7.3%.
D. 14.1%.
Security X has expected return of 7% and standard deviation of 14%. Security Y has
expected return of
11% and standard deviation of 22%. If the two securities have a correlation coefficient
of 0.45, what is their
covariance?
A. 0.0388
B. –0.0108
C. 0.0184
D. –0.0139
E. –0.1512
The lower bound on the market price of a convertible bond is
A. its straight-bond value.
B. its crooked-bond value.
C. its conversion value.
D.its straight-bond value and its conversion value.
E. None of the options are correct.
The market portfolio has a beta of
A. 0.
B. 1.
C. –1.
D. 0.5.
General pension funds typically invest __________ of their funds in equity securities.
A. none
B. 5-10%
C. 15-35%
D. 40-60%
E. more than 60%
Let RUS be the annual risk-free rate in the United States, RJ be the risk-free rate in
Japan, F be the futures price of $/yen for a 1-year contract, and E the spot exchange rate
of $/yen. Which one of the following is true?
A. If RUS > RJ, then E < F.
B. If RUS < RJ, then E < F.
C. If RUS > RJ, then E > F.
D. If RUS < RJ, then F = E.
E. There is no consistent relationship that can be predicted.
If a Treasury note has a bid price of $975, the quoted bid price in the Wall Street
Journal would be
A. 97:50.
B. 97:16.
C. 97:80.
D. 94:24.
E. 97:75.
The yield on a 1-year bill in the U.K. is 7%, and the present exchange rate is 1 pound =
U.S. $1.65. If you expect the exchange rate to be 1 pound = U.S. $1.45 a year from
now, the return a U.S. investor can expect to earn by investing in U.K. bills is
A. 6.7%.
B. 3.2%.
C. 8%.
D. 5.97%.
E. None of the options
Consider the free cash flow approach to stock valuation. Utica Manufacturing Company
is expected to have before-tax cash flow from operations of $500,000 in the coming
year. The firm’s corporate tax rate is 30%. It is expected that $200,000 of operating cash
flow will be invested in new fixed assets. Depreciation for the year will be $100,000.
After the coming year, cash flows are expected to grow at 6% per year. The appropriate
market capitalization rate for unleveraged cash flow is 15% per year. The firm has no
outstanding debt. The total value of the equity of Utica Manufacturing Company should
be
A. $1,000,000.
B. $2,000,000.
C. $3,000,000.
D. $4,000,000.
A study by Speidell and Bavishi (1992) found that when accounting statements of
foreign firms were restated on a common accounting basis,
A. the original and restated P/E ratios were quite similar.
B. the original and restated P/E ratios varied considerably.
C. most variation was explained by tax differences.
D. most firms were consistent in their treatment of goodwill.
You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard
deviation of 0.20 and a
T-bill with a rate of return of 0.03.
What percentages of your money must be invested in the risk-free asset and the risky
asset, respectively, to
form a portfolio with a standard deviation of 0.08?
A. 30% and 70%
B. 50% and 50%
C. 60% and 40%
D. 40% and 60%
E. Cannot be determined.
The put/call ratio is computed as ____________, and higher values are considered
____________ signals.
A. the number of outstanding put options divided by outstanding call options; bullish or
bearish
B. the number of outstanding put options divided by outstanding call options; bullish
C. the number of outstanding put options divided by outstanding call options; bearish
D. the number of outstanding call options divided by outstanding put options; bullish
E. the number of outstanding call options divided by outstanding put options; bearish
Interest-rate risk is important to
A. active bond portfolio managers.
B. passive bond portfolio managers.
C. both active and passive bond portfolio managers.
D. neither active nor passive bond portfolio managers.
E. obsessive bond portfolio managers.
Which of the following is not a mortgage-related government or government-sponsored
agency?
A. The Federal Home Loan Bank
B. The Federal National Mortgage Association
C. The U.S. Treasury
D. Freddie Mac
E. Ginnie Mae
Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3.
The risk-free rate is
0.04 and the market expected rate of return is 0.115. According to the Capital Asset
Pricing Model, this security
Is
A. underpriced.
B. overpriced.
C. fairly priced.
D. Cannot be determined from data provided.
Which one of the following statements is true concerning the duration of a perpetuity?
A. The duration of a 15% yield perpetuity that pays $100 annually is longer than that of
a 15% yield perpetuity that pays $200 annually.
B. The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of
a 15% yield perpetuity that pays $200 annually.
C. The duration of a 15% yield perpetuity that pays $100 annually is equal to that of a
15% yield perpetuity that pays $200 annually.
D. The duration of a perpetuity cannot be calculated.
You purchased 300 shares of common stock on margin for $60 per share. The initial
margin is 60%, and the stock pays no dividend. What would your rate of return be if
you sell the stock at $45 per share? Ignore interest on margin.
A. 25.00%
B. –33.33%
C. 44.31%
D. –41.67%
E. –54.22%
Speculators may use futures markets rather than spot markets because
A. transaction costs are lower in futures markets.
B. futures markets provide leverage.
C. spot markets are less efficient.
D. futures markets are less efficient.
E. transaction costs are lower in futures markets, and futures markets provide leverage.
In the 1972 empirical study by Black, Jensen, and Scholes, they found that the
estimated slope of the security market line was _______ what the CAPM would predict.
A. flatter than
B. equal to
C. steeper than
D. one half as much as
E. None of the options are correct.
Deferral of capital gains tax
I) means that the investor doesn’t need to pay taxes until the investment is sold.
II) allows the investment to grow at a faster rate.
III) means that you might escape the capital gains tax if you live long enough.
IV) provides a tax shelter for investors.
A. II and III
B. I, II, IV
C. I, III, and V
D. II, III, and IV
The industry with the highest return in 2016 was
A. trucking.
B.-water utilities.
C. health plans.
D. asset management.
E. money center banks.
Which of the following orders instructs the broker to buy at the current market price?
A. Limit order
B. Discretionary order
C. Limit-loss order
D. Stop-buy order
E. Market order
Given the yield on a 3-year zero-coupon bond is 7.2% and forward rates of 6.1% in
year 1 and 6.9% in year 2, what must be the forward rate in year 3?
A. 8.4%
B. 8.6%
C. 8.1%
D. 8.9%
E. None of the options are correct.
Google has a beta of 1.0. The annualized market return yesterday was 11%, and the
risk-free rate is currently 5%. You observe that Google had an annualized return
yesterday of 14%. Assuming that markets are efficient, this suggests that
A. bad news about Google was announced yesterday.
B. good news about Google was announced yesterday.
C. no news about Google was announced yesterday.
D. interest rates rose yesterday.
E. interest rates fell yesterday.
Hedge funds are prohibited from investing or engaging in
A. distressed firms.
B. convertible bonds.
C. currency speculation.
D. merger arbitrage.
E. None of the options are correct.
________ are analysts who use information concerning current and prospective
profitability of a firm to assess the firm’s fair market value.
A. Credit analysts
B. Fundamental analysts
C. Systems analysts
D. Technical analysts
E. Specialists
Studies of stock price reactions to news are called
A. reaction studies.
B. event studies.
C. drift studies.
D. reaction studies and event studies.
E. event studies and drift studies.
The Gordon model
A. is a generalization of the perpetuity formula to cover the case of a growing
perpetuity.
B. is valid only when g is less than k.
C. is valid only when k is less than g.
D. is a generalization of the perpetuity formula to cover the case of a growing
perpetuity and is valid only when g is less than k.
E. is a generalization of the perpetuity formula to cover the case of a growing perpetuity
and is valid only when k is less than g.
According to the put-call parity theorem, the value of a European put option on a
nondividend paying stock is equal to
A. the call value plus the present value of the exercise price plus the stock price.
B.the call value plus the present value of the exercise price minus the stock price.
C. the present value of the stock price minus the exercise price minus the call price.
D. the present value of the stock price plus the exercise price minus the call price.
E. None of the options are correct.
Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better
describe assets’returns by
A. expanding beyond one factor to represent sources of systematic risk.
B. using variables that are easier to forecast ex ante.
C. calculating beta coefficients by an alternative method.
D. using only stocks with relatively stable returns.
E. ignoring firm-specific risk.
Restrictions on trading involving insider information apply to the following, except
A. corporate officers.
B. corporate directors.
C. major stockholders.
D. All of the individuals.
E. None of the options.