FC 44247 | Course Paper

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The figures below show plots of monthly excess returns for two stocks plotted against

excess returns for a market index.

Which stock is likely to further reduce risk for an investor currently holding her

portfolio in a well-diversified portfolio of common stock?

A. Stock A

B. Stock B

C. There is no difference between A or B.

D. The answer cannot be determined from the information given.

Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return

is 10%. What is the residual given an actual return of 15%?

A. .0%

B. 1%

C. 2%

D. 3%

During the 1926-2013 period which one of the following asset classes provided the

lowest real return?

A. Small U.S. stocks

B. Large U.S. stocks

C. Long-term U.S. Treasury bonds

D. Equity world portfolio in U.S. dollars

A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years

and needs to hedge risk, but T-bond futures are available only with a modified duration

of the deliverable instrument of 10 years. The futures are priced at $105,000. The

proper hedge ratio to use is ______.

A. 143

B. 157

C. 196

D. 218

You are cautiously bullish on the common stock of the Wildwood Corporation over the

next several months. The current price of the stock is $50 per share. You want to

establish a bullish money spread to help limit the cost of your option position. You find

the following option quotes:

If in June the stock price is $53, your net profit on the bull money spread (buy the 45

call and sell the 55 call) would be ________.

A. $300

B. -$400

C. $150

D. $50

Todd Mountain Development Corporation is expected to pay a dividend of $3 in the

upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free

rate of return is 5%, and the expected return on the market portfolio is 17%. The stock

of Todd Mountain Development Corporation has a beta of .75. Using the

constant-growth DDM, the intrinsic value of the stock is

_________.

A. 4

B. 17.65

C. 37.50

D. 50

Steel Pier Company has issued bonds that pay semiannually with the following

characteristics:

If the maturity of the bond was less than 10 years, the modified duration would be

_____ compared to the original modified duration.

A. larger

B. unchanged

C. smaller

D. The answer cannot be determined from the information given.

A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid

annually). The bond currently sells for $925.50. A bond market analyst forecasts that in

5 years yields on such bonds will be at 7%. You believe that you will be able to reinvest

the coupons earned over the next 5 years at a 6% rate of return. What is your expected

annual compound rate of return if you plan on selling the bond in 5 years?

A. 7.37%

B. 7.56%

C. 8.12%

D. 8.54%

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an

expected return of 18% and a standard deviation of return of 20%. Stock B has an

expected return of 14% and a standard deviation of return of 5%. The correlation

coefficient between the returns of A and B is .50. The risk-free rate of return is 10%.

The expected return on the optimal risky portfolio is _________.

A. 14%

B. 15.6%

C. 16.4%

D. 18%

The practice of using options or dynamic hedging strategies to provide protection

against investment losses while maintaining upside potential is called _________.

A. trading on gamma

B. index optioning

C. portfolio insurance

D. index arbitrage

An investor must decide between putting $2,000 into a regular retirement plan or

putting $1,440 into a Roth retirement plan. If the investor’s tax rate is 28% now and in

retirement, and she expects to earn 12% per year over the next 20 years, which will

produce more cash in the end?

A. the investment in the regular retirement plan

B. the investment in the Roth retirement plan

C. both investments will have the same future value after taxes

D. the answer cannot be determined from the information given.

A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm’s P/E

ratio?

A. 12

B. 8.33

C. 10.25

D. 18.55

A nonprofit organization offers a 5% salary contribution to John’s 403b plan regardless

of his own contributions, plus a matching 5% when John contributes 5% of his salary.

John makes $56,000 a year.

What is John’s total cost of his 5% contribution?

A. $2,100 cost

B. $2,800 cost

C. $700 benefit

D. $3.500 benefit

The primary difference between Treasury notes and bonds is ________.

A. maturity at issue

B. default risk

C. coupon rate

D. tax status

The holding period return on a stock is equal to _________.

A. the capital gain yield over the period plus the inflation rate

B. the capital gain yield over the period plus the dividend yield

C. the current yield plus the dividend yield

D. the dividend yield plus the risk premium

Consider a no-load mutual fund with $200 million in assets and 10 million shares at the

start of the year and with $250 million in assets and 11 million shares at the end of the

year. During the year investors have received income distributions of $2 per share and

capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and

that the total expense ratio is 1%, what is the rate of return on the fund?

A. 11.19%

B. 23.75%

C. 24.64%

D. The answer cannot be determined from the information given.

An investor needs cash to pay some hospital bills. He is willing to use his dividend

income to pay the bills, but he will not sell any stock to do so. He is engaging in

___________.

A. overconfidence

B. representativeness

C. forecast errors

D. mental accounting

The fully automated trade-execution system installed on the NYSE is called _____.

A. FAX

B. Direct +

C. NASDAQ

D. SUPERDOT

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and

at the end of the period is $95. What is the holding-period return if the annual coupon

rate is 4.5%?

A. 4.08%

B. 4.5%

C. 5.1%

D. 5.6%

Of the following, the investment time horizon is typically the shortest for __________.

A. banks

B. endowment funds

C. life insurance companies

D. pension funds

Hedge funds can invest in various investment options that are not generally available to

mutual funds. These include:

I. Futures and options

II. Merger arbitrage

III. Currency contracts

A. I only

B. I and II only

C. I, II, and III only

D. I, II, III, and IV

A high dividend payout will ______ the value of a call option and ______ the value of a

put option.

A. increase; decrease

B. increase; increase

C. decrease; increase

D. decrease; decrease

Higher portfolio turnover:

I. Results in greater tax liability for investors

II. Results in greater trading costs for the fund, which investors have to pay for

III. Is a characteristic of asset allocation funds

A. I only

B. II only

C. I and II only

D. I, II, and III

Approximately what percentage of assets held in equity funds in 2014 was in index

funds?

A. 20%

B. 33%

C. 50%

D. 60%

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of

17%. The market index return is 14% and has a standard deviation of 21%. What is

Jensen’s alpha of the portfolio if the risk-free rate is 5%?

A. .017

B. .034

C. .067

D. .078

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its

earnings as dividends, its dividend growth rate will be _____.

A. 4.5%

B. 10.5%

C. 15%

D. 30%

A 1% decline in yield will have the least effect on the price of a bond with a

_________.

A. 10-year maturity, selling at 80

B. 10-year maturity, selling at 100

C. 20-year maturity, selling at 80

D. 20-year maturity, selling at 100

__________ portfolio construction starts with selecting attractively priced securities.

A. Bottom-up

B. Top-down

C. Upside-down

D. Side-to-side

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per

share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the

pound-denominated return?

A. 14%

B. 10%

C. 9.3%

D. 7.1%

Liquidity is a risk factor that __________.

A. has yet to be accurately measured and incorporated into portfolio management

B. is unaffected by trading mechanisms on various stock exchanges

C. has no effect on the market value of an asset

D. affects bond prices but not stock prices

_____________ is a tool that can help identify the direction of a stock’s price.

A. Prospect theory

B. Framing

C. A moving average

D. Conservatism

What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of

28%?

A. 6.48%

B. 7.25%

C. 8.02%

D. 9%