__________ are examples of financial intermediaries.
A. Commercial banks
B. Insurance companies
C. Investment companies
D. All of the options
______ are mutual funds that vary the proportions of funds invested in particular
market sectors according to the fund manager’s forecast of the performance of that
market sector.
A. Asset allocation funds
B. Balanced funds
C. Index funds
D. Income funds
The value of a listed call option on a stock is lower when:
I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.
A. II, III, and IV only
B. I, III, and IV only
C. I, II, and III only
D. I, II, III, and IV
A perpetuity pays $100 each and every year forever. The duration of this perpetuity will
be __________ if its yield is 9%.
A. 7
B. 9
C. 9.39
D. 12.11
What would be the profit or loss per share of stock to an investor who bought an
October expiration Apple call option with an exercise price of $130 if Apple closed on
the expiration date at $120? Assume the option premium was $3.00.
A. $0
B. $3.00 gain
C. $3.00 loss
D. $7.00 gain
A country has a PRS political risk rating of 75, a financial score of 40, and an economic
score of 35. The country’s composite rating is _________.
A. 75
B. 50
C. 40
D. 35
The fact that the exchange is the counterparty to every futures contract issued is
important because it eliminates _________ risk.
A. market
B. credit
C. interest rate
D. basis
Assuming positive basis and negligible borrowing cost, which of the following
transactions could yield positive arbitrage profits if pursued by a hedge fund?
A. Buy gold in the spot market, and sell the futures contract.
B. Buy the futures contract, and sell the gold spot and invest the money earned.
C. Buy gold spot with borrowed money, and buy the futures contract.
D. Buy the futures contract, and buy the gold spot using borrowed money.
An underpriced stock provides an expected return that is ____________ the required
return based on the capital asset pricing model (CAPM).
A. less than
B. equal to
C. greater than
D. greater than or equal to
Fama and French claim that after controlling for firm size and the ratio of the firm’s
book value to market value, beta is:
I. Highly significant in predicting future stock returns
II. Relatively useless in predicting future stock returns
III. A good predictor of the firm’s specific risk
A. I only
B. II only
C. I and III only
D. I, II, and III
Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is
18%. What is the expected return on a stock with a beta of 1.3?
A. 6%
B. 15.6%
C. 18%
D. 21.6%
You are convinced that a stock’s price will move by at least 15% over the next 3
months. You are not sure which way the price will move, but you believe that the results
of a patent hearing are definitely going to have a major effect on the stock price. You
are somewhat more bullish than bearish however. Which one of the following options
strategies best fits this scenario?
A. buy a strip.
B. buy a strap.
C. buy a straddle.
D. write a straddle.
Which one of the following is a false statement regarding NYSE specialists?
A. On a stock exchange most buy or sell orders are executed via an electronic system
rather than through specialists.
B. Specialists cannot trade for their own accounts.
C. Specialists maintain limit order books, which contain the outstanding unexecuted
limit orders.
D. Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread
has become too wide.
The Stone Harbor Fund is a closed-end investment company with a portfolio currently
worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If
the fund sells for $30 a share, what is its premium or discount as a percent of NAV?
A. 9.26% premium
B. 8.47% premium
C. 9.26% discount
D. 8.47% discount
Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and
coupon rate of 5%. Assume annual coupon payments.
What is the real rate of return on the TIPS bond in the first year?
A. 5%
B. 8.15%
C. .15%
D. 4%
Life insurance companies try to hedge the risks inherent in whole-life insurance policies
by investing in __________.
A. long-term bonds
B. money market mutual funds
C. savings accounts
D. short-term commercial paper
If you anticipatea dramatic decline in stock prices, which naked strategy will make you
the most profit?
A. long call
B. long put
C. short call
D. short put
The graph of the relationship between expected return and beta in the CAPM context is
called the _________.
A. CML
B. CAL
C. SML
D. SCL
The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio
standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?
A. 0
B. .45
C. .74
D. 1.35
An expanding economy puts stress on the manufacturing ability of a company. When a
firm turns business down during periods of economic expansion, a problem exists in the
area of ____________.
A. asset allocation
B. capacity utilization
C. employment management
D. strategic planning
Warrants differ from listed options in that:
I. Exercise of warrants results in dilution of a firm’s earnings per share.
II. When warrants are exercised, new shares of stock must be created.
III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options
does not.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index,
you should __________.
A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index
B. sell all the stocks in the S&P 500 and buy call options on S&P 500 Index
C. sell S&P 500 Index futures and buy all the stocks in the S&P 500
D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures
An investor who is hedging a corporate bond portfolio using a T-bond futures contract
is said to have _______.
A. an arbitrage
B. a cross-hedge
C. an over hedge
D. a spread hedge
The characteristic
line for this stock
is Rstock = ___ +
___ Rmarket.
A. .35; .12
B. 4.05; 1.32
C. 15.44; .97
D. 26; 1.36
Consider a hedge fund with $200 million at the start of the year. The benchmark S&P
500 Index was up 16.5% during the same period. The gross return on assets is 21%, and
the expense ratio is 2%. For each 1% above the benchmark return, the fund managers
receive a .1% incentive bonus.
What was the annual return on this fund?
A. 16.5%
B. 18.04%
C. 18.55%
D. 21%
The 2002 law designed to improve corporate governance is titled the _____ .
A. Pension Reform Act
B. ERISA
C. Financial Services Modernization Act
D. Sarbanes-Oxley Act
Market signals will help to allocate capital efficiently only if investors are acting
_____ .
A. on the basis of their individual hunches
B. as directed by financial experts
C. as dominant forces in the economy
D. on accurate information
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.
On which of the
given days do
you get a
margin call?
A. Monday
B. Tuesday
C. Wednesday
D. none of these options
The percentage change in the call option price divided by the percentage change in the
stock price is the __________ of the option.
A. delta
B. elasticity
C. gamma
D. theta
What happened to the effective spread on trades when the SEC allowed the minimum
tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and
from one-sixteenth of a dollar to one cent in 2001?
A. The effective spread increased in 1997 but decreased in 2001.
B. The effective spread increased in both cases.
C. The effective spread decreased in 1997 but increased in 2001.
D. The effective spread decreased in both cases.
The most common measure of __________ is the spread between the number of stocks
that advance in price and the number of stocks that decline in price.
A. market breadth
B. market volume
C. odd-lot trading
D. short interest
On May 1, 200, Joe Hill is considering one of the following newly issued 10-year AAA
corporate bonds.
If interest rates are expected to rise, then Joe Hill should ____.
A. prefer the Wildwood bond to the Asbury bond
B. prefer the Asbury bond to the Wildwood bond
C. be indifferent between the Wildwood bond and the Asbury bond
D. The answer cannot be determined from the information given.