What is the difference between this day’s high and closing prices for one 10-year
Treasury note futures contract?
Treasury note, $100,000, pts and one-half of 1/32 of a point
A. -$435.00
B. -$550.00
C. -$800.00
D. -$971.88
E. -$1,093.75
The Value-at-Risk measure assumes which one of the following?
A. returns are normally distributed
B. portfolios lie on the efficient frontier
C. all portfolios are fully diversified
D. returns tend to follow repetitive patterns
E. the risk premium is constant over time
Capital gains are included in the return on an investment:
A. when either the investment is sold or the investment has been owned for at least one
year.
B. only if the investment is sold and the capital gain is realized.
C. whenever dividends are paid.
D. whether or not the investment is sold.
E. only if the investment incurs a loss in value or is sold.
Which one of the following abbreviations is the interest rate that international banks
charge one another for overnight Eurodollar loans?
A. EIOEL
B. EUDOR
C. LEDOR
D. EDBOR
E. LIBOR
A survey of 64 of your fellow classmates determines that 19 of them are bullish on the
market while the remainder is bearish. What is the market sentiment index for this
group of individuals?
A. .28
B. .33
C. .44
D. .58
E. .70
Which one of the following best describes the current understanding of market
efficiency?
A. The market tends to overreact to new information in a manner which can be used to
earn abnormal returns.
B. Markets under-react to unanticipated events in a manner which can be used to earn
excess returns.
C. The market appears to be highly inefficient.
D. Short-term market movements are difficult, if not impossible, to predict accurately.
E. Markets tend to react slowly to unanticipated announcements.
Currently, Southern Foods has sales of $1.32 million, net profit of $521,400, and
125,000 shares of stock outstanding. The sales and net profit are each expected to grow
by 6 percent annually. The historical P/S ratio is 7.8. What is the expected price of this
stock one year from now?
A. $32.54
B. $34.49
C. $82.37
D. $85.15
E. $87.31
Sun Lee purchased 1,500 shares of Franklin Metals stock for $16.80 a share. The stock
was purchased with an initial margin of 65 percent. The maintenance margin is 30
percent. The stock is currently selling for $17.10 a share. What is the minimum dollar
amount of equity that he must have in this stock today to avoid a margin call?
A. $7,544
B. $7,695
C. $7,760
D. $7,808
E. $7,973
Davis Industrial bonds have a current market price of $990 and a 6 percent coupon. The
bonds pay interest semi-annually on March 1 and September 1. Assume today is
January 1. How many months of accrued interest are included in the dirty price of these
bonds?
A. zero
B. two
C. three
D. four
E. five
A portfolio has a beta of 1.26, a standard deviation of 15.9 percent, and an average
return of 15.07 percent. The market rate is 12.7 percent and the risk-free rate is 3.6
percent. What is the Sharpe ratio?
A. .61
B. .68
C. .72
D. .84
E. .88
Use these option quotes to answer this question:
You want to sell four call option contracts on ZZ Industries stock at a strike price of
$32.50 a share. How much will you receive in option premiums if you place this order
today?
A. $300
B. $1,290
C. $1,320
D. $728
E. $546
You have a portfolio which is comprised of 48 percent of stock A and 52 percent of
stock B. What is the standard deviation of this portfolio?
A. 1.98 percent
B. 2.06 percent
C. 2.13 percent
D. 2.27 percent
E. 2.30 percent
Moving money in and out of the market based on your market expectations is called
_____ and tends to lead to returns that are _____ than the overall market return,
assuming that the market is relatively efficient.
A. asset allocation; higher
B. asset allocation; lower
C. market timing; higher
D. market timing; lower
E. security selection; higher
The SIPC:
A. guarantees investors against any loss related to an investment account held at a
brokerage firm.
B. guarantees cash balances held in brokerage accounts up to $500,000.
C. is an agency of the federal government.
D. protects private brokerage firms from bankruptcy.
E. protects investors from missing assets when a brokerage firm closes.
A portfolio comprised of which one of the following is most apt to be the minimum
variance portfolio?
A. 100 percent stocks
B. 100 percent bonds
C. 50/50 mix of stocks and bonds
D. 30 percent stocks and 70 percent bonds
E. 30 percent bonds and 70 percent stocks
You have a marginal tax rate of 32 percent and an average tax rate of 28 percent.
Municipal bonds in your area are yielding 4.25 percent. What is your equivalent taxable
yield?
A. 5.16 percent
B. 5.93 percent
C. 5.13 percent
D. 6.25 percent
E. 6.47 percent
The Fish House increases its dividend each year. The next annual dividend is expected
to be $2.32 a share. Future dividends will increase by 4.0 percent annually. What is the
current value of this stock if the discount rate is 12 percent?
A. $28.91
B. $28.05
C. $28.78
D. $29.00
E. $29.18
Which one of the following had the highest average return for the period 1926-2012?
A. large-company stocks
B. U.S. Treasury bills
C. long-term government bonds
D. small-company stocks
E. long-term corporate bonds
Which one of the following is the definition of the term “basis”?
A. initial cost of purchasing a futures contract
B. future price of a transaction that is agreed upon today
C. difference between the cash and futures price of a commodity
D. the expected future price of a commodity based on the current spot price
E. the expected spot price of a commodity based on the future price
The following premiums apply to a 6-month bond: interest rate risk premium = 0.22
percent; real rate = 3.50 percent; default premium = 0.12 percent; inflation premium =
1.45 percent. What is the expected difference in nominal interest rates between a
6-month risky security and a 6-month, default-free security?
A. 0.12 percent
B. 0.34 percent
C. 0.37 percent
D. 1.57 percent
E. 1.60 percent
DT Metals is offering 700 shares in a Dutch auction IPO. The following bids have been
received:
What will the gross proceeds be for this offering?
A. $12,000
B. $12,600
C. $13,200
D. $13,300
E. $14,700
Use the following stock quotes to answer this question:
What is today’s closing price per share of Buy Rite stock?
A. $82.13
B. $101.13
C. $821.30
D. $1,011.30
E. $1,049.00
Which one of the following statements regarding an original issue $25,000 GNMA
bond is correct?
A. The investor will receive $25,000 as a principal payment at maturity.
B. The investor will receive fixed quarterly interest payments.
C. The investor will receive the future value of $25,000 at maturity.
D. The investor will receive payments totaling $25,000 over the life of the bond.
E. The investor should receive more than $25,000 but the amount of each payment is
unknown in advance.
Which one of the following statements is true?
A. An ETN shareholder owns a fractional ownership of the trust shares.
B. You can establish long, but not short, positions in ETNs.
C. ETNs invest only in commodities.
D. An ETN is an unsecured debt.
E. ETN is just another name for an ETF.
Over the past 50 years, which day of the week, on average, has the lowest average rate
of return?
A. Monday
B. Tuesday
C. Wednesday
D. Thursday
E. Friday
Which one of the following provisions grants the bondholder the option of exchanging
a bond for a prespecified number of shares of stock of the same issuer?
A. put
B. call
C. equity
D. conversion
E. sinking
It has been estimated that “substitution effects” underestimate the Consumer Price
Index by approximately how much?
A. 3%
B. 2.5%
C. 1.75%
D. 1.0%
E. 0.5%
When we refer to the rate of return on an investment, we are generally referring to the:
A. capital gains yield.
B. effective annual rate of return.
C. total percentage return.
D. dividend yield.
E. annualized dividend yield.
Jim has managed to save $1,000 and wants to start investing. The financial markets
make him nervous as he has very limited financial resources. Which one of the
following types of funds is probably best for Jim at this time?
A. sector
B. aggressive growth
C. social conscience
D. high yield
E. balanced
Home Interior’s stock has an expected return of 13.2 percent and a beta of 1.28. The
market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _____
because the CAPM return for the stock is _____ percent.
A. greatly overvalued; 16.50
B. slightly overvalued; 12.91
C. priced correctly; 12.89
D. slightly undervalued; 12.91
E. greatly undervalued; 16.50
The average compound return earned per year over a multi-year period when inflows
and outflows are considered is called the:
A. total return.
B. average capital gains yield.
C. dollar-weighted average return.
D. arithmetic average return.
E. geometric average return.
Hypo Tech expects its net income to grow at 20 percent a year for the next two years
and then taper off to a constant 5 percent annual rate of growth. The firm maintains a
constant dividend payout ratio. Which one of the following models is best suited for
computing the current value of this firm’s stock?
A. irregular dividend
B. constant perpetual growth
C. constant dividend
D. two-stage dividend growth
E. perpetuity formula
A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example.
The mortgage principal will initially be paid to which one of the tranches?
A. A-tranche
B. B-tranche
C. C-tranche
D. Z-tranche
E. all tranches on a pro-rata basis
A Treasury bill has 40 days left to maturity. The bank discount yield on the bill is 3.75
percent. What is the effective annual rate?
A. 3.55 percent
B. 3.66 percent
C. 3.77 percent
D. 3.88 percent
E. 3.99 percent
Which one of the following terms is used to describe a market situation where prices
are much higher than either fundamental or rational analysis would tend to support?
A. bear market
B. cloud
C. inversion
D. bubble
E. crash aversion
Create a stock price tree for three periods for a stock that is currently valued at $10 a
share. The up amount per period is 1.15 and the down amount per period is .90. Show
all dollar amounts to 3 decimal places.
What is the advantage of purchasing a STRIPS over a Treasury note?
Future stock prices that are estimated using any one of the various price ratios will be
based on an assumption related to the ratio. What is that assumption?
You have studied the historical returns and risks of various securities over the period of
1926-2012.
Describe the historical returns and risks associated with bonds as compared to stocks
over that time period.
Alfonso Rodriquez has served as the president of Imports United for the past six years.
During his tenure, the company has grown significantly and provided above-average
returns to its shareholders. Thus, Mr. Rodriquez is highly admired. Yesterday, he
announced that he will be retiring at the end of this quarter. You expected the stock
price of Imports United to decline on this news because of the admiration investors
have for this gentleman. Contrary to your expectations, the price of the stock remained
unchanged. There was no other relevant market news related to this firm and the overall
market also remained relatively unchanged for the day. What explanation can be given
for the market not reacting as you expected to Mr. Rodriquez’s announcement?
Briefly describe the basic elements of an Investment Policy Statement and its
importance.
Explain the relationship between the security market line and market efficiency.
We have studied three different “average return measures” – the arithmetic average
return, the geometric average return and the dollar-weighted average return. Briefly
outline what information each metric provides.
How do CMOs increase the availability of mortgage funds?
Identify three causes for a decrease in a firm’s sustainable rate of growth.
You are a wheat farmer with a crop that will be ready to harvest in approximately three
months. How can you hedge this crop and what are the advantages and disadvantages of
doing so?
Identify the five factors of the Black-Scholes option pricing model and identify whether
each factor must increase or decrease to cause the price of a put option to increase.
Which type of investor is most apt to purchase municipal bond funds and why?
Explain how the imputed interest is computed on a U.S. Treasury bill.
You wrote a put with a strike price of $20 and a premium of $1. Draw a graph depicting
your profits or losses for stock prices ranging from $0 to $40. Be sure to completely
label your graph.
You are advising several individual investors who are interested in investing in
portfolios comprised of both stocks and bonds. In preparation for meeting with these
various investors, you plot the investment opportunity set for stocks and bonds. Given
this information, why might you advise some of the investors to invest in a portfolio
other than the minimum variance portfolio?