1) advantages of cash flow matching and dedicated strategies include:
i. once the cash flows are matched, there is no need for rebalancing.
ii. cash flow matching typically earns a higher rate of return than active bond portfolio
management.
iii. financial institutions’ liabilities often exceed the maturity of available bonds, making
cash matching even more desirable.
a.i only
b.ii only
c.i and iii only
d.i, ii, and iii
2) which one of the following types of markets requires the greatest level of trading
activity to be cost-effective?
a.broker market
b.dealer market
c.continuous auction market
d.direct search market
3) the term “recession” describes a situation where:
a.inflation rates exceed normal levels.
b.output and living standards decline.
c.an economy’s ability to produce is destroyed.
d.government takes a less active role in economic matters.
4) consider two perfectly negatively correlated risky securities, a and b. security a has
an expected rate of return of 16% and a standard deviation of return of 20%. b has an
expected rate of return of 10% and a standard deviation of return of 30%. the weight of
security b in the minimum-variance portfolio is _________.
a.10%
b.20%
c.40%
d.60%
5) a firm purchases goods on credit worth $100. the same firm pays off $80 in old credit
purchases. an investment is made via the purchase of a new facility, and equity is issued
in the amount of $200 to pay for the purchase. what is the change in net cash provided
by financing?
a.$20 increase
b.$80 increase
c.$100 increase
d.$200 increase
6) the dollar-per-euro spot rate is 1.2 when an importer of french wines places an order.
six months later, when she takes delivery, the spot rate is 1.3 dollars per euro. if her
original invoice was for 30,000 euro, what is her gain or loss due to exchange rate risk?
a.$3,000 gain
b.$3,000 loss
c.$6,000 loss
d.no gain or loss
7) which of the following are true concerning short sales of exchange-listed stocks?
i. proceeds from the short sale must be kept on deposit with the broker.
ii. short-sellers must post margin with their broker to cover potential losses on the
position.
iii. the short-seller earns interest on any cash deposited with the broker that is used to
meet the margin requirement.
a.i only
b.i and iii only
c.i and ii only
d.i, ii, and iii
8) consider the following limit order book of a specialist. the last trade in the stock
occurred at a price of $40. if a market buy order for 100 shares comes in, at what price
will it be filled?
a.$39.75
b.$40.25
c.$40.375
d.$40.25 or less
9) hedge ratios for long call positions are __________, and hedge ratios for long put
positions are ____________.
a.negative; negative
b.negative; positive
c.positive; negative
d.positive; positive
10) the cost of buying and selling a stock includes:
i. broker’s commissions
ii. dealer’s bid-asked spread
iii. price concessions that investors may be forced to make
a.i and ii only
b.ii and iii only
c.i and iii only
d.i, ii, and iii
11) if you limit your investment opportunity set to only the largest six countries in the
world in terms of equity capitalization as a percentage of total global equity capital, you
will include about _______ of the world’s equity.
a.34%
b.44%
c.54%
d.64%
12) whenever opec attempts to influence the price of oil by significantly altering
production, economists refer to this type of event as a ______________.
a.demand shock
b.equilibrium event
c.expanding commodity event
d.supply shock
13) if an investor wants to invest 100% of her portfolio in safe assets but does not want
to manage her portfolio, she should invest in __________.
a.a money market fund
b.a growth stock fund
c.several different money market instruments
d.several different stocks
14) the return on the risky portfolio is 15%. the risk-free rate, as well as the investor’s
borrowing rate, is 10%. the standard deviation of return on the risky portfolio is 20%. if
the standard deviation on the complete portfolio is 25%, the expected return on the
complete portfolio is _________.
a.6%
b.8.75 %
c.10%
d.16.25%
15) 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
16) a coupon bond that pays interest of $60 annually has a par value of $1,000, matures
in 5 years, and is selling today at an $84.52 discount from par value. the yield to
maturity on this bond is _________.
a.6%
b.7.23%
c.8.12%
d.9.45%