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If an investor is a successful market timer, his distribution of monthly portfolio returns
will __________.
A. be skewed to the left
B. be skewed to the right
C. exhibit kurtosis
D. exhibit neither skewness nor kurtosis
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 21% and a standard deviation of return of 39%. Stock B has an
expected return of 14% and a standard deviation of return of 20%. The correlation
coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The
proportion of the optimal risky portfolio that should be invested in stock B is
approximately
_________.
A. 29%
B. 44%
C. 56%
D. 71%
Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market
capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely.
The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the
market capitalization rate?
A. .5%
B. 1%
C. 1.5%
D. 2%
The market-timing form of active portfolio management relies on __________
forecasting, and the security selection form of active portfolio management relies on
__________ forecasting.
A. macroeconomic; macroeconomic
B. macroeconomic; microeconomic
C. microeconomic; macroeconomic
D. microeconomic; microeconomic
SIPC ensures investors against failure of a brokerage firm up to a limit of _______.
A. $100,000
B. $250,000
C. $500,000
D. $1,000,000
According to the CAPM, the risk premium an investor expects to receive on any stock
or portfolio is _______________.
A. directly related to the risk aversion of the particular investor
B. inversely related to the risk aversion of the particular investor
C. directly related to the beta of the stock
D. inversely related to the alpha of the stock
A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5
years, and is selling today at $85. The actual yield to maturity on this bond is
_________.
A. .2%
B. 8.8%
C. 9.1%
D. 9.6%
Financial markets allow for all but which one of the following?
A. shift consumption through time from higher-income periods to lower
B. price securities according to their riskiness
C. channel funds from lenders of funds to borrowers of funds
D. allow most participants to routinely earn high returns with low risk
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 a $5.25 discount from par value. The current yield on
this bond is _________.
A. 6%
B. 6.49%
C. 6.3%
D. %
Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is
5%, and the market expected rate of return is 15%. According to the capital asset
pricing model, security X is _________.
A. fairly priced
B. overpriced
C. underpriced
D. none of these answers
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 effective salary reduction if he is in the 25% tax bracket?
A. $2,100
B. $2,800
C. $5,600
D. $8,400
A typical hedge fund incentive bonus is usually equal to ________ of investment profits
beyond a predetermined benchmark index.
A. 5%
B. 10%
C. 20%
D. 25%
The variance of the return on the market portfolio is .04 and the expected return on the
market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk
aversion, A, is _________.
A. .5
B. 2.5
C. 3.5
D. 5
Which insurance company sold more than $400 billion of CDS contracts on subprime
mortgages prior to the 2008 market crash?
A. Metlife
B. AIG
C. Northwestern Mutual
D. New York Life
You would like to hold a protective put position on the stock of Avalon Corporation to
lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50.
Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill
rate is 5%. Unfortunately, no put options are traded on Avalon Co.
What would have been the cost of a protective put portfolio?
A. $48.81
B. $51.19
C. $52.38
D. $53.38
If enough investors decide to purchase stocks, they are likely to drive up stock prices,
thereby causing _____________ and ___________.
A. expected returns to fall; risk premiums to fall
B. expected returns to rise; risk premiums to fall
C. expected returns to rise; risk premiums to rise
D. expected returns to fall; risk premiums to rise
You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal
tax bracket. If over your holding period inflation was 3%, your real after-tax rate of
return was _____.
A. 6.8%
B. 3.69%
C. 4.91%
D. 4.25%
If the beta of the market index is 1 and the standard deviation of the market index
increases from 12% to 18%, what is the new beta of the market index?
A. .8
B. 1
C. 1.2
D. 1.5
Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
If the yield to maturity decreases to 8.045%, the expected percentage change in the
price of the bond using modified duration would be ____.
A. 11%
B. 13%
C. 12%
D. 10%
Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15
million shares at the start of the year and with $500 million in assets, 40 million in debt,
and 18 million shares at the end of the year. During the year investors have received
income distributions of $.50 per share and capital gain distributions of $.30 per share. If
the total expense ratio is .75%, what is the rate of return on the fund?
A. 12.09%
B. 12.99%
C. 8.25%
D. The answer cannot be determined from the information given.
Flanders, Inc., has expected earnings of $4 per share for next year. The firm's ROE is
8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is
15%, what is the present value of its growth opportunities?
A. -$6.33
B. $0
C. $20.34
D. $26.67
Futures contracts are said to exhibit the property of convergence because
_______________.
A. the profits from long positions and short positions must ultimately be equal
B. the profits from long positions and short positions must ultimately net to zero
C. price discrepancies would open arbitrage opportunities for investors who spot them
D. the futures price and spot price of any asset must ultimately net to zero
What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5%
and an expected market return of 15.5%?
A. 3.8%
B. 13.1%
C. 15.6%
D. 19.1%
All other things equal (YTM = 10%), which of the following has the longest duration?
A. a 30-year bond with a 10% coupon
B. a 20-year bond with a 9% coupon
C. a 20-year bond with a 7% coupon
D. a 10-year zero-coupon bond
A writer of a call option will want the value of the underlying asset to __________, and
a buyer of a put option will want the value of the underlying asset to _________.
A. decrease; decrease
B. decrease; increase
C. increase; decrease
D. increase; increase
Active portfolio management consists of:
I. Market timing
II. Security selection
III. Sector selection within given markets
IV. Indexing
A. I and II only
B. II and III only
C. I, II, and III only
D. I, II, III, and IV
New manufacturers continue to enter the market.
Characteristics _______ would be typical of an industry that is in the start-up stage.
A. 4 and 7
B. 1 and 4
C. 2 and 5
D. none of these options
A stock is priced at $45 per share. The stock has earnings per share of $3 and a market
capitalization rate of 14%. What is the stock's PVGO?
A. $23.57
B. $15
C. $19.78
D. $21.34
You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the
beginning of the year. The fund deducted a front-end commission of 4%. The securities
in the fund increased in value by 15% during the year. The fund's expense ratio is 2%
and is deducted from year-end asset values. What is your rate of return on the fund if
you sell your shares at the end of the year?
A. 5.35%
B. 7.23%
C. 8.19%
D. 10%
Ownership of a put option entitles the owner to the __________ to ___________ a
specific stock, on or before a specific date, at a specific price.
A. right; buy
B. right; sell
C. obligation; buy
D. obligation; sell
The fed funds rate is the __________.
A. interest rate that banks charge their best corporate customers
B. interest rate banks charge each other for overnight loans of deposits on reserve at the
Fed
C. interest rate the Fed charges commercial banks on short-term loans
D. interest rate that the U.S. Treasury pays on its bills
Forward contracts _________ traded on an organized exchange, and futures contracts
__________ traded on an organized exchange.
A. are; are
B. are; are not
C. are not; are
D. are not; are not
The financial statements of Flathead Lake Manufacturing Company are shown below.
Note: The common shares are trading in the stock market for $15 per share.
Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's
debt-to-equity ratio for 2015 is _________.
A. 2.13
B. 2.44
C. 2.56
D. 2.89
