If covered interest arbitrage opportunities exist,
A. interest rate parity does not hold.
B. interest rate parity holds.
C. arbitragers will be able to make risk-free profits.
D. interest rate parity does not hold, and arbitragers will be able to make risk-free
profits.
E. interest rate parity holds, and arbitragers will be able to make risk-free profits.
In 2016, _______ of the assets of U.S. households were financial assets as opposed to
tangible assets.
A. 20.4%
B. 34.2%
C. 69.4%
D. 71.7%
E. 82.5%
Consider the one-factor APT. The standard deviation of returns on a well-diversified
portfolio is 19%. The standard deviation on the factor portfolio is 12%. The beta of the
well-diversified portfolio is approximately
A. 1.58.
B. 1.13.
C. 1.25.
D. 0.76.
Which one of the following stock index futures has a multiplier of 10 euros times the
index?
A. CAC 40
B. Hang Seng
C. Nikkei
D. DAX-30
E. CAC 40 and Hang Seng
When comparing investments with different horizons, the ____________ provides the
more accurate
comparison.
A. arithmetic average
B. effective annual rate
C. average annual return
D. historical annual average
The bid price of a T-bill in the secondary market is
A. the price at which the dealer in T-bills is willing to sell the bill.
B. the price at which the dealer in T-bills is willing to buy the bill.
C. greater than the asked price of the T-bill.
D. the price at which the investor can buy the T-bill.
E. never quoted in the financial press.
A substitution swap is an exchange of bonds undertaken to
A. change the credit risk of a portfolio.
B. extend the duration of a portfolio.
C. reduce the duration of a portfolio.
D. profit from apparent mispricing between two bonds.
E. adjust for differences in the yield spread.
Kahneman and Tversky (1973) reported that people give __________ weight to recent
experience compared to prior beliefs when making forecasts. This is referred to as
____________.
A. too little; hyper rationality
B. too little; conservatism
C. too much; framing
D. too much; memory bias
If the value of a Treasury bond was lower than the value of the sum of its parts
(STRIPPED cash flows),
A. arbitrage would probably occur.
B. arbitrage would probably not occur.
C. the FED would adjust interest rates.
D. None of the options are correct.
Of the following five investments, ________ is (are) considered the safest.
A. commercial paper
B. corporate bonds
C. U.S. agency issues
D. Treasury bonds
E. Treasury bills
In 2016, ____________ was the most significant asset of U.S. households in terms of
total value.
A. real estate
B. mutual fund shares
C. debt securities
D. life insurance reserves
E. pension reserves
The most appropriate discount rate to use when applying a FCFE valuation model is the
A. required rate of return on equity.
B. WACC.
C. risk-free rate.
D. None of the options are correct.
Kane, Marcus, and Trippi (1999) show that the annualized fee that investors should be
willing to pay for active
management, over and above the fee charged by a passive index fund, depends on
I) the investor’s coefficient of risk aversion.
II) the value of the at-the-money call option on the market portfolio.
III) the value of the out-of-the-money call option on the market portfolio.
IV) the precision of the security analyst.
V) the distribution of the squared information ratio in the universe of securities.
A. I, II, and IV
B. I, III, and V
C. II, IV, and V
D.I, IV, and V
E. II, III, and V
In a particular year, Aggie Mutual Fund earned a return of 15% by making the
following investments in the following asset classes:
The return on a bogey portfolio was 10%, calculated as follows:
The contribution of selection within markets to total excess return was
A. 1%.
B. 3%.
C. 4%.
D. 5%.
__________ refer to strategies aimed at attaining the established rate of return
requirements while meeting expressed risk tolerance and applicable constraints.
A. Investment constraints
B. Investment objectives
C. Investment policies
D. All of the options are correct.
E. None of the options are correct.
A 12% coupon bond with semi-annual payments is callable in five years. The call price
is $1,120. If the bond is selling today for $1,110, what is the yield to call?
A. 12.03%
B. 10.86%
C. 10.95%
D. 9.14%
E. None of the options are correct.
According to the index model, covariances among security pairs are
A. due to the influence of a single common factor represented by the market index
return.
B. extremely difficult to calculate.
C. related to industry-specific events.
D. usually positive.
E. due to the influence of a single common factor represented by the market index
return and usually positive.
Over a period of 30 years or so, in managing investment funds, Benjamin Graham used
the approach of investing in the stocks of companies where the stocks were trading at
less than their working capital value. The average return from using this strategy was
approximately
A. 5%.
B. 10%.
C. 15%.
D. 20%.
E. None of the options are correct.
The principle of duration matching is not
A. used only in bond portfolio management.
B. a useful concept for investments with target dates.
C. matching one’s assets to one’s objectives.
D. a useful concept for investments with target dates or matching one’s assets to one’s
objectives.
E. None of the options are correct.
The Securities Act of 1934 I) requires full disclosure of relevant information relating to
the issue of new securities.
II) requires registration of new securities.
III) requires issuance of a prospectus detailing financial prospects of the firm.
IV) established the SEC.
V) requires periodic disclosure of relevant financial information.
VI) empowers SEC to regulate exchanges, OTC trading, brokers, and dealers.
A. I, II, and III
B. I, II, III, IV, V, and VI
C. I, II, and V
D. I, II, and IV
E. IV, V, and VI
The presence of risk means that
A. investors will lose money.
B. more than one outcome is possible.
C. the standard deviation of the payoff is larger than its expected value.
D. final wealth will be greater than initial wealth.
E. terminal wealth will be less than initial wealth.
Security X has expected return of 12% and standard deviation of 18%. Security Y has
expected return of
15% and standard deviation of 26%. If the two securities have a correlation coefficient
of 0.7, what is their
covariance?
A. 0.038
B. 0.070
C. 0.018
D. 0.033
E. 0.054
Which of the following statements about real estate investment trusts is true?
A. REITs may be equity trusts or mortgage trusts.
B. REITs are usually highly leveraged.
C. REITs are similar to closed-end funds.
D. REITs may be equity trusts or mortgage trusts and are usually highly leveraged.
E. All of the options are true.
To hedge a long position in Treasury bonds, an investor would most likely
A. buy interest rate futures.
B. sell S&P futures.
C. sell interest rate futures.
D. buy Treasury bonds in the spot market.
E. None of the options are correct.
Statistical arbitrage is a version of a ______ strategy.
A. market neutral
B. directional
C. relative value
D. divergence
E. convergence
Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year.
Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is
5%, and the expected return on the market portfolio is 13%. The stock is trading in the
market today at a price of $90.00.
What is the market-capitalization rate for Risk Metrics?
A. 13.6%
B. 13.9%
C. 15.6%
D. 16.9%
E. None of the options are correct.
The “modified duration” used by practitioners is equal to ______ divided by (one plus
the bond’s yield to maturity).
A. current yield
B. the Macaulay duration
C. yield to call
D. yield to maturity
E. None of the options are correct.
The possibility of experiencing a drop in revenue or an increase in cost in an
international transaction due to a change in foreign exchange rates is called
A. foreign exchange risk.
B. political risk.
C. translation exposure.
D. hedging risk.
A purely passive strategy is defined as
A. one that uses only index funds.
B. one that allocates assets in fixed proportions that do not vary with market conditions.
C. one that is mean-variance efficient.
D.one that uses only index funds and allocates assets in fixed proportions that do not
vary with market
conditions.
E. All of the options are correct.
ING Stock currently sells for $38. A one-year call option with strike price of $45 sells
for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with
strike price of $45?
A. $9.00
B. $12.89
C. $16.00
D. $18.72
E.$14.27
