A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The
risk-free rate is 6%. An
investor has the following utility function: U = E(r) (A/2)s2. Which value of A makes
this investor indifferent
between the risky portfolio and the risk-free asset?
A. 5
B. 6
C. 7
D. 8
Studies of positive earnings surprises have shown that there is
A. a positive abnormal return on the day positive earnings surprises are announced.
B. a positive drift in the stock price on the days following the earnings surprise
announcement.
C. a negative drift in the stock price on the days following the earnings surprise
announcement.
D. a positive abnormal return on the day positive earnings surprises are announced and
a positive drift in the stock price on the days following the earnings surprise
announcement.
E. a positive abnormal return on the day positive earnings surprises are announced and
a negative drift in the stock price on the days
Suppose you held a well-diversified portfolio with a very large number of securities,
and that the single index model holds. If the σ of your portfolio was 0.14 and σM was
0.19, the β of the portfolio would be approximately
A. 0.74.
B. 0.80.
C. 1.25.
D. 1.56.
You are a U.S. investor who purchased British securities for 2,200 pounds one year ago
when the British pound cost $1.50. No dividends were paid on the British securities in
the past year. Your total return based on U.S. dollars was __________ if the value of the
securities is now 2,560 pounds and the pound is worth $1.60.
A. 16.7%
B. 20.3%
C. 24.1%
D. 41.4%
E. None of the options
You sold short 100 shares of common stock at $75 per share. The initial margin is 50%.
At what stock price would you receive a margin call if the maintenance margin is 30%?
A. $90.23
B. $88.52
C. $86.54
D. $87.12
The following data are available relating to the performance of Wildcat Fund and the
market portfolio:
The risk-free return during the sample period was 7%.
Calculate Sharpe’s measure of performance for Wildcat Fund.
A. 1.00%
B. 8.80%
C. 44.00%
D. 50.00%
A coupon bond that pays interest annually has a par value of $1,000, matures in five
years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be
______ if the coupon rate is 7%.
A. $712.99
B. $620.92
C. $1,123.01
D. $886.28
E. $1,000.00
Commercial paper is a short-term security issued by ________ to raise funds.
A. the Federal Reserve Bank
B. commercial banks
C. large, well-known companies
D. the New York Stock Exchange
E. state and local governments
Which of the following are not examples of defensive industries?
A. Food producers
B.-Durable goods producers
C. Pharmaceutical firms
D. Public utilities
If a 7.5% coupon bond that pays interest every 182 days paid interest 62 days ago, the
accrued interest would be
A. $11.67.
B. $12.35.
C. $12.77.
D. $11.98.
E. $12.15.
The financial statements of Black Barn Company are given below.
Note: The common shares are trading in the stock market for $40 each.
Refer to the financial statements of Black Barn Company. The firm’s P/E ratio for 2009
is
A. 8.88.
B. 7.63.
C. 7.88.
D. 7.32.
Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky
assets (P) and T-Bills. The information below refers to these assets.
What are the proportions of stocks A, B, and C, respectively, in Bo’s complete
portfolio?
A. 40%, 25%, 35%
B. 8%, 5%, 7%
C. 32%, 20%, 28%
D. 16%, 10%, 14%
E. 20%, 12.5%, 17.5%
Which of the following is not a component of the money market?
A. Repurchase agreements
B. Eurodollars
C. Real estate investment trusts
D. Money market mutual funds
E. Commercial paper
Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFE in
year 2 of $1.97, and per share FCFE in year 3 of $2.54. After year 3, per share FCFE is
expected to grow at the rate of 8% per year. An appropriate required return for the stock
is 11%. The stock should be worth _______ today.
A. $77.53
B. $40.67
C. $82.16
D. $71.80
E. None of the options are correct.
The following data are available relating to the performance of Sooner Stock Fund and
the market portfolio:
The risk-free return during the sample period was 3%.
Calculate the information ratio for Sooner Stock Fund.
A. 1.53
B. 1.30
C. 8.67
D. 31.43
E. 37.14
Black argues that past risk premiums on firm-characteristic variables, such as those
described by Fama and French, are problematic because
A. they may result from data snooping.
B. they are sources of systematic risk.
C. they can be explained by security characteristic lines.
D. they are more appropriate for a single-factor model.
E. they are macroeconomic factors.
Beta books typically rely on the __________ most recent monthly observations to
calculate regression parameters.
A. 12
B. 36
C. 60
D. 120
Suppose the following equation best describes the evolution of β over time:
βt = 0.4 + 0.6βt– 1.
If a stock had a β of 0.9 last year, you would forecast the β to be _______ in the coming
year.
A. 0.45
B. 0.60
C. 0.70
D. 0.94
You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard
deviation of 0.21 and a
T-bill with a rate of return of 0.045.
What percentages of your money must be invested in the risk-free asset and the risky
asset, respectively, to
form a portfolio with a standard deviation of 0.08?
A. 30.1% and 69.9%
B. 50.5% and 49.50%
C. 60.0% and 40.0%
D. 61.9% and 38.1%
E. Cannot be determined.
The price that the buyer of a put option pays to acquire the option is called the
A. strike price.
B. exercise price.
C. execution price.
D. acquisition price.
E. premium.
Consider the free cash flow approach to stock valuation. F&G Manufacturing Company
is expected to have before-tax cash flow from operations of $750,000 in the coming
year. The firm’s corporate tax rate is 40%. It is expected that $250,000 of operating cash
flow will be invested in new fixed assets. Depreciation for the year will be $125,000.
After the coming year, cash flows are expected to grow at 7% per year. The appropriate
market capitalization rate for unleveraged cash flow is 13% per year. The firm has no
outstanding debt. The projected free cash flow of F&G Manufacturing Company for the
coming year is
A. $250,000.
B. $180,000.
C. $300,000.
D. $380,000.
The financial statements of Midwest Tours are given below.
Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm’s return on equity ratio for
2009 is
A. 12.24%.
B. 14.63%.
C. 15.50%.
D. 14.50%.
E. 16.9%.
Investment bankers
A. act as intermediaries between issuers of stocks and investors.
B. act as advisors to companies in helping them analyze their financial needs and find
buyers for newly-issued securities.
C. accept deposits from savers and lend them out to companies.
D. act as intermediaries between issuers of stocks and investors and act as advisors to
companies in helping them analyze their
A preferred stock will pay a dividend of $2.75 in the upcoming year and every year
thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this
stock. Use the constant growth DDM to calculate the intrinsic value of this preferred
stock.
A. $0.275
B. $27.50
C. $31.82
D. $56.25
__________ focus more on past price movements of a firm’s stock than on the
underlying determinants of future profitability.
A. Credit analysts
B. Fundamental analysts
C. Systems analysts
D. Technical analysts
An analyst has determined that the intrinsic value of HPQ stock is $20 per share using
the capitalized earnings model. If the typical P/E ratio in the computer industry is 25,
then it would be reasonable to assume the expected EPS of HPQ in the coming year is
A. $3.63.
B. $4.44.
C. $0.80.
D. $22.50.
Suppose that the risk-free rates in the United States and in Japan are 5.25% and 4.5%,
respectively. The spot exchange rate between the dollar and the yen is $0.008828/yen.
What should the futures price of the yen for a one-year contract be to prevent arbitrage
opportunities, ignoring transactions costs?
A. $0.009999/yen
B. $0.009981/yen
C. $0.008981/yen
D. $0.008891/yen
Bond market indexes can be difficult to construct because
A. they cannot be based on firms’market values.
B. bonds tend to trade infrequently, making price information difficult to obtain.
C. there are so many different kinds of bonds.
D. prices cannot be obtained for companies that operate in emerging markets.
E. corporations are not required to disclose the details of their bond issues. Bond
trading is often “thin,” making prices stale (or not current).
Firms raise capital by issuing stock
A. in the secondary market.
B. in the primary market.
C. to unwary investors.
D. only on days when the market is up.
Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has
total fixed costs of $500,000 and variable costs of 50 per widget. Firm B has total fixed
costs of $240,000 and variable costs of 75 per widget. The corporate tax rate is 40%. If
the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a
recession, each firm will sell 1,100,000 widgets. If the economy enters a recession, the
after-tax profit of Firm A will be
A. $0.
B. $6,000.
C.-$30,000.
D. $60,000.
E. None of the options are correct.
Historically, P/E ratios have tended to be
A. higher when inflation has been high.
B. lower when inflation has been high.
C. uncorrelated with inflation rates but correlated with other macroeconomic variables.
D. uncorrelated with any macroeconomic variables, including inflation rates.
______ bias arises because hedge funds only report returns to database publishers if
they want to.
A. Survivorship
B. Backfill
C. Omission
D. Incubation
E. None of the options are correct.
