An index fund that uses futures to hold the S&P 500 Index and invests the remainder in
bonds would be an example of:
a. a value index fund.
b. a derivatives index fund.
c. an enhanced index fund.
d. an active index fund.
Several analysts and empiricists recommend investing in stocks with what kind of price
to book value ratios?
a. low.
b. equal to one.
c. high.
d. equal to zero.
The following information is to be used to answer questions
SD_ Beta alpha R 2
_
Fund 1 1.97 1.0 1.3 0.95
Fund 2 2.94 0.8 0.6* 0.80
Fund 3 3.82 1.2 -3.5 0.90
Fund 4 4.70 1.4 4.2 0.65
*Significant at the 5 percent level
Which of these funds was least well diversified?
a. Fund 1
b. Fund 2
c. Fund 3
d. Fund 4
Speculators in the futures markets
a. make the market more volatile.
b. contribute liquidity to the market.
c. engage mainly in short sales.
d. serve no real economic function.
If you invest in German bonds and the Euro becomes stronger during your holding
period, then:
a. you will be able to buy back fewer dollars when you redeem your bond or it matures
b. your dollar-denominated return will increase
c. your-dollar denominated return will decrease
d. your return will be the interest you receive
A. T. Edwards paid an annual dividend of $1.25 last year. Investors expect the
dividends to grow at a rate of 6 percent per year over the foreseeable future. If the
required rate of return for this stock is 12 percent, what is its intrinsic value today?
Which of the following variables is not established on a futures contract?
a. contract size
b. price
c. delivery date
d. specified grade
On average, which type of mutual fund is expected to have the highest performance?
a. money market funds
b. bond funds
c. equity funds
d. municipal bond funds
Which of the following statements regarding the Nasdaq Stock Market is not true?
a. It was less affected by the 2000-2002 market decline than the NYSE
b. NASDAQ dealers make a market by standing ready to buy and sell securities
c. Stocks listed on the NYSE may also trade on NASDAQ
d. NASDAQ ‘s electronic trading system provides instantaneous transactions
Which of the following is true regarding random diversification?
a. Investment characteristics are considered important in random diversification
b. The benefits of random diversification eventually no longer continue as more
securities are added
c. Random diversification, if done correctly, can eliminate all risk in a portfolio
d. Random diversification eventually removes all company specific risk from a
portfolio
Why is duration important for investing in bonds?
a) Investors need to know the relationship between interest rates and prices.
b) Investors need to know the “average” maturity of the bonds they are considering.
c) Investors need to know the coupon rates of the bonds they are considering.
d) Investors need to know the yield to maturity.
Given the following probability distribution, calculate the expected return of security
XYZ.
Security XYZ’s
Potential return Probability
20% 0.3
30% 0.2
-40% 0.1
50% 0.1
10% 0.3
a. 16 percent
b. 22 percent
c. 25 percent
d. 18 percent
An inverted yield curve generally indicates:
a. the economy is accelerating.
b. economic activity is slowing down.
c. a pending recession.
d. rising inflation.
Investment decision making traditionally consists of two steps:
a. investment banking and security analysis
b. buying and selling
c. risk and expected return.
d. security analysis and portfolio management.
In the U.S. since the end of World War II, the typical business cycle contraction consists
of how many months?
a. 6
b. 10
c. 12
d. 15
Which is the better measure to estimate the performance of a well-diversified portfolio
in relation to the market index?
a. Sharpe’s RVAR
b. Treynor’s RVOL
c. Total return (alone)
d. Portfolio beta (alone)
The Financial Industry Regulatory Authority (FINRA) created in 2007 is the largest
regulator for securities firms in the U.S. FINRA’s objective is to:
a. protect the bid-ask spread and exchange participants’ profits
b. protect corporations and investors
c. protect investors and ensure market integrity
d. ensure market integrity
Which of the following statements is true regarding full-service brokers?
a. They typically seek clients with at least $10,000 in their accounts.
b. They derive only a small percentage of their revenues from commissions.
c. They compete primarily on price and services offered.
d. Less than 10 percent of U.S. households now use a full-service broker.
Margin Call price is the amount borrowed divided by:
a. number of shares x (1 – initial margin proportion)
b. number of shares x (1 – maintenance margin proportion)
c. current value of the shares purchased x (1 – initial margin proportion)
d. current value of the shares purchased x (1 – maintenance margin proportion)
Warren Buffett thinks long-term movements in stock prices are caused by which of the
following two economic variables?
a. interest rates and realized corporate profits.
b. interest rates and expected corporate profits
c. interest rates, inflation, and unemployment
d. interest rates, inflation, and growth in GDP
The estimated value of common stock is the:
a. present value of all expected cash flows.
b. present value of all capital gains.
c. future value of all dividend payments.
d. present value of all dividend payments.
If an astute (or lucky) market analyst were to find a “money machine ” system that
consistently beat the market, would the system eventually become self-defeating?
The Dow Jones averages handle stock splits by adjusting the market value of the stocks.
Futures exchange members:
a. trade strictly for their own accounts.
b. trade strictly for others.
c. can trade for their own accounts or for others.
d. are all controlled by commodity firms.
Will risk-averse investors ever include commodity futures or options in their portfolios?
Explain.
Probability distributions:
are always discrete.are always continuous.can be either discrete or continuous.are
inverse to interest rates.
Relative valuation methods tend to be more sophisticated, more formal and less
intuitive than discounted cash flow techniques.
Most professional investors use the S&P 500 as a general gauge of total market
performance.