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1) convexity implies that duration predictions:
i. underestimate the percentage increase in bond price when the yield falls.
ii. underestimate the percentage decrease in bond price when the yield rises.
iii. overestimate the percentage increase in bond price when the yield falls.
iv. overestimate the percentage decrease in bond price when the yield rises.
a.i and iii only
b.ii and iv only
c.i and iv only
d.ii and iii only
2) you manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per
quarter. assume the risk-free rate is 2% per quarter and the current value of the s&p 500
index is 1,200. you want to exploit the positive alpha, but you are afraid that the stock
market may fall and you want to hedge your portfolio by selling 3-month s&p 500
future contracts. the s&p contract multiplier is $250.
what is the expected quarterly return on the hedged portfolio?
a.0%
b.2%
c.3%
d.4%
3) consider the single factor apt. portfolio a has a beta of .2 and an expected return of
13%. portfolio b has a beta of .4 and an expected return of 15%. the risk-free rate of
return is 10%. if you wanted to take advantage of an arbitrage opportunity, you should
take a short position in portfolio __________ and a long position in portfolio
_________.
a.a; a
b.a; b
c.b; a
d.b; b
4) art has come out with a new and improved product. as a result, the firm projects an
roe of 25%, and it will maintain a plowback ratio of .20. its earnings this year will be $3
per share. investors expect a 12% rate of return on the stock.
what price do you expect art shares to sell for in 4 years?
a.$53.96
b.$44.95
c.$41.68
d.$39.76
5) in a private defined benefit pension plan the ___________ bears the investment risk,
and in a private defined contribution plan the ____________ bears the investment risk.
a.plan sponsor; employee
b.employee; plan sponsor
c.u.s. government; plan sponsor
d.plan sponsor; u.s. government
6) the small-firm-in-january effect is strongest ________.
a.early in the month
b.in the middle of the month
c.late in the month
d.in even-numbered years
7) the term alpha transport refers to _____.
a.establishing alpha and then using index products to hedge market exposure and reduce
exposure to particular sectors.
b.establishing alpha and then using sector mutual funds to hedge market exposure and
reduce exposure to the general market.
c.establishing alpha and then using sector mutual funds to hedge market exposure and
gain exposure to the general market.
d.establishing alpha and then using index products to hedge market exposure and gain
exposure to particular sectors.
8) which of the following strategies makes a profit if the stock price stays stable?
a.long call and short put
b.long call and long put
c.short call and short put
d.short call and long put
9) which one of the following allows you to purchase the stock of a specific foreign
company?
a.webs
b.
c.adr
d.eafe
10) an open-end fund has a nav of $16.50 per share. the fund charges a 6% load. what is
the offering price?
a.$14.57
b.$15.95
c.$17.55
d.$16.49
11) arbitrage is __________________________.
a.an example of the law of one price
b.the creation of riskless profits made possible by relative mispricing among securities
c.a common opportunity in modern markets
d.an example of a risky trading strategy based on market forecasting
12) which of the following best explains why prices tend to be inflexible even when
demand changes?
a.government regulations limit the number of times a firm can change prices in a year.
b.in most industries the profit-maximizing price does not change even when demand
changes.
c.production costs do not tend to change when a firm varies its level of output.
d.firms may be reluctant to change prices for fear of setting off a price war or losing
customers to rivals.
13) the clearing corporation has a net position equal to ______.
a.the open interest
b.the open interest times 2
c.the open interest divided by 2
d.zero
14) it is very hard to statistically verify abnormal fund performance because of all of the
following except which one?
a.inevitably, some fund managers experience streaks of good performance that may just
be due to luck.
b.the noise in realized rates of return is so large as to make it hard to identify abnormal
performance in competitive markets.
c.portfolio composition is rarely stable long enough to identify abnormal performance.
d.even if successful, there is really not much value to be added by active strategies such
as market timing.
15) if economic conditions are such that very slow growth is expected in the
foreseeable future, one would want to invest in industries with __________ sensitivity
to economic conditions.
a.below-average
b.average
c.above-average
d.since growth is expected to be slow, sensitivity to economic conditions is not an issue.
16) when the market is more optimistic about a firm, its share price will ______; as a
result, it will need to issue _______ shares to raise funds that are needed.
a.rise; fewer
b.fall; fewer
c.rise; more
d.fall; more
17) the risk-free rate, average returns, standard deviations, and betas for three funds and
the s&p 500 are given below.
based on the m2 measure, portfolio c has a superior return of _____ as compared to the
s&p 500.
a.-1.33%
b.1.43%
c.2%
d.0%
18) rank the following from highest average historical return to lowest average
historical return from 1926 to 2010.
i. small stocks
ii. long-term bonds
iii. large stocks
iv. t-bills
a.i, ii, iii, iv
b.iii, iv, ii, i
c.i, iii, ii, iv
d.iii, i, ii, iv
