FE 54308 | Course Paper

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The most marketable money market security is _____.

A. Treasury bills

B. bankers’ acceptances

C. certificates of deposit

D. common stock

An insurance company plans to sell annuities to investors. Based on actuarial

calculations, an investor has a 20-year life span, and she wants a $50,000-per-year

annuity, payable at the end of each year. If the insurance company uses a 3% assumed

investment rate, how much should the annuity cost?

A. $696,928

B. $743,874

C. $833,552

D. $953.982

In a well-diversified portfolio, __________ risk is negligible.

A. nondiversifiable

B. market

C. systematic

D. unsystematic

The table presents the actual return of each sector of the manager’s portfolio in column

(1), the fraction of the portfolio allocated to each sector in column (2), the benchmark

or neutral sector allocations in column (3), and the returns of sector indexes in column

What was the

manager’s over-

underperformance for the month?

A. Underperformance = .03%

B. Overperformance = .03%

C. Overperformance = .14%

D. Underperformance = 3%

Which of the following is used to back international sales of goods and services?

A. certificate of deposit

B. bankers’ acceptance

C. eurodollar deposits

D. commercial paper

Maintenance requirements for margin accounts are set by ____.

A. brokerage firms

B. the SEC

C. the Federal Reserve System’s Board of Governors

D. the Supreme Court

If a long-short hedge fund were banned by government regulation from short selling,

which statement would no longer be true?

A. they are not market neutral.

B. they may establish a concentrated focus on economic regions.

C. they are equity oriented.

D. derivatives may be used.

Advantages of investment companies to investors include all but which one of the

following?

A. record keeping and administration

B. low-cost diversification

C. professional management

D. guaranteed rates of return

Which of the following is not a sentiment indicator?

A. confidence index

B. short interest

C. relative strength

D. put/call ratio

__________ is not a money market instrument.

A. A certificate of deposit

B. A Treasury bill

C. A Treasury bond

D. Commercial paper

Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the

upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free

rate of return is 5%, and the expected return on the market portfolio is 12%. The stock

of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the

return you should require on the stock is

_________.

A. 7.25%

B. 10.25%

C. 14.75%

D. 21%

One year U.S. interest rates are 7%, and European interest rates are 5%. The spot euro

direct exchange rate quote is 1.30 and the 1-year forward rate direct quote is 1.25. If

you can borrow either $1 million or €1 million to start with, what would be your dollar

profits from interest arbitrage based on these data?

A. $60,384

B. $42,973

C. $68,422

D. $78,500

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.

When you hedge your stock portfolio with futures contracts, the value of your portfolio

beta is __________.

A. 0

B. 1

C. 1.2

D. The answer cannot be determined from the information given.

You have the following rates of return for a risky portfolio for several recent years:

2011 35.23% 2012 18.67% 2013 −9.87% 2014 23.45%

The annualized (geometric) average return on this investment is _____.

A. 16.15%

B. 16.87%

C. 21.32%

D. 15.60%

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share.

What is your maximum possible loss?

A. $50

B. $150

C. $10,000

D. unlimited

_____ has the highest market capitalization of listed corporations among developed

markets.

A. The United States

B. Japan

C. The United Kingdom

D. Switzerland

Which of the following valuation measures is often used to compare firms that have no

earnings?

A. price-to-book ratio

B. P/E ratio

C. price-to-cash-flow ratio

D. price-to-sales ratio

Financial assets represent _____ of total assets of U.S. households.

A. over 70%

B. over 90%

C. under 10%

D. about 30%

The federal government decides to pay for the transition to private social security

accounts with a one-time $1 trillion bond issue. What will be the biggest concern to

businesses relative to the “crowding out” effect?

A. higher interest rates due to the new government borrowing

B. inflation resulting from more government purchases

C. a negative supply shock

D. shortage of investment due to new accounts

Which of the following result in a taxable event for investors?

I. Short-term capital gain distributions from the fund

II. Dividend distributions from the fund

III. Long-term capital gain distributions from the fund

A. I only

B. II only

C. I and II only

D. I, II, and III

Advantages of exchange-traded options over OTC options include all but which one of

the following?

A. ease and low cost of trading

B. anonymity of participants

C. contracts that are tailored to meet the needs of market participants

D. no concerns about counterparty credit risk

Bonds rated _____ or better by Standard & Poor’s are considered investment grade.

A. AA

B. BBB

C. BB

D. CCC

A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28%

tax bracket, this bond would provide you with an equivalent taxable yield of

_________.

A. 4.5%

B. 7.25%

C. 8.68%

D. none of these options

In a particular year, Lost Hope Mutual Fund made the following investments in asset

classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of asset allocation

across markets to the total extra return was __________.

A. -1%

B. 0%

C. 1%

D. 2%

The ratio of the purchasing power of two economies is termed the _______.

A. balance of trade

B. real exchange rate

C. real interest rate

D. nominal exchange rate

In 2008 the largest corporate bankruptcy in U.S. history involved the investment

banking firm of ______.

A. Goldman Sachs

B. Lehman Brothers

C. Morgan Stanley

D. Merrill Lynch

All else equal, bond price volatility is greater for __________.

A. higher coupon rates

B. lower coupon rates

C. shorter maturity

D. lower default risk

You believe that the spread between the September S&P 500 future and the S&P 500

Index is too large and will soon correct. To take advantage of this mispricing, a hedge

fund should

______________.

A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

B. sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index

C. sell S&P 500 Index futures and buy all the stocks in the S&P 500

D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

Which of the following is not a type of bond swap used in active portfolio

management?

A. intermarket spread swap

B. substitution swap

C. rate anticipation swap

D. asset-liability swap