1) Exhibit 12.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following
information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
Calculate the firm’s ROE.
a. 36%
b. 25%
c. 15%
d. 10%
e. 8%
2) The process of fundamental valuation requires estimates of all the following factors,
except
a. The time pattern of returns.
b. The economy’s real risk-free rate.
c. The risk premium for the asset.
d. The times series of stock prices.
e. The expected rate of inflation.
3) The cumulative number of shares that have been sold short by investors and not
covered is called
a. Margin interest.
b. Short interest.
c. Short ratio.
d. Short/long ratio.
e. Naked short ratio.
4) There are a number of differences between forward and futures contracts. Which of
the following statements is false?
a. Futures have less liquidity risk than forward contracts.
b. Futures have less credit risk than forward contracts.
c. Futures have more default risk than forward contracts.
d. In futures, the exchange becomes the counterparty to all transactions.
e. None of the above (that is, all statements are true)
5) In a long short-short hedge fund strategy
a. Managers take long positions in undervalued stocks and short positions in overvalued
stocks.
b. Managers take short positions in undervalued stocks and long positions in overvalued
stocks.
c. Managers take offsetting risk positions on the long and short side.
d. All of the above.
e. None of the above.
6) The U.S. balance of payments, the federal deficit and military contract awards are
____ of aggregate economic activity.
a. Leading indicators
b. Coincident indicators
c. Lagging indicators
d. Not categorized indicators
e. Not indicators
7) Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Refer to Exhibit 8.3. The covariance between Radtron and the true index is
a. 57.30
b. 86.50
c. 88.00
d. 92.50
e. 107.90
8) If interest rates rise due to inflation, and expected cash flows to a firm rise, then you
would expect stock prices to
a. Rise.
b. Rise and then decline.
c. Remain unchanged.
d. Decline.
e. None of the above.
9) During which industry life cycle stage do firms experience low rates of return on
capital and investors begin to seek alternative uses of capital?
a. Pioneering and development
b. Mature growth
c. Stabilization and market maturity
d. Deceleration of growth and decline
e. Disassembly and restructure
10) Exhibit 9.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor
loadings (or factor betas).
The zero-beta return (λ0) = 3%, and the risk premia are λ1= 10%, λ2= 8%. Assume that
all three stocks are currently priced at $50.
Assume that you wish to create a portfolio with no net wealth invested and the portfolio
that achieves this has 50% in stock X, −100% in stock Y, and 50% in stock Z. The net
arbitrage profit is
a. $8
b. $5
c. $7
d. $12
e. $15
11) Which of the following statements is a true definition of an in-the-money option?
a. A call option in which the stock price exceeds the exercise price.
b. A call option in which the exercise price exceeds the stock price.
c. A put option in which the stock price exceeds the exercise price.
d. An index option in which the exercise price exceeds the stock price.
e. A call option in which the call premium exceeds the stock price.
12) When F0,T> E(ST) it is known as
a. Backwardation.
b. Normal backwardation.
c. Normal contango.
d. Inverted spread.
e. Pure expectations equilibrium.
13) Which of the following is not a major risk premium component for bond investors?
a. Quality differentials.
b. Term to maturity.
c. Indenture provisions.
d. Yield to maturity.
e. Exchange rate risk differences.
14) Which of the following statements is true?
a. At a support level, the technician would expect an increase in the demand for a stock.
b. At a resistance level, the technician would expect an increase in the demand for a
stock.
c. At a resistance level, the technician would expect any price increase to reverse
abruptly.
d. Choices a and c
e. All of the above
15) Which of the following is true when F0,T< E(ST)?
a. Occurs when long hedgers outnumber short hedgers.
b. Occurs when short hedgers outnumber long hedgers.
c. The market is said to be in contango.
d. The market is said to be in normal contango.
e. The pure expectations hypothesis holds.
16) Exhibit 4.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60
percent and Turtle Industries is currently selling at $50 per share.
Refer to Exhibit 4.1. How many shares of Turtle can Jackie purchase?
a.5,000
b.3,000
c.1,800
d.1,200
e.None of the above
17) The relative strength ratio for a stock can be computed by dividing the value of the
S&P 500 stock index by the price of a stock.
18) It is always theoretically possible to use options as a perfect hedge against
fluctuations in value of the underlying asset.
19) When the government introduces a licensing requirement for an industry, it reduces
the barriers to entry for the industry.
20) In well developed economies, markets are not affected by changes in expected
inflation.
21) A defensive company is one whose sales, earnings and cash flows are strongly
correlated with the business cycle.
22) It is essential that both the client and the portfolio manager agree on an appropriate
benchmark portfolio.
23) An efficient market requires a large number of profit-maximizing investors.
24) The weak form of the efficient market hypothesis contends that stock prices fully
reflect all public and private information.
25) Specialists provide added liquidity in the Nasdaq market.
26) If the market portfolio is mean-variance efficient it has the lowest risk for a given
level of return among the attainable set of portfolios.