Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%,
and the risk-free rate is currently 4%. You observe that Music Doctors had an
annualized return yesterday of 15%. Assuming that markets are efficient, this suggests
that
A. bad news about Music Doctors was announced yesterday.
B. good news about Music Doctors was announced yesterday.
C. no news about Music Doctors was announced yesterday.
D. interest rates rose yesterday.
E. interest rates fell yesterday.
Of the following types of ETFs, an investor who wishes to invest in a diversified
portfolio that tracks the MSCI France Index should choose
A. SPY.
B. EWJ.
C. EWQ.
D. IWM.
E. VTI.
The current market price of a share of MSI stock is $24. If a call option on this stock
has a strike price of $24, the call
A. is out of the money.
B. is in the money.
C.is at the money.
D. None of the options are correct.
Fama and French (1992) found that the stocks of firms within the highest decile of
book-to-market ratios had an average annual return of _______, while the stocks of
firms within the lowest decile of book-to-market ratios had an average annual return of
________.
A. 15.6%; 13.1%
B. 17.2%; 11.1%
C. 13.2%; 16.4%
D. 11.1%; 17.2%
You wish to earn a return of 11% on each of two stocks, C and D. Stock C is expected
to pay a dividend of $3 in the upcoming year while stock D is expected to pay a
dividend of $4 in the upcoming year. The expected growth rate of dividends for both
stocks is 7%. The intrinsic value of stock C
A. will be greater than the intrinsic value of stock D.
B. will be the same as the intrinsic value of stock D.
C. will be less than the intrinsic value of stock D.
D. will be the same or greater than the intrinsic value of stock D.
E. None of the options.
The expectations theory of the term structure of interest rates states that
A. forward rates are determined by investors’expectations of future interest rates.
B. forward rates exceed the expected future interest rates.
C. yields on long- and short-maturity bonds are determined by the supply and demand
for the securities.
D. All of the options are correct.
E. None of the options are correct.
Studies of equity carve outs find __________, which __________ the EMH.
A. strong support for the law of one price; supports
B. strong support for the law of one price; violates
C. evidence against the law of one price; violates
D. evidence against the law of one price; supports
Given an optimal risky portfolio with expected return of 13%, standard deviation of
26%, and a risk free rate of
5%, what is the slope of the best feasible CAL?
A. 0.60
B. 0.14
C. 0.08
D. 0.36
E. 0.31
In the 1972 empirical study by Black, Jensen, and Scholes, they found that the
estimated slope of the security market line was _______ what the CAPM would predict.
A. higher than
B. equal to
C. less than
D. twice as much as
E. More information is required to answer this question.
Which of the following statements is false about models that attempt to measure the
empirical performance of the CAPM?
I) The conventional CAPM works better than the conditional CAPM with human
capital.
II) The conventional CAPM works about the same as the conditional CAPM with
human capital.
III) The conditional CAPM with human capital yields a better fit for empirical returns
than the conventional CAPM.
A. I only
B. II only
C. III only
D. I and II
E. II and III
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk
is
A. unique risk.
B. beta.
C. standard deviation of returns.
D. variance of returns.
Consider the following probability distribution for stocks A and B:
The coefficient of correlation between A and B is
A. 0.46.
B. 0.60.
C. 0.58.
D. 1.20.
Stephanie Watson is 23 years old and has accumulated $4,000 in her selfdirected
defined contribution pension plan. Each year she contributes $2,000 to the plan, and her
employer contributes an equal amount. Stephanie thinks she will retire at age 67 and
figures she will live to age 81. The plan allows for two types of investments. One offers
a 3.5% riskfree real rate of return. The other offers an expected return of 10% and has a
standard deviation of 23%. Stephanie now has 5% of her money in the riskfree
investment and 95% in the risky investment. She plans to continue saving at the same
rate and keep the same proportions invested in each of the investments. Her salary will
grow at the same rate as inflation. How much does Stephanie currently have in the safe
account; how much in the risky account?
A. $3,800; $200
B. $2,000; $2,000
C. $200; $3,800
D. $2,500; $1,500
E. $1,500; $2,500
The yield on a 1-year bill in the U.K. is 8%, and the present exchange rate is 1 pound =
U.S. $1.60. If you expect the exchange rate to be 1 pound = U.S. $1.50 a year from
now, the return a U.S. investor can expect to earn by investing in U.K. bills is
A. 6.7%.
B. 0%.
C. 8%.
D. 1.25%.
E. None of the options are correct.
If a Treasury note has a bid price of $995, the quoted bid price in the Wall Street
Journal would be
A. 99:50.
B. 99:16.
C. 99:80.
D. 99:24.
E. 99:32.
A firm has a net profit/pretax profit ratio of 0.625, a leverage ratio of 1.2, a pretax
profit/EBIT of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of
8%. The firm’s asset turnover is
A. 0.3.
B. 1.3.
C. 2.3.
D. 3.3.
In a typical underwriting arrangement, the investment-banking firm I) sells shares to the
public via an underwriting syndicate.
II) purchases the securities from the issuing company.
III) assumes the full risk that the shares may not be sold at the offering price.
IV) agrees to help the firm sell the issue to the public but does not actually purchase the
securities.
A. I, II, and III
B. I, III, and IV
C. I and IV
D. II and III
E. I and II
The following data are available relating to the performance of Monarch Stock Fund
and the market portfolio:
The risk-free return during the sample period was 4%.
What is the information ratio measure of performance evaluation for Monarch Stock
Fund?
A. 1.00%
B. 280.00%
C. 44.00%
D. 50.00%
E. None of the options are correct.
Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of
year 1 for $80. Abolishing Dividend Corporation pays no dividends. The stock price at
the end of year 1 is $100, $120 at the end of year 2, and $150 at the end of year 3. The
stock price declines to $100 at the end of year 4, and you sell your 100 shares. For the
four years, your geometric average return is
A. 0.0%.
B. 1.0%.
C. 5.7%.
D. 9.2%.
E. 34.5%.
A 7.5% coupon bond with an ask price of $100.00 pays interest every 182 days. If the
bond paid interest 62 days ago, the invoice price of the bond would be
A. $1,011.67.
B. $1,012.35.
C. $1,012.77.
D. $1,011.98.
E. $1,012.15.
You purchased shares of a mutual fund at a price of $20 per share at the beginning of
the year and paid a front-end load of 6.0%. If the securities in which the fund invested
increased in value by 10% during the year, and the fund’s expense ratio was 1.5%, your
return if you sold the fund at the end of the year would be
A. 1.99%.
B. 2.32%.
C. 1.65%.
D. 2.06%.
E. None of the options are correct.
A major finding by Heaton and Lucas (2000) is that
A. the market rate of return does not help explain the rate of return of individual
securities, and CAPM must be rejected.
B. the market rate of return does explain the rate of return of individual securities.
C. the change in proprietary wealth helps explain the rate of return of individual
securities.
D. the market rate of return does not help explain the rate of return of individual
securities, and CAPM must be rejected, but the change in proprietary wealth helps
explain the rate of return of individual securities.
E. None of the options are correct.
The Fama French model
I) is a useful tool for benchmarking performance against a well defined set of factors.
II) premia are determined by market irrationality.
III) premia are determined by rational risk factors.
IV) is the reason that the premia is unsettled.
V) is not a useful tool for benchmarking performance against a well defined set of
factors.
A. I only
B. V only
C. I and II
D. I and IV
E. II and V
Banz (1981) found that, on average, the risk-adjusted returns of small firms
A. were higher than the risk-adjusted returns of large firms.
B. were the same as the risk-adjusted returns of large firms.
C. were lower than the risk-adjusted returns of large firms.
D. were unrelated to the risk-adjusted returns of large firms.
E. were negative.
The index model for stock A has been estimated with the following result:
RA = 0.01 + 0.94RM + eA
If σM = 0.30 and R2
A = 0.28, the standard deviation of return of stock A is
A. 0.2025.
B. 0.2500.
C. 0.4500.
D. 0.5329.
The standard deviation of a portfolio of risky securities is
A. the square root of the weighted sum of the securities’ variances.
B. the square root of the sum of the securities’ variances.
C. the square root of the weighted sum of the securities’ variances and covariances.
D. the square root of the sum of the securities’ covariances.
________ were designed to concentrate the credit risk of a bundle of loans on one class
of investor, leaving the other investors in the pool relatively protected from that risk.
A. Stocks
B. Bonds
C. Derivatives
D. Collateralized debt obligations
E. All of the options
A call option on a stock is said to be at the money if
A. the exercise price is higher than the stock price.
B. the exercise price is less than the stock price.
C.the exercise price is equal to the stock price.
D. the price of the put is higher than the price of the call.
E. the price of the call is higher than the price of the put.
Increases in the money supply will cause demand for investment and consumption
goods to _______ in the short run and cause prices to ________ in the long run.
A.-increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; hold steady
E. be unaffected; be unaffected
If a 7% coupon bond is trading for $975.00, it has a current yield of
A. 7.00%.
B. 6.53%.
C. 7.24%.
D. 8.53%.
E. 7.18%.