1) portfolio managers martin and krueger each manage $1 million funds. martin has
perfect foresight, and the call option value of his perfect foresight is $150,000. krueger
is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all
bear markets. the value of krueger’s imperfect forecasting ability is __________.
a.$30,000
b.$67,500
c.$108,750
d.$217,500
2) the lack of adequate trading volume in stock that may ultimately lead to its ability to
produce excess returns is referred to as the ____________________.
a.january effect
b.liquidity effect
c.neglected-firm effect
d.p/e effect
3) consider the multifactor apt with two factors. portfolio a has a beta of .5 on factor 1
and a beta of 1.25 on factor 2. the risk premiums on the factor 1 and 2 portfolios are 1%
and 7%, respectively. the risk-free rate of return is 7%. the expected return on portfolio
a is __________ if no arbitrage opportunities exist.
a.13.5%
b.15%
c.16.25%
d.23%
4) a discount bond that pays interest semiannually will:
i. have a lower price than an equivalent annual payment bond
ii. have a higher ear than an equivalent annual payment bond
iii. sell for less than its conversion value
a.i and ii only
b.i and iii only
c.ii and iii only
d.i, ii, and iii
5) the _________ price is the price at which a dealer is willing to sell a security.
a.bid
b.ask
c.clearing
d.settlement
6) real assets are ______.
a.assets used to produce goods and services
b.always the same as financial assets
c.always equal to liabilities
d.claims on a company’s income
7) a put option has a strike price of $35 and a stock price of $38. if the call option is
trading at $1.25, what is the time value embedded in the option?
a.$0
b.$.75
c.$1.25
d.$3
since the put option is out of money, intrinsic value is zero and option premium = time
value.
8) an investor invests 70% of her wealth in a risky asset with an expected rate of return
of 15% and a variance of 5%, and she puts 30% in a treasury bill that pays 5%. her
portfolio’s expected rate of return and standard deviation are __________ and
__________ respectively.
a.10%; 6.7%
b.12%; 22.4%
c.12%; 15.7%
d.10%; 35%
9) an example of a real asset is:
i. a college education
ii. customer goodwill
iii. a patent
a.i only
b.ii only
c.i and iii only
d.i, ii, and iii
10) on a particular day, there were 920 stocks that advanced on the nyse and 723 that
declined. the volume in advancing issues was 80,846,000, and the volume in declining
issues was 70,397,000. the trin ratio is __________, and technical analysts are likely to
be __________.
a..90; bullish
b..90; bearish
c.1.11; bullish
d.1.11; bearish
11) a stock priced at $65 has a standard deviation of 30%. three-month calls and puts
with an exercise price of $60 are available. the calls have a premium of $7.27, and the
puts cost $1.10. the risk-free rate is 5%. since the theoretical value of the put is $1.525,
you believe the puts are undervalued.
if you construct a riskless arbitrage to exploit the mispriced puts, your arbitrage profit
will be _____.
a.$5.75
b.$6.17
c.$.96
d.$.42
12) caribou gold mining corporation is expected to pay a dividend of $4 in the
upcoming year. dividends are expected to decline at the rate of 3% per year. the
risk-free rate of return is 5%, and the expected return on the market portfolio is 13%.
the stock of caribou gold mining corporation has a beta of .5. using the capm, the return
you should require on the stock is _________.
a.2%
b.5%
c.8%
d.9%