1) A portfolio manager has the following sequence of cash flows over a two year
period:
Calculate the portfolio manager’s dollar weighted return.
a. 13.56%
b. 11.48%
c. 15.50%
d. 8.75%
e. 10.67%
2) An 8.5 percent coupon bond issued by the State of Ohio sells for $1,000. What
coupon rate on a corporate bond selling at $1,000 par value would produce the same
after tax return to the investor as the municipal bond if the investor is in the 25 percent
marginal tax bracket?
a. 2.13%
b. 12.25%
c. 11.33%
d. 13.53%
e. 34.71%
3) A one year call option has a strike price of 60, expires in 6 months, and has a price of
$2.5. If the risk free rate is 7%, and the current stock price is $55, what should the
corresponding put be worth?
a. $5.00
b. $4.56
c. $5.50
d. $7.08
e. $7.54
4) Exhibit 25.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The data presented below has been collected at this point in time.
Compute the Jensen Measure for the BBB fund.
a. 2.10
b. 2.74
c. 5.43
d. 2.00
e. 1.65
5) The line of best fit for a scatter diagram showing the rates of return of an individual
risky asset and the market portfolio of risky assets over time is called the
a. Security market line.
b. Capital asset pricing model.
c. Characteristic line.
d. Line of least resistance.
e. Market line.
6) The separation theorem divides decisions on ____ from decisions on ____.
a. Lending, borrowing
b. Risk, return
c. Investing, financing
d. Risky assets, risk free assets
e. Buying stocks, buying bonds
7) Johnson Company just paid an annual dividend of $1.75. The next dividend will be
paid one year from today. Johnson Company expects a constant growth of 5% in
dividends forever. The required rate of return for this company’s common stock is 13%.
What is the value of one share of common stock?
a. $1.55
b. $13.46
c. $14.13
d. $21.88
e. $22.97
8) Bond ratings are negatively related to
a. Profitability.
b. Cash flow coverage.
c. Earnings instability.
d. All of the above.
e. None of the above.
9) Exhibit 7.14
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks A and B have a correlation coefficient of –0.8. The stocks’ expected returns and
standard deviations are in the table below. A portfolio consisting of 40% of stock A and
60% of stock B is constructed.
Refer to Exhibit 7.14. What is the standard deviation of the stock A and B portfolio?
a. 0.0%
b. 0.5%
c. 4.1%
d. 6.9%
e. 20.3%
10) Exhibit 14.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
At the end of the year 2010 the BRK Corporation had free cash flow to equity (FCFE)
of $250,000 and shares outstanding of 200,000. The company projects the following
annual growth rates in FCFE:
From year 2019 onward growth in FCFE is expected to remain constant at 5% per year.
The stock has a beta of 1.3 and the current market price is $55. Currently the yield on
10-year Treasury notes is 5% and the equity risk premium is 4%.
Calculate the intrinsic value of the stock now (Year 2010).
a. $55
b. $48.52
c. $77.79
d. $35.77
e. $62.34
11) Endowment funds
a. Are formed from the contributions to charitable and educational institutions.
b. Are attractive investments for individuals with low liquidity needs.
c. Usually have very short investment horizons.
d. Provide retirement benefits for public employees.
e. Provide death benefits for its contributor’s survivors.
12) Buying a bear spread is equivalent to
a. Selling a bull spread.
b. Buying an out-of-the-money call and selling an in-the-money call on the same stock
with the same exercise date.
c. Selling an out-of-the-money call and buying an in-the-money call on the same stock
with a different exercise price.
d. Choices a and b only.
e. None of the above
13)
Refer to Exhibit 7.6. What is the expected return of a portfolio of two risky assets if the
expected return E(Ri), standard deviation (si), covariance (COVi,j), and asset weight
(Wi) are as shown above?
a. 10.6 %
b. 10.2%
c. 13.0%
d. 11.9%
e. 14.0%
14) Suppose the current 7 year rate is 8% and the current 6 year rate is 6%. What is the
one year forward rate for six years?
a. 16.33%
b. 18.22%
c. 20.82%
d. 14.65%
e. 15.14%
15) Which of the following is not a factor needed to calculate the value of an American
call option?
a. The price of the underlying stock.
b. The exercise price.
c. The price of an equivalent put option.
d. The volatility of the underlying stock.
e. The interest rate.
16) Exhibit 23.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of
500,000 barrels per month. Due to the cost structure of the business, BGI needs to
receive $56.50 per barrel in order to remain solvent. On the other side of this situation
is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West
Texas crude oil in its normal production operations. The nature of PU’s business is such
that they will financially suffer if they have to pay more than an average of $57.80 per
barrel for oil over the next six years. To hedge against their exposure to volatile oil
prices, BI and PU contact a swap dealer to arrange the six-year oil swap described
below:
Describe the transaction that occurs between PU and the swap dealer if the monthly
average oil futures settlement price is $55.50.
a. PU pays the swap dealer $850,000.
b. The swap dealer pays PU $1,000,000.
c. PU pays the swap dealer $1,000,000.
d. The swap dealer pays PU $850,000.
e. None of the above.
17) The expected return for Zbrite stock calculated using the CAPM is 15.5%. The risk
free rate is 3.5% and the beta of the stock is 1.2. Calculate the implied market risk
premium.
a. 5.5%
b. 6.5%
c. 10.0%
d. 15.5%
e. 12.0%
18) Exhibit 14.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
In the listing above, which three factors influence the capital gain component of a
growth company?
a. 1, 3, and 5
b. 2, 3, and 4
c. 2, 3, and 6
d. 3, 4, and 5
e. 3, 4, and 6
19) When applying active management techniques to a global portfolio the additional
concern is expectations regarding exchange rates between countries.
20) In the absence of arbitrage opportunities, the forward price should be equal to the
spot price plus the cost of carry.
21) An increase in debit balances means more investing by naive investors and would
be a bearish indicator.
22) Results from studies on the effects of unexpected world events have consistently
indicated that the price change is so rapid, that it takes place between the close of one
day and the opening of the next day.
23) Secondary equity issues are new shares offered by firms that already have stock
outstanding.
24) The use of trading rules requires a great deal of subjective judgment.
25) The total market value of all assets of a mutual fund divided by the number of
shares of the fund is known as the net asset value.
26) Empirical tests of the APT model have found that as the size of a portfolio increased
so did the number of factors.
27) The intrinsic value of a warrant = (Market price of common stock + Warrant
exercise price) – Number of shares specified by the warrant.
28) Subordinated bondholders have claim to the assets of the firm only after the firm
has satisfied the claims of all senior secured and debenture bondholders.