1) Recently you have received a tip that the stock of Buttercup Industries is going to
rise from $76.00 to $85.00 per share over the next year. You know that the annual return
on the S&P 500 has been 13% and the 90-day T-bill rate has been yielding 3% per year
over the past 10 years. If beta for Buttercup is 1.0, will you purchase the stock?
a. Yes, because it is overvalued.
b. Yes, because it is undervalued.
c. No, because it is undervalued.
d. No, because it is overvalued.
e. Yes, because the expected return equals the estimated return.
2) Exhibit 7.15
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Refer to Exhibit 7.15. What is the standard deviation of this portfolio?
a. 10.0%
b. 12.5%
c. 14.4%
d. 15.5%
e. 16.0%
3) Exhibit 11.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to
grow at a rate of 9% per year for the next three years. After that dividends are expected
to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is
7%.
The future price of the stock in year 3 is
a. $81.75
b. $84.81
c. $92.56
d. $101.85
e. $111.16
4)
Refer to Exhibit 7.3. 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. 8.95%
b. 9.30%
c. 9.95%
d. 10.20%
e. 10.70%
5) Which of the following is not characteristic of the “decline” phase of the industry life
cycle?
a. Little product differentiation
b. Substantial manufacturing overcapacity
c. Many competitors
d. Falling prices
e. None of the above (this is, all are characteristics of the “decline” phase)
6) Exhibit 16.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A portfolio manager is trying to establish a strategic asset allocation for two different
clients, Bob Bowman and Tom Luck. Bob Bowman has a risk tolerance factor of 22 and
Tom Luck has a risk tolerance factor of 6. The characteristics of the three model
portfolios under consideration are provided in the table below.
The expected utilities of Portfolios A, B and C for Tom Luck are
a. Portfolio A = 9.95, Portfolio B = 7.27, Portfolio C = 4.73
b. Portfolio A = 4.5, Portfolio B = 5.33, Portfolio C = 4.0
c. Portfolio A = 7.95, Portfolio B = 5.33, Portfolio C = 4.73
d. Portfolio A = 3.5, Portfolio B = 7.27, Portfolio C = 4.73
e. Portfolio A = 5.33, Portfolio B = 7.27, Portfolio C = 6.75
7) Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at
$1050, what is the bond’s yield to call? Interest is paid annually.
a. 15%
b. 16.5%
c. 7.65%
d. 8.52%
e. 9.64%
8) A price range at which technicians would expect a substantial increase in the demand
for a stock is called
a. Demand threshold.
b. Resistance level.
c. Support level.
d. Resistance limit.
e. Technical restraint.
9) Which of the following statements is true?
a. The buyer of a futures contract is said to be long futures.
b. The seller of a futures contract is said to be short futures.
c. The seller of a futures contract is said to be long futures.
d. The buyer of a futures contract is said to be short futures.
e. Choices a and b
10) The January anomaly refers to the phenomenon where stock prices
a.Decline in December.
b.Decline in January.
c.Rise in January.
d.Decline in December and rise in January.
e.Rise in December and decline in January.
11) Exhibit 17.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
XLR Corporation just issued a $1,000 par value bond with a 7% yield to maturity,
twenty years to maturity, with an 8% semi-annual coupon rate.
What is the price of the XLR Corporate bond?
a. $901.04
b. $932.04
c. $1,102.62
d. $1,105.94
e. $1,106.78
12) Using the constant growth model, an increase in the required rate of return from 14
to 15 percent combined with an increase in the growth rate from 6 to 7 percent would
cause the price to
a. Rise more than 1%
b. Rise less than 1%.
c. Remain constant.
d. Fall more than 1%.
e. Fall less than 1%.
13) Estimate the percentage price change for a 5-year $1,000 par value bond, with a 6%
coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.
a. 2.1%
b. -2.1%
c. 4.4%
d. -4.4%
e. None of the above
14) Exhibit 25.12
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An analyst is considering investing in funds A, B, C, and D. The market portfolio, M, is
expected to be 11% next period and the risk-free rate of return is 3%. The market
portfolio had a standard deviation over the past ten years of 0.20. The analyst gathered
the following information on the four funds.
Compute the Jensen Measure for the C fund.
a. 0.16%
b. 1.80%
c. 7.20%
d. 9.00%
e. 9.13%
15) Which of the following is not a major category of membership in stock exchanges?
a.Specialist
b.Commission broker
c.Floor broker
d.Financial analyst
e.Registered trader
16) For an investor with a time horizon of 4 years and higher risk tolerance, an
appropriate asset allocation strategy would be
a.100% cash
b.30% cash, 50% bonds, and 20% stocks
c.20% cash, 40% bonds, and 40% stocks
d.10% cash, 40% bonds, and 50% stocks
e.100% bonds
17) If the Micro mutual fund was originated by selling $250,000 of stock at $10.00 per
share. Calculate its current NAV if the fund consists of the following four stocks.
a. $5.78
b. $10.00
c. $12.43
d. $16.11
e. $19.21
18) Banks typically
a. Have low liquidity needs.
b. Face very few federal and state regulatory constraints.
c. Don’t have to compete for funds.
d. Have high liquidity needs and a short time horizons constraint.
e. Low investment risk.
19) 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.
The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are
a. $53.55, $54.4, $55.25
b. $45.35, $54.4, $55.25
c. $55.55, $56.35, $57.15
d. $50, $50, $50
e. $51.35, $47.79, $51.58.
20) The Standard & Poor’s 500 index is an example of a value weighted index.
21) For a given change in yield bond price volatility is inversely related to coupon.
22) An advantage of quadratic programming is that it relies on historical correlations.
23) Technical analysts believe that security prices do not adjust rapidly.
24) Banks must compete for funds (savings deposits, CD’s, etc.) in order to make loans
and other types of investments.
25) Studies examining stock splits support the semistrong form efficient market
hypothesis.
26) The minimum amount that must be maintained in an account is called the
maintenance margin.