1) The growth rate of equity earnings without external financing is equal to
a. Retention rate plus return on equity.
b. Retention rate minus return on equity.
c. Retention rate divided by return on equity.
d. Retention rate times return on equity.
e. Return on equity divided by retention rate.
2) Exhibit 5.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Refer to Exhibit 5.6. If an equal-weighted index is constructed on Day T with $10,000
in each stock, what is the percentage change in wealth for this index on Day T + 1?
Assume a base index value of 100 on Day T.
a.8.65%
b.10.14%
c.15.69%
d.30.42%
e.47.08%
3) 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 P/E multiple.
a. 35
b. 30
c. 25
d. 20
e. 15
4) An investor who purchases a call option:
a.Has the right to buy a given stock at a specified price during a designated time period.
b.Has the right to sell a given stock at a specified price during a designated time period.
c.Has the obligation to buy a given stock at a specified price during a designated time
period.
d.Has the obligation to sell a given stock at a specified price during a designated time
period.
e.None of the above.
5) Once the portfolio is constructed, it must be continuously
a.Rebalanced.
b.Recycled
c.Reinvested
d.Monitored.
e.Manipulated.
6) Suppose you buy a round lot of DG Solutions stock on 60% margin when it is selling
at $55 a share. The broker charges a 10 percent annual interest rate and commissions
are 3 percent of the total stock value on both the purchase and the sale. If at year end
you receive a $1.10 per share dividend and sell the stock for 55 5/8, what is your rate of
return on the investment?
a.-10.38%
b.-12.84%
c.-10.95%
d.21.84%
e.28.38%
7) The Value Line Composite Average is calculated using the ____ of percentage price
changes.
a.arithmetic average
b.harmonic average
c.expected value
d.geometric average
e.logarithmic average
8) Which of the following statements about the risk-free asset is correct?
a. The risk-free asset is defined as an asset for which there is uncertainty regarding the
expected rate of return.
b. The standard deviation of return for the risk-free asset is equal to zero.
c. The standard deviation of return for the risk-free asset cannot be zero, since division
by zero is undefined.
d. Choices a and b.
e. Choices a and c.
9) In a call market, trading for individual stocks
a.Occurs anytime the market is open.
b.Takes place at specific times.
c.Takes place at the open and close of the trading day.
d.All of the above.
e.None of the above.
10) 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.
Rank the four funds and market portfolio in order from highest to lowest based on their
Sharpe measures.
a. A, B, C, D, M
b. B, C, M, D, A
c. C, A, M, D, B
d. D, A, B, M, C
e. D, B, A, C, M
11) Which of the following statements regarding real estate investments is false?
a.The large number of transactions and national data sources provide accurate readily
available estimates of historical returns.
b.Real Estate Investment Trusts (REITs) had higher returns than common stocks from
1972 to 1987.
c.Real Estate Investment Trusts (REITs) had lower volatility than common stocks from
1972 to 1987.
d.All of the above statements are true.
e.All of the above statements are false.
12) Exhibit 2.1
USE THE TAX TABLE PROVIDED BELOW FOR THE FOLLOWING
PROBLEM(S)
Refer to Exhibit 2.1. What is the marginal tax rate for a single individual with taxable
income of $85,000?
a.15%
b.25%
c.28%
d.33%
e.35%
13) The cost of active management is the coefficient sERand it is sometimes referred to
as
a. Market timing.
b. Reward for risk.
c. Excess reward.
d. Excess risk.
e. Tracking error.
14) Suppose you consider investing $10,000 in a load fund from which a fee of 3% is
deducted and you expect the fund to earn 12% over the next year. Alternatively, you
could invest in a no load fund which is expected to earn 10% and which takes a 0
percent redemption fee. Which is better and by how much?
a. Load fund by $151
b. No load fund by $136
c. Funds are equal
d. No load fund by $421
e. Load fund by $115
15) ____ are investment specialists that are responsible for managing the investments of
others. There are often legal standards against which they must abide in the
performance of their duties.
a. Underwriters
b. Investments bankers
c. Fiduciaries
d. Account executives
e. Trust officers
16) Exhibit 23.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two
three-month issues. The corporation is concerned that interest rates will rise over the
next three months. Thus, the corporation purchases a 3 – 6 FRA whereby the
corporation pays the dealer’s quoted fixed rate of 3.5% in exchange for receiving
3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000
and that there are 60 days between month 3 and month 6.
How much compensation does the dealer receive for transaction costs, credit risk and
other costs associated with matching the FRA’s?
a. $42,700
b. $62,500
c. $82,000
d. $96,300
e. None of the above
17) Exhibit 23.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two
three-month issues. As the Treasurer, you are concerned that interest rates will rise over
the next three months and the rate upon which the second payment will be based will be
undesirable. (The amount of Chimichango’s first payment will be known at origination.)
To reduce the company’s interest rate exposure, you decide to purchase a 3 – 6 FRA
whereby you pay the dealer’s quoted fixed rate of 5.91% in exchange for receiving
3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal
of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the contract
specified settlement in arrears at month 6, describe the transaction that occurs between
the dealer and Chimichango.
a. The dealer is obligated to pay Chimichango $38,750.
b. The dealer is obligated to pay Chimichango $31,250.
c. Chimichango is obligated to pay the dealer $38,750.
d. Chimichango is obligated to pay the dealer $31,250.
e. None of the above.
18) The binomial model is a continuous method for valuing options.
19) High Portfolio turnover lowers mutual fund costs.
20) The lower a bond’s yield to maturity, the greater its duration.
21) If the covariance of two stocks is positive, these stocks tend to move together over
time.
22) A price weighted series is disproportionately influenced by larger capitalization
companies.
23) The primary purpose of government regulations and voluntary standards in the
professional asset management industry is to ensure that managers deal with all
investors fairly and equitably and that information about investment performance is
accurately reported.
24) The major problem facing a bond analyst is the ability to forecast the basic interest
rate level since yield spreads are generally inconsequential.
25) The APT assumes that security returns are normally distributed.