A lady bought 100 shares of a leading diamond mining company with an expected
return of 20 percent per year. The following day the company’s president announced a
major new discovery in Arkansas. The stock price immediately doubled. This scenario
probably best illustrates
a. weak form EMH is not valid.
b. semi-strong form of EMH is not valid.
c. market prices are random.
d. the lady was lucky.
An investor with a bond portfolio wishes to protect the value of his position by using
futures contracts. This investor should use a
a. long hedge.
b. short hedge.
c. time spread.
d. money spread.
A writer of a call can terminate the contract before expiration by:
a. writing a second call.
b. buying a put.
c. buying a comparable call.
d. writing a put.
Gold coins would be classified as:
a. real assets
b. indirect assets
c. personal assets
d. financial assets
If the Dow Jones Industrials had a price appreciation of 6 percent one year and yet total
return for the year was 9 percent, the difference would be due to:
a. the tax treatment of capital gains.
b. the cumulative wealth effect.
c. dividends.
d. profits.
Which of the following statements regarding indifference curves is not
true?
a. Investors have a finite number of indifference curves
b. The greater the slope of the indifference curve, the greater the risk aversion of
investors
c. The indifference curves for all risk-averse investors will be upward sloping
d. Indifference curves cannot intersect
———– shifts the weights of securities in the portfolio to take advantage of areas
expected to do relatively better than others.
a. Portfolio management
b. Technical analysis
c. Momentum strategy
d. Sector rotation
Treasury STRIPS are most similar to which type of corporate security?
a. preferred stock
b. premium bond
c. high-yield bond
d. zero-coupon bond
Which of the following statements about the industry life cycle is incorrect?
a. Companies may stay in one phase for a significant period of time .
b. All industries can be classified very accurately into a specific phase.
c. The general framework may not apply to some industries.
d. This approach does not explicitly lead to a stock price determination.
What is the estimated value of a stock with a required rate of return of 12 percent, a
projected constant growth rate of dividends of 7 percent and expected dividend of
$2.50?
a. $60
b. $15
c. $150
d. $5 Ans: a
An indifference curve shows:
a. the one most desirable portfolio for a particular investor
b. all combinations of portfolios that are equally desirable to a particular investor
c. all combinations of portfolios that are equally desirable to all investors
d. the one most desirable portfolio for all investors
Which of the following is not one of the reasonable conclusions of the CAPM reached
by a consensus of the empirical results?
a. The intercept term is generally higher than the RF.
b. The SML appears to be non-linear.
c. The slope of the CAPM is generally less steep than suggested by the theory.
d. CAPM is an imperfect model for the explanation of the cross section of security
returns.
The balance sheet shows:
a. the portfolio of assets for a corporation, as well as its liabilities, over an accounting
period.
b. the portfolio of assets for a corporation, as well as its labilities, over an accounting
period.
c. the portfolio of assets for a corporation, as well as its liabilities and owner’s equity,
over an accounting period.
d. the portfolio of assets for a corporation, as well as its liabilities and owner’s equity, at
a moment in time.
Which one of the following statements is true?
Notation: RVAR: Sharpe’s reward-to-variability measure
RVOL: Treynor’s reward-to-volatility measure
a. RVOL is based on total risk while RVAR is based on systematic risk.
b. RVAR is based on total risk while RVOL is based on systematic risk.
c. RVAR is based on unsystematic risk while RVOL is based on systematic risk.
d. RVOL is based on systematic risk while RVAR is based on unsystematic risk.
When markets are in equilibrium, the CML will be upward sloping
a. because it shows the optimum combination of risky securities.
b. because the price of risk must always be positive.
c. because it contains all securities weighted by their market values.
d. because the CML indicates the required return for each portfolio risk level.
When trading futures, margin
a. is seldom used.
b. indicates that credit is being extended.
c. is a down payment.
d. in effect, is a performance bond.
Relative valuation measures commonly used by market participants today include:
a. P/E ratio, Price/Book Value, and Sales/Price ratios
b. Earnings per Share ratio
c. Discounted Cash Flow
d. Residual Income Valuation
Like the CAPM, the APT assumes a single-period investment horizon.
What are the implications for the usefulness of the P/E ratio if a company’s earnings are
very low (like a few cents) or negative?
A put/call ratio of .70 indicates:
a. puts have a cost 70% less than the cost of calls.
b. there are 7 puts purchased for every one call purchased.
c. there are 70% more puts purchased than calls.
d. there are 7 puts purchased for every 10 calls purchased.
Two stocks with perfect negative correlation will have a correlation coefficient of:
+1.0-2.00-1.0
How could one invest indirectly in sectors and practice sector rotation?
Retirement programs offer tax sheltering for individual U.S. investors.
You are asked to invest $30 million in a bond portfolio consisting of only two bonds.
Bond A has a duration of 4.36 years, and bond B has a duration of 6.50 years. The
portfolio is to have an investment horizon of 5 years. How much of each bond issue
would you have to buy to immunize the portfolio?