Indifference curves:
a. always curve to the left
b. have a positive slope
c. cannot intersect
d. are convex
Strategic asset allocation is usually done:
a. once every few years, establishing a long-run or strategic asset mix.
b. using Monte Carlo simulation to identify a range of outcomes for various
asset mixes.
c. the life-cycle concept.
d. a market timing strategy.
Unregulated companies that seek to exploit various market opportunities and require a
substantial investment from investors are known as:
a. derivatives.
b. options.
c. hedge funds.
d. SMAs.
The largest single institutional owner of common stocks is:
a. mutual funds.
b. insurance companies.
c. pension funds
d. commercial banks
Which of the following has helped to eliminate the use of stock certificates by placing
stock transactions on computers.
a. Federal Reserve
b. Securities Exchange Commission
c. Depository Trust Company
d. Federal Depository Insurance Corporation
The way to protect a stock portfolio most in a bear market is to:
a. Buy stock index calls.
b. Buy stock index puts.
c. Write stock index calls.
d. Write stock index puts.
WWW Company currently (t = 0) earns $4.00 per share, and has a payout of 40 percent.
Dividends are expected to grow at a constant rate of 4 percent per year. The required
rate of return is 15 percent. The price of this stock would be estimated at
a. $57.14.
b. $22.86.
c. $15.13.
d. $24.69.
Don Jorge Shipping Inc. has net income of $40 million, total assets of $300 million, and
sales of $800 million. Its equity is $190 million. (a)Calculate ROA.
(b)Calculate ROE.
(c)If the book value per share is $7. 00, what is EPS?
The life-cycle theory of asset allocation proposes that as investors progress through life,
their
a. asset allocation will tend to become more conservative.
b. earnings increase in their 20s, reach a peak at about age 45, then decline.
c. assets must grow geometrically in order to achieve reasonable goals.
d. asset allocation should remain fixed in order to avoid short-sighted adjustments.
The original electronic network, started in 1969 for brokers, dealers, exchange
specialists and institutional investors only is known as:
a. ReadiMarket
b. National Market System
c. OTC Worldwide
d. lnstinet
Which of the following limits the usefulness of the S&P 500 Index as a market
benchmark?
a. It is too weighted with NYSE stocks to be representative.
b. It is too difficult to calculate for the average investor.
c. Its use of a base year in its calculations affects its performance.
d. Its performance can be greatly affected by a small number of stocks.
Which of the following mandated that companies, starting in 2004, must submit an
annual report to the SEC outlining the effectiveness of their internal accounting
controls?
a. SEC Amendments Act
b. SIPC
c. Glass-Stegall Act
d. Sarbanes-Oxley Act
The difference between the cash price and the futures price on the same asset or
commodity is known as the
a. basis.
b. spread.
c. yield spread.
d. premium.
Assume a portfolio manager holds $2 million (par value) of 9 percent Treasury bonds
due 1994-1999. The current market price is 77, for a yield of 12 percent. Fearing a rise
in interest rates over the next three months, the manager seeks to protect this position
by hedging in futures.
(a) If T-bond futures are available at 67, what is the gain or loss from a simple hedge of
20 contracts if the price three months later is 60?
(b) What is the gain or loss on the cash position if the bonds are priced at 68 three
months hence?
(c) What is the net effect of this hedge?
The earnings yield, which is used in the Fed model, is the:
a. same as the dividend yield.
b. inverse of the dividend yield.
c. same as the P/E ratio.
d. inverse of the P/E ratio.
In the Black-Scholes model,
a. all of the inputs except two are observable.
b. all of the inputs except one are observable.
c. the greater the stock price, the lower the price of the call option.
d. there is an inverse relationship between the value of a call and interest rates in the
market.
A portfolio of directly-owned individual securities guided by an investment manager is
known as a:
a. IRA.
b. IMA.
c. SMA.
d. DCA.
An efficient market is defined as one in which:
a. all participants have the same opportunity to make the same returns.
b. all participants have the same legal rights and transactions costs.
c. securities prices quickly and fully reflect all available information.
d. securities prices are completely in line with the intrinsic value.
SCORP has puts and calls available for trading for the expiration months of June,
September, and December. For the trading day May 2, 199X, SCORP closed at $40 per
share. Strike prices for SCORP are $35, $40, and $45. The following prices for the 9
call options (3 expiration dates and 3 strike prices) for this date were (in scrambled
order):
A. 5 ½ F. 4 7/8
B. 4 G. 3/4
C. 2 1/16 H. 7 1/4
D. 6 3/8 I. 2 7/16
E. 3 1/8
Fill in the following matrix of prices for these calls, using LETTERS ONLY (i.e., A
through I)
The sustainable growth rate of a firm can be calculated as the product of the
a. return on assets and the return on equity.
b. dividend payout ratio and leverage.
c. retention rate and the return on equity.
d. net profit margin and total sales.
Explain how (a) the payout rate, (b) the expected dividend growth rate, and (c) the
required rate of return affect the P/E ratio.
The directors of MJ Inc. expect to pay a dividend of $2.00 (annual) a year from today. It
is estimated that during the next four years (i.e. years 2 through 5), the dividend will
grow at an annual rate of 16 percent (i.e. g1 = 16 percent). After that, the growth rate
(g2) will be equal to 12 percent per year and continue at that rate indefinitely. Calculate
the present value of the MJ’s stock if the required rate of return is 15 percent.
Which of the following statements regarding the correlation coefficient is not true?
It is a statistical measureIt measure the relationship between two securities’ returnsIt
determines the causes of the relationship between two securities’ returnsIt is greater
than or equal to -1 and less than or equal to +1
What is the difference between the potential gains and losses on long positions versus
the potential gains and losses on short sales?
Does one mutual fund provide all the diversification that an investor needs?
Insider trading is illegal in the U. S. How is this related to the strong form EMH?
How could unexpected inflation affect the P/E ratio?
Investors who sell short are expecting the price of the security to fall.
Overall, the low P/E strategy should be viewed as a short run strategy.
An oil company’s P/E ratio is 15; its projected EPS is $8; and its price is $120.
Expectations are that a new field will add $2 EPS the next year. If the P/E remains
constant, what should happen to the price in an efficient market? How soon? Are
investors that pay the price after adjustment paying a fair price and are they expected to
earn a normal return?
Retirees would likely have a greater percentage of their wealth in common stock than
would a recent college graduate.