Security X has expected return of 14% and standard deviation of 22%. Security Y has
expected return of
16% and standard deviation of 28%. If the two securities have a correlation coefficient
of 0.8, what is their
covariance?
A. 0.038
B. 0.049
C. 0.018
D. 0.013
E. 0.054
The dividend discount model
A. ignores capital gains.
B. incorporates the after-tax value of capital gains.
C. includes capital gains implicitly.
D. restricts capital gains to a minimum.
E. None of the options are correct.
The variance of a portfolio of risky securities
A. is a weighted sum of the securities’ variances.
B. is the sum of the securities’ variances.
C. is the weighted sum of the securities’ variances and covariances.
D. is the sum of the securities’ covariances.
E. None of the options are correct.
Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The
risk-free rate of return is 4%, and the expected return on the market portfolio is 14%.
Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The
beta of Sure Tool Company’s stock is 1.25.
What is the intrinsic value of Sure’s stock today?
A. $20.60
B. $20.00
C. $12.12
D. $22.00
A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the
bond matures in 27 years, the bond should sell for a price of _______ today.
A. $59.74
B. $501.87
C. $513.16
D. $483.49
Rome Corporation is expected have EBIT of $2.3M this year. Rome Corporation is in
the 30% tax bracket, will report $175,000 in depreciation, will make $175,000 in capital
expenditures, and will have no change in net working capital this year. What is Rome’s
FCFF?
A. 2,300,000
B. 1,785,000
C. 1,960,000
D. 1,610,000
E. 1,435,000
The industry life cycle is described by which of the following stage(s)?
A. Start-up
B. Consolidation
C. Absolute decline
D.-Start-up and consolidation
E. All of the options are correct.
Commingled funds are
A. amounts invested in equity and fixed-income mutual funds.
B. funds that may be purchased at intervals of 3, 6, or 12 months at the discretion of
management.
C. amounts invested in domestic and global equities.
D. closed-end funds that may be repurchased only once every two years at the
discretion of mutual fund management.
E. partnerships of investors that pool their funds, which are then managed for a fee.
Consider two perfectly negatively correlated risky securities A and B. A has an expected
rate of return of 12%
and a standard deviation of 17%. B has an expected rate of return of 9% and a standard
deviation of 14%.
The risk-free portfolio that can be formed with the two securities will earn _____ rate of
return.
A. 9.5%
B. 10.4%
C. 10.9%
D. 9.9%
Assume that you manage a $3 million portfolio that pays no dividends and has a beta of
1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per
month) and the S&P 500 is at 1,220. If you expect the market to fall within the next 30
days, you can hedge your portfolio by ______ S&P 500 futures contracts (the futures
contract has a multiplier of $250).
A. selling 1
B. selling 14
C. buying 1
D. buying 14
E. selling 6
The price of a stock call option is __________ correlated with the stock price and
__________ correlated with the strike price.
A. positively; positively
B. negatively; positively
C. negatively; negatively
D. positively; negatively
E. not; not
A convertible bond has a par value of $1,000 and a current market value of $850. The
current price of the issuing firm’s stock is $27, and the conversion ratio is 30 shares.
The bond’s conversion premium is
A. $40.
B. $150.
C. $190.
D. $200.
E. None of the options are correct.
Over the past year, you earned a nominal rate of interest of 10% on your money. The
inflation rate was 5% over
the same period. The exact actual growth rate of your purchasing power was
A. 15.5%.
B. 10.0%.
C. 5.0%.
D. 4.8%.
E. 15.0%.
Which statement is true regarding the market portfolio?
I) It includes all publicly traded financial assets.
II) It lies on the efficient frontier.
III) All securities in the market portfolio are held in proportion to their market values.
IV) It is the tangency point between the capital market line and the indifference curve.
A. I only
B. II only
C. III only
D. IV only
E. I, II, and III
The Treynor-Black model assumes that
A. the objective of security analysis is to form an active portfolio of a limited number of
mispriced securities.
B. the cost of less than full diversification comes from the nonsystematic risk of the
mispriced stock.
C.the optimal weight of a mispriced security in the active portfolio is a function of the
degree of mispricing, the
market sensitivity of the security, and its degree of nonsystematic risk.
D.All of the options are correct.
E. None of the options are correct.
Who popularized the dividend discount model, which is sometimes referred to by his
name?
A. Burton Malkiel
B. Frederick Macaulay
C. Harry Markowitz
D. Marshall Blume
E. Myron Gordon
Suppose you purchase 100 shares of GM stock at the beginning of year 1 and purchase
another 100 shares at the end of year 1. You sell all 200 shares at the end of year 2.
Assume that the price of GM stock is $50 at the beginning of year 1, $55 at the end of
year 1, and $65 at the end of year 2. Assume no dividends were paid on GM stock. Your
dollar-weighted return on the stock will be __________ your time-weighted return on
the stock.
A. higher than
B. the same as
C. less than
D. exactly proportional to
E. More information is necessary to answer this question.
The current market price of a share of TSCO stock is $75. If a put option on this stock
has a strike price of $79, the put
A. is out of the money.
B. is in the money.
C. can be exercised profitably.
D. is out of the money and can be exercised profitably.
E.is in the money and can be exercised profitably.
Medtronic Company has an expected ROE of 16%. The dividend growth rate will be
________ if the firm follows a policy of paying 70% of earnings in the form of
dividends.
A. 3.0%
B. 6.0%
C. 7.2%
D. 4.8%
You want to evaluate three mutual funds using the Jensen measure for performance
evaluation. The risk-free return during the sample period is 6%, and the average return
on the market portfolio is 18%. The average returns, standard deviations, and betas for
the three funds are given below.
The fund with the highest Jensen measure is
A. Fund A.
B. Fund B.
C. Fund C.
D. Funds A and B (tied for highest).
E. Funds A and C (tied for highest).
Consider the following probability distribution for stocks C and D:
The expected rates of return of stocks C and D are _____ and _____, respectively.
A. 4.4%; 9.5%
B. 9.5%; 4.4%
C. 6.3%; 8.7%
D. 8.7%; 6.2%
E. None of the options are correct.
You have been given this probability distribution for the holding-period return for GM
stock:
What is the expected variance for GM stock?
A. 200.00%
B. 221.04%
C. 246.37%
D. 14.87%
E. 16.13%
Barber and Odean (2000) ranked portfolios by turnover and report that the difference in
return between the highest and lowest turnover portfolios is 7% per year. They attribute
this to
A. overconfidence.
B. framing.
C. regret avoidance.
D. sample neglect.
The financial statements of Midwest Tours are given below.
Note: The common shares are trading in the stock market for $36 each.
Refer to the financial statements of Midwest Tours. The firm’s leverage ratio for 2009 is
A. 1.62.
B. 1.56.
C. 2.00.
D. 2.42.
E. 2.17.
Consider the multifactor APT. The risk premiums on the factor 1 and factor 2 portfolios
are 6% and 4%, respectively. The risk-free rate of return is 4%. Stock A has an expected
return of 16% and a beta on factor-1 of 1.3. Stock A has a beta on factor-2 of
A. 1.33.
B. 1.05.
C. 1.67.
D. 2.00.
To exploit an expected decrease in interest rates, an investor would most likely
A. buy Treasury bond futures.
B. take a long position in wheat futures.
C. buy S&P 500 Index futures.
D. take a short position in Treasury bond futures.
E. None of the options are correct.
A 10% coupon bond maturing in 10 years that requires annual payments is expected to
make all coupon payments but to pay only 50% of par value at maturity. What is the
expected yield on this bond if the bond is purchased for $975?
A. 10.00%
B. 6.68%
C. 11.00%
D. 8.68%
E. None of the options are correct.
In the start-up stage of the industry life cycle,
A. it is difficult to predict which firms will succeed and which firms will fail.
B. industry growth is very rapid.
C. firms pay a high level of dividends.
D.-it is difficult to predict which firms will succeed and which firms will fail, and
industry growth is very rapid.
E. industry growth is very rapid, and firms pay a high level of dividends.
A coupon bond that pays interest annually has a par value of $1,000, matures in five
years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be
_________ if the coupon rate is 12%.
A. $922.77
B. $924.16
C. $1,075.82
D. $1,077.20
E. None of the options
Structure of interest rates is
A. the relationship between the rates of interest on all securities.
B. the relationship between the interest rate on a security and its time to maturity.
C. the relationship between the yield on a bond and its default rate.
D. All of the options are correct.
E. None of the options are correct.
