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In the mean standard deviation graph, the line that connects the risk-free rate and the
optimal risky portfolio, P, is called the _________.
A. capital allocation line
B. indifference curve
C. investor's utility line
D. security market line
A typical traditional initial investment in a hedge fund generally is in the range between
_____ and _____.
A. $1,000; $5,000
B. $5,000; $25,000
C. $25,000; $250,000
D. $250,000; $1,000,000
Investor A bought a call option that expires in 6 months. Investor B wrote a put option
with a 9-month maturity. All else equal, as the time to expiration approaches, the value
of investor A's position will _______ and the value of investor B's position will
_______.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
A safe driver who drives faster as a result of purchasing collision car insurance would
be an example of the ___________ problem.
A. moral hazard
B. adverse selection
C. Texas hedge
D. actuarial error
You have an investment horizon of 6 years. You choose to hold a bond with a duration
of 6 years and continue to match your investment horizon and duration throughout your
holding period. Your realized rate of return will be the same as the promised yield on
the bond if:
I. Interest rates increase.
II. Interest rates stay the same.
III. Interest rates fall.
A. I only
B. II only
C. I and II only
D. I, II, and III
In 2015, the income cap on Social Security taxes was set at _____ with an exemption of
_____.
A. $200,000; $10,000
B. $153,600; $7,600
C.
$118,500; $0
D. $96,000; $10,000
If the currency of your country is depreciating, this should __________ exports and
__________ imports.
A. stimulate; stimulate
B. stimulate; discourage
C. discourage; stimulate
D. discourage; discourage
Most studies indicate that investors' risk aversion is in the range _____.
A. 1-3
B. 1.5-4
C. 3-5.2
D. 4-6
The historical average rate of return on large company stocks since 1926 has been
_____ .
A. 5%
B. 8%
C. 11.5%
D. 20%
Pension fund managers can generally best bring about an effective reduction in their
interest rate risk by holding ___________________.
A. long-maturity bonds
B. long-duration bonds
C. short-maturity bonds
D. short-duration bonds
Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs
of $1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 40%. If the
economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a
recession, the firm will sell only half as many gadgets. If the economy enters a
recession, the after-tax profit of firm A will be _________.
A. $0
B. $90,000
C. $180,000
D. $270,000
A long hedger will __________ from an increase in the basis; a short hedger will
__________.
A. be hurt; be hurt
B. be hurt; profit
C. profit; be hurt
D. profit; profit
You invest $1,000 in a complete portfolio. The complete portfolio is composed of a
risky asset with an expected rate of return of 16% and a standard deviation of 20% and
a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1
year of $1,100 could be formed if you _________.
A. place 40% of your money in the risky portfolio and the rest in the risk-free asset
B. place 55% of your money in the risky portfolio and the rest in the risk-free asset
C. place 60% of your money in the risky portfolio and the rest in the risk-free asset
D. place 75% of your money in the risky portfolio and the rest in the risk-free asset
A hypothetical futures contract on a nondividend-paying stock with a current spot price
of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price
be?
A. $76.29
B. $93.46
C. $107
D. $131.08
Which one of the following is a true statement regarding corporate bonds?
A. A corporate callable bond gives its holder the right to exchange it for a specified
number of the company's common shares.
B. A corporate debenture is a secured bond.
C. A corporate convertible bond gives its holder the right to exchange it for a specified
number of the company's common shares.
D. Holders of corporate bonds have voting rights in the company.
The Volker Rule
A. prohibits banks from proprietary trading.
B. restricts banks' investments in hedge funds.
C. restricts banks' investments in private equity funds.
D. All of the options.
Given its time to maturity, the duration of a zero-coupon bond is _________.
A. higher when the discount rate is higher
B. higher when the discount rate is lower
C. lowest when the discount rate is equal to the risk-free rate
D. the same regardless of the discount rate
At contract maturity the value of a put option is ___________, where X equals the
option's strike price and ST is the stock price at contract expiration.
A. max (0, ST - X)
B. min (0, ST - X)
C. max (0, X - ST)
D. min (0, X - ST)
The common stock of the Avalon Corporation has been trading in a narrow range
around $40 per share for months, and you believe it is going to stay in that range for the
next 3 months. The price of a 3-month put option with an exercise price of $40 is $3,
and a call with the same expiration date and exercise price sells for $4.
What would be a simple options strategy using a put and a call to exploit your
conviction about the stock price's future movement?
A. sell a call
B. purchase a put
C. sell a straddle
D. buy a straddle
A benchmark index has three stocks priced at $23, $43, and $56. The number of
outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares,
respectively. If the market value weighted index was 970 yesterday and the prices
changed to $23, $41, and $58 today, what is the new index value?
A. 960
B. 970
C. 975
D. 985
The SEC requires public U.S. companies to file registration statements and periodic
reports electronically through
A. Yahoo.
B. Google.
C. EDGAR.
D. FINRA.
A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8%
to a taxable investor. If the stocks paid no dividends, we know that the
________.
A. after-tax return of the stock portfolio was higher than the after-tax return of the bond
portfolio
B. after-tax return of the bond portfolio was higher than the after-tax return of the stock
portfolio
C. after-tax income of the stock portfolio was equal to the after-tax income of the bond
portfolio
D. after-tax income of the stock portfolio could have been higher or lower than the
after-tax income of the bond portfolio, depending on the marginal tax rate of the
investor
In a binomial option model with three subintervals, the probability that the stock price
moves up every possible time is
_________.
A. 25%
B. 15.5%
C. 12.5%
D. 8%
Which of the following is not one of the three key financial statements available to
investors in publicly traded firms?
A. income statement
B. balance sheet
C. statement of operating earnings
D. statement of cash flows
Use the following cash flow data of Haven Hardware for the year ended December 31,
2015.
What is the net
cash provided
by or used in
investing
activities of
Haven
Hardware?
A. −$12,000
B. −$62,000
C. $12,000
D. $164,000
Which of the following statements about convertible bonds are true?
I. The conversion price does not change over time.
II. The associated stocks may not pay dividends as long as the bonds are outstanding.
III. Most convertibles are also callable at the discretion of the firm.
IV. They may be thought of as straight bonds plus a call option.
A. I and III only
B. I and IV only
C. I, II, and IV only
D. III and IV only
To obtain an approximate estimate of the real interest rate, one must _________ the
__________ the nominal risk-free rate.
A. add; default premium to
B. subtract; default premium from
C. add; expected inflation to
D. subtract; expected inflation from
The potential loss for a writer of a naked call option on a stock is _________.
A. equal to the call premium
B. larger the lower the stock price
C. limited
D. unlimited
According to capital asset pricing theory, the key determinant of portfolio returns is
_________.
A. the degree of diversification
B. the systematic risk of the portfolio
C. the firm-specific risk of the portfolio
D. economic factors
An investor holds a very conservative portfolio invested for retirement, but she takes
some extra cash she earned from her year-end bonus and buys gold futures. She appears
to be engaging in ___________.
A. overconfidence
B. representativeness
C. forecast errors
D. mental accounting
