An example of a ______ strategy is the mispricing of a futures contract that must be
corrected by contract expiration.
A. market neutral
B. directional
C. relative value
D. divergence
E. convergence
Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The
expected return on the market
index is 18%. The standard deviation of the return on the market portfolio is 25%. The
nonsystematic standard
deviation of the active portfolio is 15%. The risk-free rate of return is 6%. The beta of
the active portfolio is 1.2.
The optimal proportion to invest in the active portfolio is
A. 50.0%.
B. 69.4%.
C. 72.3%.
D.80.6%.
E. 100.0%.
You have been given this probability distribution for the holding-period return for KMP
stock:
What is the expected holding-period return for KMP stock?
A. 10.40%
B. 9.32%
C. 11.63%
D. 11.54%
E. 10.88%
In the decline stage of the industry life cycle,
A. the product may have reached obsolescence.
B. the industry will grow at a rate less than the overall economy.
C. the industry may experience negative growth.
D. the product may have reached obsolescence, and the industry will grow at a rate less
than the overall economy.
E.-the product may have reached obsolescence, the industry will grow at a rate less than
the overall economy, and the industry may experience negative growth.
Which of the following is true regarding private placements of primary security
offerings?
A. Extensive and costly registration statements are required by the SEC.
B. For very large issues, they are better suited than public offerings.
C. They trade in secondary markets.
D. The shares are sold directly to a small group of institutional or wealthy investors.
E. They have greater liquidity than public offerings.
A statistic that measures how the returns of two risky assets move together is:
A. variance.
B. standard deviation.
C. covariance.
D. correlation.
E. covariance and correlation.
Antiquated Products Corporation produces goods that are very mature in their product
life cycles. Antiquated Products Corporation is expected to pay a dividend in year 1 of
$1.00, a dividend of $0.90 in year 2, and
a dividend of $0.85 in year 3. After year 3, dividends are expected to decline at a rate of
2% per year. An appropriate required rate of return for the stock is 8%. The stock
should be worth
A. $8.98.
B. $10.57.
C. $20.00.
D. $22.22.
Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20
each. Firm C has total fixed costs of $750,000 and variable costs of 30 per coat hanger.
Firm D has total fixed costs of $400,000 and variable costs of 50 per coat hanger. The
corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat
hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.
If the economy enters a recession, the after-tax profit of firm C will be
A. $1,680,000.
B. $750,000.
C. $510,000.
D. $204,000.
E.-$306,000.
The intrinsic value of an out-of-the-money put option is equal to
A. the stock price minus the exercise price.
B. the put premium.
C. zero.
D. the exercise price minus the stock price.
Shelf registration
A. is a way of placing issues in the primary market.
B. allows firms to register securities for sale over a two-year period.
C. increases transaction costs to the issuing firm.
D. is a way of placing issues in the primary market and allows firms to register
securities for sale over a two-year period.
E. is a way of placing issues in the primary market and increases transaction costs to the
issuing firm.
The current market price of a share of a stock is $80. If a put option on this stock has a
strike price of $75, the put
A. is in the money.
B. is out of the money.
C. sells for a lower price than if the market price of the stock is $75.
D. is in the money and sells for a lower price than if the market price of the stock is
$75.
E.is out of the money and sells for a lower price than if the market price of the stock is
$75.
High P/E ratios tend to indicate that a company will _______, ceteris paribus.
A. grow quickly
B. grow at the same speed as the average company
C. grow slowly
D. not grow
E. None of the options are correct.
Which of the following is(are) true regarding the APT?
I) The security market line does not apply to the APT.
II) More than one factor can be important in determining returns.
III) Almost all individual securities satisfy the APT relationship. IV) It doesn’t rely on
the market portfolio that contains all assets.
A. II, III, and IV
B. II and IV
C. II and III
D. I, II, and IV
E. I, II, III, and IV
A 5.5%, 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the
33% marginal tax bracket, this bond would offer an equivalent taxable yield of
A. 8.20%.
B. 10.75%.
C. 11.40%.
D. 4.82%.
Banz (1981) found that, on average, the risk-adjusted returns of large firms
A. were higher than the risk-adjusted returns of small firms.
B. were the same as the risk-adjusted returns of small firms.
C. were lower than the risk-adjusted returns of small firms.
D. were unrelated to the risk-adjusted returns of small firms.
E. were negative.
A ________ is an investment fraud in which a manager collects funds from clients,
claims to invest those funds on their behalf, and reports extremely favorable investment
returns, but in fact uses the funds for his or her own use.
A. Ponzi scheme
B. bonsai scheme
C. statistical arbitrage scheme
D. pairs trading scheme
E. None of the options are correct.
You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard
deviation of 0.15 and a
T-bill with a rate of return of 0.05.
What percentages of your money must be invested in the risky asset and the risk-free
asset, respectively, to
form a portfolio with an expected return of 0.09?
A. 85% and 15%
B. 75% and 25%
C. 67% and 33%
D. 57% and 43%
E. Cannot be determined.
Consider the following probability distribution for stocks A and B:
The expected rates of return of stocks A and B are _____ and _____, respectively.
A. 13.2%; 9%
B. 13%; 8.4%
C. 13.2%; 7.7%
D. 7.7%; 13.2%
Growth Fund had year-end assets of $862,000,000 and liabilities of $12,000,000. There
were 32,675,254 shares in the fund at year end. What was Growth Fund’s net asset
value?
A. $28.17
B. $25.24
C. $19.62
D. $26.01
E. $21.56
Barber and Odean (2001) report that men trade __________ frequently than women.
A. less
B. less in down markets
C. more in up markets
D. more
The governance section of an Investment Policy Statement for individual investors
typically contains
A. assigning the responsibility for determining investment policy.
B. the review process for the IPS.
C. assigning the responsibility for risk management.
D. the review process for the IPS and assigning the responsibility for risk management.
E. All of the options are correct.
The smallest component of domestic net worth in 2016 was
A. nonresidential real estate.
B. residential real estate.
C. inventories.
D. consumer durables.
E. equipment and software.
Suppose the price of a share of IBM stock is $200. An April call option on IBM stock
has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of
the call option will earn a profit if the price of the share
A. increases to $204.
B. decreases to $190.
C.increases to $206.
D. decreases to $196.
E. None of the options are correct.
The current market price of a share of CSCO stock is $22. If a call option on this stock
has a strike price of $20, the call
A. is out of the money.
B. is in the money.
C. sells for a higher price than if the market price of CSCO stock is $21.
D. is out of the money and sells for a higher price than if the market price of CSCO
stock is $21.
E.is in the money and sells for a higher price than if the market price of CSCO stock is
$21.
Suppose two portfolios have the same average return and the same standard deviation
of returns, but Buckeye Fund has a lower beta than Gator Fund. According to the
Treynor measure, the performance of Buckeye Fund
A. is better than the performance of Gator Fund.
B. is the same as the performance of Gator Fund.
C. is poorer than the performance of Gator Fund.
D. cannot be measured as there are no data on the alpha of the portfolio.
E. None of the options are correct.
____________ may be responsible for the prevalence of active versus passive
investments management.
A. Forecasting errors
B. Overconfidence
C. Mental accounting
D. Conservatism
E. Regret avoidance
An arbitrage opportunity exists if an investor can construct a __________ investment
portfolio that will yield a sure profit.
A. positive
B. negative
C. zero
D. All of the options.
E. None of the options are correct.
Consider the following probability distribution for stocks C and D:
If you invest 25% of your money in C and 75% in D, what would be your portfolio’s
expected rate of return and
standard deviation?
A. 9.891%; 8.70%
B. 9.945%; 11.12%
C. 8.225%; 8.70%
D. 10.275%; 11.12%
Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor, and portfolio
B has a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11%
and 17%, respectively. Assume that the risk-free rate is 6%, and that arbitrage
opportunities exist. Suppose you invested $100,000 in the risk-free asset, $100,000 in
portfolio B, and sold short $200,000 of portfolio A. Your expected profit from this
strategy would be
A. –$1,000.
B. $0.
C. $1,000.
D. $2,000.
Which of the following would be required for tests of the multifactor CAPM and APT?
A. Specification of risk factors
B. Identification of portfolios that hedge these fundamental risk factors
C. Tests of the explanatory power and risk premiums of the hedge portfolios
D. All of the options are correct.
E. None of the options are correct.
Tests of the CAPM that use regression techniques are subject to inaccuracies because
A. the statistical results used are almost always incorrect.
B. the slope coefficient of the regression equation is biased downward.
C. the slope coefficient of the regression equation is biased upward.
D. the intercept of the regression equation is biased downward.
E. the intercept of the regression equation is equal to the risk free rate.
Which of the following two bonds is more price sensitive to changes in interest rates?
1) A par-value bond, A, with a 12 year to maturity and a 12% coupon rate.
2) A zero-coupon bond, B, with a 12 year to maturity and a 12% yield to maturity.
A. Bond A because of the higher yield to maturity
B. Bond A because of the longer time to maturity
C. Bond B because of the longer duration
D. Both have the same sensitivity because both have the same yield to maturity.
E. None of the options are correct.